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University of Toronto endowment exceeds historic $2 billion milestone

Figure accompanied by operating surplus, better-than-expected net income
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According to figures released by U of T’s Governing Council in a Business Board meeting on June 18, the university is making financial headway. For the first time in its history, U of T’s endowment has grown to $2.1 billion and generated a net income of $287.8 million, its highest annual income since taking heavy financial losses in the 2008–2009 year.

Higher net income

The net income generated for the 2014–2015 year is 48 per cent higher than numbers forecasted back in January. This higher than expected net income was primarily due to stronger than expected returns on investment, at 14.7 per cent and funds being set aside in accordance with multi-year divisional academic plans. The plans call for “prudent and deliberate use of reserves for capital investment in academic facilities and for faculty hiring.”

According to Althea Blackburn-Evans, director of news & media relations at U of T, these divisional plans are designed to “bring together all aspects of divisions planning, including enrolment, academic programs, space, fundraising, and the interdependencies between these elements.”

“A key feature of the university’s budget planning process is the requirement for academic divisions to plan for future initiatives and contingencies,” Blackburn-Evans explained. “Divisions set aside funds to pay for new buildings, renovations, endowment matching and so on. As divisional plans evolve, the amount of funds set aside in reserves will rise and fall.”

Balancing the budget

At the same time, the university has managed to balance its operating fund with a surplus of $7.2 million, overcoming a projected deficit of $5.7 million. The operating fund pertains to the main activities of the university such as teaching, research, and administrative functions. These activities are supported by revenue consisting of tuition fees and government grants.

The pension plans’ deficit has also improved to $617.4 million because of strong investment returns on pension plans’ assets. These assets exceeded expected returns by $301.4 million, which helped offset costs incurred by changes to key actuarial assumptions amounting to $275.1 million as a result of employees living longer.

Despite the improvements in net assets and income, the university’s chief financial officer Sheila Brown warns that the university has not made a full recovery.

“While the endowment pool as a whole has full inflation protection and a small cushion, three per cent of individual endowment funds remain ‘under water.’ That is, their market value at April 30, 2015 is still less than their original contributed capital,” Brown said, adding that the unit value of the endowment pool has to increase to $228 per unit for all funds to match its original contributed capital value. As of April 30, 2015, the value was at $213 per unit.

The university’s bountiful returns might not necessarily translate into more visible expenditures. As Ben Coleman, an outgoing student governor representative on the Governing Council and president of the University of Toronto’s Students’ Union (UTSU) notes, much of the extra income has already been earmarked for future infrastructural improvements.

“The rally in the endowment value will have some effect on students, as it helps increase the payout slightly, but it’s not something that would be noticeable, as the endowment payout is only about four per cent of the budget,” Coleman said.

Debt Status

The university also ended the year with outstanding debt of $1.012 billion, compared to last year’s $1.0129 billion. This corresponds to a debt burden ratio of 3.7 per cent, which is calculated interest and principal amount payable in that year divided by the total expenditures of that year. The university’s debt strategy allows for a debt burden ratio of up to five per cent.

Standard & Poor’s (S&P) credit rating report was also included together with the debt status report. The credit rating agency affirms the university’s current rating of AA/Stable, noting the university’s “strong enrolment and student demand profile, solid consolidated financial performance, and robust financial resources.”

S&P also considered the university’s “significant” debt and pension deficit hindrances to attaining a higher rating. However, S&P believes that the debt burden is “manageable and broadly in line with that of peers.”