On February 1, the Business Board of U of T’s Governing Council met to lay out the university’s deferred maintenance plan for the year, the annual debt strategy review, and the forecast of its financial results for the financial year ending in April 2023.

Inflation, underfunding undercut maintenance

The meeting’s first report on deferred maintenance was given by Ron Saporta, chief operating officer of Property Services & Sustainability, after a brief introduction by Scott Mabury, vice-president, operations.

In his introduction, Mabury pointed out that recent high rates of inflation have caused maintenance costs to skyrocket compared to previous years. In his presentation, Saporta explained that U of T has seen an increase in the replacement value of buildings from 2021 to 2022, growing from $559 million to $5.9 billion in 2022. This growth is partially due to inflation costs for non-residential building construction in Toronto, which rose by 15.6 per cent to 17.5 per cent in 2022. The deferred maintenance liability for these buildings has also increased from $820.5 million to $961.3 million over the same period of time.

The university’s deferred maintenance funding is low compared to similar reference points, both at a provincial and federal level. “We are, for us, making significant investments from our operating fund, but combined with the paltry sum we get from the province through the facilities renewal program, FRP — 12.8 million — it’s insufficient,” Mabury said. “If we were in Québec, our sister institution may get its 157 million per year — we get 13.”

UTSG is also considering the impact of the climate crisis on its deferred maintenance plans. The Financial Accountability Office of Ontario predicts “a 7 to 29% increase in the costs of operating and maintaining public buildings by 2100,” according to the deferred maintenance report, which will mean a cost increase of $20 million to $80 million for the university. The report says that the university is also planning to use “decarbonization and infrastructure resilience” to address the effects of the climate crisis.

Interest rates hampering debt strategy

Alongside inflation, high interest rates are another artifact of the post-COVID-19 economy that are affecting U of T’s financial forecasts and burdening the university’s debt. Trevor Rodgers, chief financial officer, presented this perspective during the Business Board meeting’s portion dedicated to debt strategy. 

“In the current environment of rising interest rates, of inflation and construction costs… we are anticipating that there’s going to be some pressure and that we will have to review the borrowing capacity in the outer years of the plan,” Rodgers said. “Of particular note this year, we’ve updated the future cost of borrowing… our sensitivity analysis shows that any further increases beyond that would, of course, reduce the overall debt capacity.”

The university’s debt strategy includes both internal and external debt with a single debt limit that is redetermined annually. The debt limit determines the maximum debt that the university can take on. 

This year, as of April 30, 2022, the debt limit was $2,096.7 million, with $962.7 million from internal sources and $1,134 million of external debt. As of December 31, 2022, the university’s actual outstanding debt was $877.2 million.

The debt policy limit is projected to grow by an additional $374.3 million over the next five years, but economic uncertainty may limit that growth. Rodgers explained that this uncertainty may include rising interest rates, slower growth in university expenditures, and construction cost inflation in the GTA.

U of T has lower debt service costs than some other Canadian universities. Nevertheless, the university has been exploring financing structures other than debt to address funding changes.

Certain uncertainty

Rodgers also presented the forecast of the university’s financial results for the fiscal year ending in April 30, 2023. Given that information on enrollment, tuition fees, operating grants, and most expenses are already known for the year, Rodgers mentioned that most of the forecast should be fairly reliable. 

However, there are still some significant uncertainties. Investment returns can vary greatly from year to year, and the report noted that uncertainty was particularly present this year, “due to the ongoing war in Ukraine, the residual effects of the COVID-19 pandemic, persistently high inflation, and rising interest rates.” Additionally, the university’s final year-end results may differ based on what happens in the final four months of the fiscal year.

The forecast has made some key assumptions about the university’s endowment payouts, its investment income, the increase in the value of its capital assets, and divisional savings to fund other projects such as planned capital expansion, faculty start-up funding, research infrastructure, and funds to match future donations.

The next meeting of the Business Board is scheduled for March 15.