Financial troubles ahead for U of T as tuition revenue lags behind salary increases

Ontario legislation is hurting U of T’s finances, the Governing Council’s Business Board revealed this summer. The board met on June 20 to review the university’s 2022 financial statements, outline the upcoming year’s financial landscape, and discuss imposing fees on charitable donations.

The university’s audited financial statements indicate “another very strong year” despite how volatile the investment markets have been, said Chief Financial Officer Trevor Rodgers.

He detailed that fundraising pledges exceeded $300 million for the third year in a row. Government grants for research and capital, which dipped over the past few years during the COVID-19 pandemic, have returned to pre-pandemic levels — this year, they amounted to $508 million.

The university also reported that its ancillary units — non-classroom services like dining halls, event planning, and residences — have regained the financial losses they experienced during the pandemic. However, Rodgers noted that income from parking and food services is still recovering slowly. 

Student-related operating revenue — tuition, student fees, and operating grants from the government — is also lagging as expenses grow. These revenue sources make up the lion’s share of the university’s operating revenue but only grew less than three per cent this year. By contrast, staff salary and benefits — the university’s biggest expense — grew by more than double that rate. 

Rodgers attributed this gap to the provincial government’s ongoing mandate that tuition for Ontario students, as well as the operating grants it provides, be frozen at 2020 rates. Rodgers also noted that U of T’s growth in domestic enrolment has only been “modest.” International tuition rates, meanwhile, are “reaching the top of the market” — which means the university cannot continue to increase international tuition rates without seeing decreases in enrolment. 

The gap between student-related operating revenues and salary expenses might widen further still as the university’s largest employee groups negotiate salary increases in the wake of Bill 124’s repeal. The bill limited public sector workers’ salary increases to one per cent per year, and was declared unconstitutional in November 2022.

The University of Toronto’s Faculty Association, which participated in the constitutional challenge, announced that it will negotiate for salary increases to retroactively offset the impact that Bill 124 had while it was in effect, as their last agreement expired on June 30, 2023. 

University of Toronto Asset Management (UTAM) aims to produce predictable and balanced long-term returns for the university, and reported some positive results despite the market volatility observed this year.

The Long-Term Capital Appreciation Pool reported a return of 4.3 per cent, up from 1.5 per cent the previous year. Similarly, the Medium and Short-Term Expendable Pools made considerable comparative gains, up 1.8 per cent and three per cent respectively, in contrast to the respective 6.2 per cent and 1.6 per cent losses in the previous year.

The endowment fund, however, was less successful this year. Endowments act like a perpetual donation — the university invests a donor’s money indefinitely and puts each year’s return on the investment toward a purpose of the donor’s choice.

Its return — 4.3 per cent on a gross basis — is not enough to cover the payout from the endowment combined with inflation adjustment, said Rodgers. 

In response to this, the university used its “smoothing mechanism” which takes reserves from years with endowment returns above the university’s target — four per cent plus inflation — to fund years where the return falls short. The fund’s reserves now stand at $354 million, down from the $386 million reported last year.

David Palmer, vice-president of university advancement, proposed to the board that U of T reintroduce fees on charitable donations to the university. 

U of T has previously imposed fees since the 1990s, but Palmer explained that they were phased out in 2007 because deans would frequently grant donors exemptions, which made the process seem unfair and arbitrary. 

This time around, Palmer said, the fee system must avoid this pitfall: “It must be universal, it must be transparent, and it must be equitable.” 

Within Palmer’s proposed model, two per cent of charitable donations and 0.26 per cent of endowed gifts will be taken as fees by the Governing Council. This fee would be used at the discretion of the Governing Council for strategic investments, while the remainder would go to the cause of the donor’s choice. 

Palmer noted that the practice of imposing fees has significant precedent at other North American universities, hospitals, and other charitable organizations. For example, he noted that about half of Canadian universities impose fees on gifts. Palmer also said that the proposed fee rates are relatively minuscule compared to other institutions’ fees. 

The next meeting of the Business Board is scheduled for September 27.