On January 29, the U of T Business Board had a meeting discussing how a Canada-US tariff war could impact its plans to take out $1.4 billion in debt over the next five years. It joined the Planning and Budget Committee in recommending that the university embark on a $350 billion program to maintain U of T’s infrastructure. It also changed how U of T manages investment risks.
Debt in the age of tariffs
U of T’s capacity to build the massive projects that dot its campuses hinges on its Debt Policy, which specifies that the university cannot take out debt that would leave it spending more than six per cent of its budget on interest payments.
At the January 29 meeting, Executive Director of Treasury and Investment Services Anthony Tia told the board that the university projects that it can borrow enough money to build projects worth $4.6 billion over the next five years — without adjusting its debt policy. However, a trade war between the US and Canada could put that forecast in jeopardy.
On April 30, 2024, the university’s debt limit totalled $2.95 billion — far more than its $1.16 billion in debt as of December 31, 2024. Tia hinted that plans on the horizon include academic projects and projects as part of the 4 Corners Strategy: a real estate initiative where private companies develop and lease university-owned land. If the university’s sprawling governance infrastructure approves all projects in the works, U of T expects to take out an additional $1.4 billion in debt by 2030, bringing its total debt to $3.2 billion.
The administration’s analysis assumes that the university will face a six per cent interest rate — one percentage point higher than what its peer universities currently face. If interest rates rose to seven per cent, the university’s planned borrowing would bump up against its debt ceiling. Board member Samantha Kappagoda questioned whether the six per cent forecast matches the moment. “There’s always the possibility of a tariff war, ensuing higher inflation and because of that, higher [interest] rates,” she said.
On January 29, the Bank of Canada — which is responsible for setting the interest rates faced by commercial banks — announced that it was reducing its target overnight rate, sending ripple effects through the economy. A lower overnight rate leads commercial banks to lower their interest rates, encouraging businesses to invest more. With inflation reaching two per cent, the bank’s decision to lower interest rates signaled that the bank has relative confidence — or at least tentative hope — that more investment wouldn’t drive up inflation.
However, the Bank of Canada acknowledged in its announcement that “if broad-based and significant [US] tariffs were imposed, the resilience of Canada’s economy would be tested.” US President Donald Trump threatened a 25 per cent tariff on Canadian imports starting February 1, which would drive up inflation by increasing the costs of imported goods while also weakening investment.
This could leave the bank caught between trying to encourage investment and keeping inflation down. Because the US and Canada trade billions of dollars worth of construction materials each year, a trade war could also drive up construction prices, reducing how much the university’s Canadian dollars can buy.
U of T Chief Financial Officer Trevor Rodgers assured Kappagoda that the school would strategically time taking out loans to find lower rates, while Tia floated that the university could raise the policy limit, bringing it closer to other universities. Tia told the board that U of T can “respond to changing circumstances” by potentially “delaying some of the projects that are nice to have.”
“There’s no trade-off here”
At the meeting, Chief Operating Officer, Property Services & Sustainability Ron Saporta presented an item that Vice-President, Operations and Real Estate Partnerships Scott Mabury described as “typically one of the highlights of the business board”: U of T’s 2024 Deferred Maintenance Report.
Deferred maintenance (DM) refers to the building and infrastructure updates and upkeep that is put off year to year. According to the report, failing to address DM can leave systems unreliable, cause “failures,” and damage the university’s “ranking and reputation.”
The report reveals that U of T’s DM backlog came in at $1.5 billion for 2024 — a $263 million increase from 2023. Due to its size and age, most of these costs are concentrated at UTSG. The increasing DM backlog comes down to three factors: increasing construction prices in Toronto over the past five years; construction “growth spurts” in the post-war period and early 2000s whose renovation timelines align; and increasing wear and tear due to climate change.
In 2024, the university spent 0.55 per cent of all 177 buildings’ total replacement value — the value it would take to hypothetically replace all the buildings — on DM. This figure is far below the 1.5–3 per cent range recommended by experts and less than half of the provincial average. “No, it’s not enough. We would like to spend more, but budgets are about making choices,” Mabury told the board.
To address this issue, the Business Board unanimously recommended that the university take out $250 million in debt to address DM over the next three years as part of a new $350 million project. Vice-President and Provost Trevor Young assured the board that the university has the capacity to take on the debt without “skimping on” hiring students or missing other opportunities.
“There’s no trade-off here,” Mabury said.
On February 27, the Governing Council will decide whether to greenlight the project.
Because many maintenance updates will increase energy efficiency, the university expects the project to save one to two million dollars each year. By bundling projects across multiple buildings, the university can enter into fewer contracts and reduce its costs. The administration projects that, by spending $300 million on UTSG, the university can fix issues that would cost $600 million to address in 2050.
“This is going to save us money,” said Mabury.
Less risk, less reward
U of T squirrels away money in various investment pools: its short-term Expendable Funds Investment Pool (EFIP), which carries little risk but lower returns; its medium-term EFIP, which provides higher returns over longer periods; and its Long-term Capital Appreciation Pool, which provides returns over decades.
On January 29, the Business Board approved a change to how the University of Toronto Asset Management Corporation (UTAM) — which manages the university’s portfolios — balances the medium-term EFIP’s risk and reward.
The medium-term pool makes up approximately 30 per cent of the EFIP, which itself totaled $3.9 billion in 2023. In 2022, a rapid rise in interest rates left the medium-term EFIP with a negative 10 per cent return. “There were unrealized losses of $80 million that year and [that] really exceeded our tolerance level,” Rodgers told the board.
UTAM decides where to place U of T’s vast amounts of money based on the risk and returns experienced by benchmark portfolios. In light of the 2022 “volatility,” the administration proposed changing the medium-term EFIP’s reference portfolio from the FTSE Canada Corporate BBB Index to an even split between that index and the FTSE Canada Short-Term BBB Index — both of which track how bonds in Canada perform.
This new benchmark will “result, we expect, in a modest reduction in yield, but really a significant improvement in that annualized volatility, and that will be much more aligned with our objectives,” said Rodgers. The board unanimously approved the change.
Looking ahead
With final numbers set to drop in June, Rodgers presented the board with U of T’s forecasted financial results for 2024–2025. Although the administration knows approximately how much money it will receive from students and pay employees, Rodgers noted the “unprecedented uncertainty” in investment markets, which could change the final tallies.
The administration currently expects that U of T’s revenue will exceed its expenses by three per cent, which is smaller than the 10.9 per cent net revenue experienced last year but still financially healthy.
“We’re not terribly worried at three per cent, but just noting the direction of travel,” Rodgers told the board. Young hinted that the university witnessed a bump in applications from the US, which could help it enroll more international students.
Mabury also told the board that the administration assessed the productivity of every job at the university. “We have been preparing for a period in which revenues are more modest and [where] we need to think about our efficiency and productivity,” he said.
