Thanks to a rebound in financial markets, Canadian university endowment funds have recouped much of the losses they suffered during last year’s market rout. But universities say they aren’t ready to loosen the purse strings just yet.
The University of New Brunswick, for example, saw its endowment fund rise to $166 million in late October, up 23 percent from a low of $135 million in February, a healthy gain but not enough to return the fund to its pre-crash level of $175 million. “We’re not out of the woods, but it certainly feels better [now] than at the end of October last year,” said Dan Murray, UNB’s vice-president, finance and corporate services.
When financial markets collapsed last year, universities lost millions of dollars in the value of their endowment funds, which are made up of charitable contributions. The donations are invested, and a portion of those earnings are used to pay for student aid, research chairs and other expenses.
Still, universities are remaining cautious about endowment spending and aren’t doing away with the money-saving measures they put in place over the past year. “Everybody is thinking that this is a fragile recovery,” Mr. Murray said. “There is still a lot of concern out there.”
Universities say they are worried about reductions in provincial government operating funds. As well, there is lingering anxiety about another possible dip in financial markets, Mr. Murray said. Like many universities, UNB lowered the payout rate from its endowment fund to 4.25 percent from 4.5 percent previously, and he suspects the university’s board will maintain the lower rate to allow the fund to fully recover.
The situation is the same at many universities across Canada. The University of Alberta’s endowment rose to $700 million in late October, up from $600 million at March 31. But the university will likely maintain its payout rate at 3.5 percent compared to 4.25 percent last year, said Phyllis Clark, vice-president, finance and administration.
“To have a small portion of the [overall] budget improve dramatically is wonderful,” Ms. Clark said, but the big issue facing the university now is what will happen to its main funding source, provincial government grants. The Alberta government said it will freeze operating grants next year. What’s more, the university’s interest earnings on its cash holdings are down from previous years and its pension contributions are up. As a result, the university is projecting a funding shortfall of $59 million in the fiscal year ending March 31, 2011, about eight percent of its operating budget.
U of A is hoping to offset the projected gap by raising some tuition and ancillary fees and making savings through administrative efficiencies. It is also talking to the faculty association about the possibility of introducing unpaid furlough days and reducing a previously negotiated wage increase. The university is doing everything it can to avoid job losses, Ms. Clark said, but layoffs are possible if sufficient savings aren’t found through other means.
Lakehead University also has served notice that it plans to introduce unpaid days off this year.
At the University of Western Ontario, Gitta Kulczycki, vice-president, resources and operations, said that while Western received additional provincial funding to expand graduate enrolment, for the most part government grants have remained “static.” The province hasn’t set funding levels for next year, but she said it’s clear the province faces a tough fiscal situation: “It doesn’t lead me to believe we are going to see increases in funding.”
Many universities continue to struggle under the weight of pension funding obligations. David Barnard, president of the University of Manitoba, told a town hall meeting in mid-October that the university faces a projected $36.4 million shortfall in its 2011 budget, in part due to increased pension contributions. He said he doesn’t expect provincial government funding will fully offset the gap.
Meanwhile, in late October the federal government announced plans to amend the federal Income Tax Act to allow federally and provincially regulated defined-benefit plans to increase their allowable surplus to 25 percent of liabilities from 10 percent to allow employers to build up a thicker cushion to deal with market volatility in the future.
Universities – many of them with defined-benefit or hybrid plans – welcomed the move. Still, the proposed measure won’t provide any immediate relief to the many pension plans that are in deficit, said UNB’s Mr. Murray.
On the capital spending side, universities are experiencing benefits from the federal Knowledge Infrastructure Program. And fundraising activities are also picking up.