On 2 October 2014, McGill’s Board of Governors approved the audited financial statements for Fiscal Year 2014 (FY2014), ending 30 April.
McGill finished FY2014 with a small surplus of $3.2 million on around $750 million in operating revenues, thus allowing us to reduce our financed accumulated deficit to under $100 million.
In addition, better than expected market performance reduced the University’s long-term liability of the pension fund by $12.5 million. Thus McGill’s overall GAAP (generally accepted accounting principles) deficit was reduced by $15.7 and now stands at $271.8 million, including the financed deficit noted above.
However, that good news is being tempered by announcements from the Government of Quebec. The Province is struggling to address a deficit of approximately $2.35 billion in its finances. Consequently, Quebec universities have been assigned cuts, some of them very specific.
These cuts come on the heels of reduced provincial funding to universities during the last two fiscal years. At the beginning of September, with one quarter of the fiscal year behind us, the government imposed further, unexpected cuts on the universities’ operating grants.
Cuts coming in the middle of a fiscal year have an impact on the amounts already allocated to units. In addition, McGill has been informed that the cuts for FY2015 are not over yet, with more to come, potentially as late as February 2015.
The Ministry has also let it be known that the financial picture for universities will not be rosier in FY2016.
Many in the McGill Community are probably wondering where the University stands in this confusion of small surpluses, large deficits, and continuing cuts.
The funding situation is still evolving. In the meantime, “The Reporter” asked the people responsible for McGill’s budget and finances to tell us what they know … so far.
Quebec government funding for FY2015, the current fiscal year:
Q1: What is the amount of the government cut for this current fiscal year?
At the moment, we do not have all the information to give a definitive number. As of early October, the operating grant from the Quebec government looks to be approximately $13 to $15 million less than we projected when our budget was tabled last April. Recall as well that that budget projected a potential $7 million deficit.
However, further information from the government suggests that there will be even more cuts to our operating grant this current year, and the next fiscal year, which starts 1 May 2015, will see still more cuts.
Once we get some much needed clarity on the cuts from the government, and on their implications for what we have budgeted and allocated, the Provost will communicate this information to the McGill community.
Q2: How will McGill address the government cut for FY2015?
Allocations for Faculties and Administrative and Support Units will remain unchanged, at least until December of this year.
If required, Provost Masi, working with VP (Administration and Finance) Di Grappa, will present an action plan for January. Our analysis depends on confirmation of the information we receive from the Ministry.
The Provost will consult with the community, in open forum sessions on October 27, to decide on the best course to take. The objective remains to protect funding for our core priorities as outlined in Budget Book FY2015.
In assessing our overall financial situation, it is clear that the cuts we made in our operating expenses last year, including the Voluntary Retirement Program, have given us a firmer foundation for facing this difficult conjuncture.
Q3: The Quebec government originally promised to re-invest in universities this year, and that funding did not come through. McGill’s Budget Book FY2015 states that if the reinvestment is significantly reduced, funding will be delayed or redirected for some priorities. Can we now afford to fund all the priorities laid out in Budget Book 2015?
As we did in FY2014, we took a cautious approach in stipulating McGill’s FY2015 budget. In short, we did not allocate the full amount promised for re-investment by the Quebec Government last spring. However, not only was there no re-investment, there are actual cuts to our grant from the Ministry.
In light of these unanticipated cuts, our goal is to reduce their impact on the allocations already made in FY2015, at least as much as possible. Therefore, our first line of attack in addressing the shortfall will be to modify or postpone certain expenditures outlined in the Budget Book FY2015.
McGill has well-articulated strategic plans and with those as our guides we must look to protect the funding for our core mission-critical priorities.
Q4: Will we have to revise our FY2015 deficit, which we originally anticipated at $7 million?
Over the last decade, which has seen several such funding cuts imposed on McGill and the rest of the Quebec network of universities, we have avoided restating or revising the budget. Rather, we try to adjust our expenditures in light of diminished revenues and report these differences in the audited Financial Statements.
While we hope that the biggest cuts have already been announced, we are still waiting for more announcements regarding FY2015 to be made by the Ministry.
Along those lines, if we must make a significant adjustment, we will present a note to the Finance Committee, indicating revisions to certain line items, but we will not issue a new budget book or even a new global budget. Of course, the situation is very fluid and we have been advised that cuts could come as late as February 2015, which is only 60 to 90 days before we have to close our fiscal year and prepare the audited financial statements.
Q5: What explains the difference between the FY2014 year-end projections and Budget Book FY2014?
We must be careful in making a distinction between the annual operating deficit and our GAAP deficit. Oversimplifying somewhat, the former is directly associated with expenditures and revenues, and the latter with liabilities and assets. The GAAP deficit includes any financed deficit.
As noted at the time of its presentation to the Board, and in preliminary discussions with Deans and the Senate, the projected operating deficit for FY2014 was estimated to be $10.4 million. It was based on the best information available in April 2013, when the Budget Book FY2014 was tabled.
At that time, of course, we still did not have the audited financial statements for FY2013, which closed at the end of April. Financial statements were then prepared for presentation to the Board in the fall.
In our context, the budget is a planning document, based on assumptions and projections for both revenues and expenditures. These estimates are subject to fluctuations, both positive and negative. Sometimes the variances can be quite large. Consequently, by being prudent and fiscally responsible, we project spending only on those revenues for which we have a reasonably high degree of reliability.
Q6: How did revenues and expenses change from the budgeted projections in FY2014?
For FY2014, McGill had an unexpected, but welcomed, increase in revenues, as well as a reduction in liabilities.
The budgeted amounts for FY2014 saw four major positive variances: a recalculation of previous amounts owed to McGill and transferred to us from Quebec, better yields on tuition and fees based on enrolments, a significant increase in the sale of goods and services, and higher investment income.
There were also negative variances that offset the positives, including higher salary costs (including the pay outs for the VRP). The net effect was that we ended the year with a surplus of about $3.2 million which was applied to our financed accumulated deficit, reducing the later to just less than $100 million.
In addition, McGill’s GAAP liability of the pension fund, based on net calculations, was reduced by $12.5 million, allowing our accumulated operating deficit, net of all assets minus liabilities, to be reduced to $271.8 million, which includes the nearly $100 million financed deficit.
Q7: McGill’s pension liability was reduced by $12.5 million in FY2014. Will contributions from the members and the University go down as well?
The pension liability as reported on the balance sheet of the University was reduced from $41.9 million in FY2013 to $29.3 million in FY2014, thanks to favourable market conditions.
No provision for changes in balance sheet pension liability was made in the Budget Book FY2014 for our operating fund budget. It is, however, a major contributor to our GAAP deficit.
The pension fund deficit remains a major concern for the University because it depends on real-time fluctuations of four main elements:
- market conditions which affect returns on investment
- employer-employee contributions
- interest rates, and
- life-expectancy estimates.
Gains made by one of the elements may be offset by losses in another.
While we made gains in FY2014 due to favourable market conditions, as well as increased contributions, it is premature to change the course of our contributions, at least until we have the actuarial valuation in 2016. Life expectancy continues to rise, and market fluctuations could just as easily have a negative impact on our pension liability.
Q8: Was reducing our costs in FY2014 with measures like the VRP necessary given that we finished the year with a surplus?
McGill GAAP deficit is over $270 million dollars, of which nearly $100 million is financed and owing to the banks. Our expenses have been outstripping our revenues for some time, but this has been tolerable because we consider that latter deficit to be an investment in the quality of our teaching, research, and service missions. Nonetheless, we know that we have to get our finances in order, especially if interest rates go up or if markets turn down.
We knew that the financial situation of the Quebec government made the re-investment promised last year very uncertain, and we needed to reduce operating expenses. A major component of our operating expenses is the salary mass, and that was where we needed to act. You will remember that a few years ago we offered a retirement incentive to academic staff as well.
The new cuts to the government grants that were announced recently, and the hints of more to come, confirmed the wisdom of that course of action. Thanks to the sacrifices the community made last year, we are in a better shape to face the difficult situation this year.
Constrained budgets are the operating reality of all publicly-funded institutions. We have to stay the course and continue to look for further savings and increased efficiencies, but also for other sources of operating revenue.
Q9: How has McGill benefited from the FY2014 cost-reduction measures?
Reducing our operating spending last year is paying dividends today:
- If we had delayed cutting spending and had instead borrowed against the government’s promised reinvestment, our deficit last year would have increased significantly. We would then have had to make deeper cuts this year, as is the case for many of our sister institutions in the Quebec system.
- We reduced our total accumulated deficit from $287.5 million at the end of FY2013 to $271.8 million at the close of FY2014.
- We created operating savings that we now have to make permanent, through the Voluntary Retirement Program (VRP).
Q10: Can we use our fiscal 2014 surplus to fund our fiscal 2015 shortfall?
McGill currently has an overall financed accumulated deficit in our operating budget of just under $100 million. Consequently, the “surplus” we reported last year of around $3.2 million goes to the bottom line and is not available as a carry-forward to be used against this year’s cuts.
Simply put, as long as we have an accumulated deficit that we have to finance, there will be no real “surplus” that we can use on a rainy day.
The benefit however, is that now we are in a slightly better starting position in terms of our accumulated deficit that projected in the Budget Book FY2015.