WLU Budget Update from President & Vice-Chancellor Dr. Max Blouw

Waterloo - Previous budget communications with the Laurier community indicated that any material changes to the budget-planning environment would be shared with the university. This Update from the President outlines key items within the March 26 provincial budget and describes the impact on Laurier’s projections and plans.

The recent provincial budget included two items of particular significance for universities:

* A share, with colleges, of $150 million in one-time funding to flow to institutions in the current fiscal year and a further $150 million to the post-secondary education sector in 2009-10, and
* Temporary solvency funding relief for Pension Plans affected by the 2008 financial market turmoil, pending formal amendment of regulations under the Pension & Benefits Act.

Both of these signal positive and much-appreciated support by the provincial government for post-secondary education, but they do not resolve the budget challenges facing Laurier. The cuts announced in January are still required.

It is critical that the university address two sources of deficit – the structural deficit and the Pension Plan.

First, the structural deficit: The structural deficit is approximately 5% of Laurier’s $167-million budget. It is historically related to the timing and uncertainty of provincial government funding – it is often unclear until very late in the fiscal year how much funding the government will provide, and when it will arrive. Specifically, the deficit is caused by:

* Partial, not full, funding of enrolment increases (hence we speak of “unfunded students”),
* Partial, if any, funding of inflation (especially for salaries and benefits, currently running at about 6%), and
* Absence of capital replacement funds to replace computers, microscopes and other equipment at the end of their useful lives.

The deficit problem has been further magnified in 2008-09 because of the roughly 20% drop in endowment income due to the turmoil in the financial markets. This leaves us short a significant amount of funding that would normally be devoted to scholarships, bursaries, research chairs, etc.

Second, the Pension Plan: The financial health of the Plan is evaluated in two ways. In very brief summary:

* The first way is to pretend that the university is declared insolvent or is bankrupt on a particular date (in our case December 31, 2009) and to calculate whether there are enough funds in the Pension Plan to meet the pension obligations that are due to the employees as of that date. This form of calculation is called a solvency calculation, and if a Plan is found to have insufficient funds to meet the pension obligations calculated in this way, then the employer must pay, over a five-year period, sufficient monies into the Plan to restore it to a fully funded status. This five-year window may be lengthened to 10 years with the recent budget announcement, pending formal amendment of regulations under the Pension & Benefits Act.
* The second way in which the financial health of a Plan is evaluated is to assume that the university will continue operations indefinitely into the future (as a so-called “going concern”). The complex actuarial calculation that is made in this case assumes, among a number of factors, that all employees remain employed and that they and the university contribute to the Plan until their expected retirement. The calculation estimates the amount of money required for each person in the Plan based on their expected earnings while employed and length of life after retirement. It then sums this across all the employees of the university for a Total University Pension Plan funding requirement. If the university Plan has, through contributions and 6.25% market returns, sufficient current and projected funds available to meet this estimated requirement, then it is declared to be fully funded. If there is a shortfall between available funds and this estimate, then the university has a 15-year period over which to pay the estimated shortfall. This form of estimate is called a going concern calculation, and the deficit – if there is one – is called a going concern deficit.

As a result of the market turmoil last fall, the Plan’s market value has decreased by $48 million – from $273 million as of June 30, 2008 to $225 million as of April 7, 2009. The Plan has both a going concern deficit (projected to be $84 million after the December 31, 2009 valuation) and solvency deficit (projected to be $53 million). We are not optimistic that the markets will return to the required 6.25% rates of return in the short-term, and the university will be required to repay to the Plan an estimated, additional $14 million per year for 15 years.

Ultimately, the news provided by the provincial budget was good in that it provided one-time funding and a deferral of one year in pension deficiency payments. Unfortunately it does not change what Laurier must do to address the financial turmoil.

In closing, I would like to once again thank all members of the Laurier community who have worked diligently to address the budget situation. This is a stressful and challenging time for us all, but I remain confident that we will emerge an even stronger institution than we are today.