Queen’s reported a surplus of $15.6 million in its 2022-23 Audited Consolidated Financial Statements. Can these funds be used to offset this year’s operating budget deficit?
Queen’s Audited Consolidated Financial Statements report on the university’s annual financial results and track financial activities across six separate funds. The operating fund represents about 65 per cent of the total revenues of the university. The other 35 per cent of total revenues are spread across the five other funds that include money that is externally restricted, such as research and donor funds.
Page 12 of the 2022-23 Audited Consolidated Financial Statements shows the surplus and deficit by fund and, in particular, the $50 million deficit in the operating fund. The large deficit was partially driven by a $30M transfer to the capital fund to pay for the remaining portion of the internal loan for the Queen’s Centre Construction costs. Excluding this capital fund transfer, the operating fund deficit would still have been a sizable $20 million.
Can Queen’s pause any current or planned capital projects to save money?
Almost all of the approved capital projects currently underway at the University are funded primarily from sources outside of the operating fund (i.e. funds such as donations, student contributions to the John Deutsch Centre Revitalization Project, government grants, and ancillary funds). Pausing these projects would not provide a source of funds to offset the operating budget pressures.
In 2016-17, the Queen’s operating budget's budgeted income from the Pooled Investment Fund (PIF) was increased from $4.2 million to $5.2 million in recognition that the fund’s value had risen from $155 million in 2012-13 to $210 million and that it was therefore producing more investment income. Since that time the value of the fund has increased to $561 million (as of September 30, 2023) but the amount budgeted remains at the level set in 2016-17. Why has the university not increased the budgeted figure in light of increases to the value of the PIF?
The operating fund has benefitted in recent years from increased interest income on its cash balances, held outside the Pooled Investment Fund.
PIF investment returns in excess of $5.2 million are deposited in a capital reserve to support capital investment priorities at Queen’s, as world-class academic facilities are essential to supporting the university’s academic mission. Beyond the internal loan payments to fund internal debt, these funds are the only source of operating funding available to support capital expansion of the university’s academic / research facilities. The capital reserve also serves as a buffer in years when investment losses are significant.
Because of the nature of expenses supported by the operating fund it is imperative that the operating budget be supported by a reliable and stable source of funding. The investment objective of the Pooled Investment Fund is to maximize medium term returns subject to the risk tolerance as determined by the Board of Trustees. Investments in the Pooled Investment Fund include equities, fixed income, and real assets and must be made in accordance with the Board of Trustees approved Statement of Investment Policies and Procedures. Annual investment returns are very volatile, and it would not be responsible to use such a volatile source of income to fund base operating expenses such as salaries. As reported in the 2023 financial statements, investment income (across all investment portfolios) swung from $12.8 million in 2021-22 to $84.4 million in 2022-23. In the current year, as of August 30, 2023 year to date investment income earned by the Pooled Investment Fund was $17.1 million. Investment income dropped to a year-to-date loss of $2.1 million by September 30, 2023. The volatility of returns over the last ten years are presented below.
DBRS Morningstar’s May 2023 ratings report for Queen’s University listed the university’s expendable resources, defined as unrestricted net assets, most internally restricted net assets, and internally restricted endowments, at $768.6 million. Given statements that “The reserves will not last for much longer, and many funds are not available for general use” will the university provide clarity on what unrestricted and internally restricted funds it holds and what the restrictions are on these funds?
Details of the university’s unrestricted and internally restricted reserves are reported annually in its audited financial statements. A breakdown of expendable assets as calculated by DBRS is presented in Table 1.
The majority of the $768.6 million is not available to help mitigate annual deficits. Internally restricted endowments already provide a stable source of ongoing funding to support the university’s operating budget, as well as department chairs, etc. Spending from the Pooled Endowment Fund is governed by a Board of Trustees approved Spending Policy.
Capital and research reserves are committed to support current and future capital and research projects, respectively. Sinking funds are committed to servicing the university’s future debenture repayments. The pension reserve has been set aside to fund potential future pension commitments related to past service as with the transition to the University Pension Plan the university remains responsible to fund pension deficits related to past service, should they arise. Operating contingencies (departmental carry-forwards or reserves) are available to help mitigate annual deficits, and were reduced to $136,718 million at April 30, 2023.
Departmental reserves can be used to bridge to a point of guaranteed funding relief – meaning that we have certainty that revenues will increase for example because of confirmed changes to tuition fees or provincial grant funding, but Queen’s has no such certainty as it is anticipated that the university will face budget pressures for a number of years. As noted above, operating contingencies (departmental carry-forwards) were drawn down to $136.7M on April 30, 2023 and will likely be drawn down by a further $48M by April 30, 2024. The only way to pay for the operating budget shortfall is by using carry-forwards/reserves (effectively our savings account).
Why did the $30 million Queen’s Centre Loan have to be repaid in 2022-23?
Because the transfer was an internal accounting decision, the decision to “fund” the Queen’s Centre debt had no impact on the cash available to support the university’s academic mission. The transfer simply reduced the debt reported in “internally financed capital projects” and reduced the level of capital reserves. Both balances are reported annually in the university’s audited financial statements. Offsetting these two amounts reduced the risk that a reader of the annual financial statements would reach an incorrect conclusion about the funds available to support new capital infrastructure priorities at Queen’s.
Because the only source of funding for the Queen’s Centre debt is the operating budget (as expected donations to fund the project did not materialize), if the balance had not been funded in 2022-23 future operating budget allocations would have been required to fund the balance reducing funding available to support the academic mission.
All remaining capital project internal loans have funding plans in place. The risk of capital projects proceeding without full funding plans has been mitigated through updates to the Board of Trustees Capital Projects Approval Policy. The Board of Trustees will not approve a capital project without a full funding plan.
The Capital reserves at April 30, 2023 were $164.2 million. Why Can't we use these reserves to manage the budget deficit?
The majority of the university's capital reserves are committed for specific purposes, as detailed in the table below.
