Fall 2023 Operating Budget Update

The University of Waterloo is a leader on the global stage, synonymous with innovation, ingenuity, and resilience. As an institution, we are committed to excellence in teaching and learning, and research and scholarship in support of the University’s mission and strategic goals. These are the driving factors behind careful decisions that have been made over the years in order to create a strong and stable future for our University. These decisions have helped us navigate uncertainty and prepare us for challenging times. We find ourselves now in a challenging time, to which I would like to bring broad awareness, as an important part of our community’s common path forward. 

Last Spring, the Board of Governors approved the University’s 2023/24 Operating Budget. At the time, we knew that it would be a challenging financial year for our institution, which was reflected in a $4 million operating budget deficit at the start of the year and uncertainty surrounding in-year effects of Bill 124 related adjustments to salaries, student enrolment projections, inflationary and interest rate effects, and outcomes from the Ontario Government’s Blue-Ribbon Panel examining the financial sustainability of the post-secondary sector. We committed to providing an extraordinary Fall operating budget update once we had some critical pieces of information. I am now able to provide this financial update for the institution.

Critical Systemic Factors

Fiscal responsibility, including balanced budgets, has been and is of central importance to the University. But in recent years, a number of systemic factors related to the basic mechanism of funding universities have evolved, which over time have eroded our ability to continue to buffer challenging economic, political, and geo-political circumstances that are negatively impacting our ability to balance the operating budget this year.  

In particular, the provincial government’s imposition of a 10 per cent domestic tuition cut in 2019, followed by an ongoing freeze on tuition fees for domestic Ontario students, has had severe cumulative impacts. These measures have brought domestic tuition rates down to the level they were in 2014/15, reducing the University’s revenue by tens of millions year over year, for a total impact of >$250 million over the five-year period.

Similarly, provincial basic operating grant funding has been essentially frozen for over ten years and therefore the relative contribution of grant to University operating budget revenues has progressively declined over the same period, currently at approximately 27 per cent. In the lead up to negotiating the third Strategic Mandate Agreement (SMA3), the University was undergoing some strategic net growth in domestic student enrolment in anticipation of additional government grants to support these students through an expanded corridor in SMA3. However, the government made a decision to eliminate the possibility of enrolment corridor expansion from the SMA3 discussions at the beginning of negotiations. This, and some further incremental domestic growth over the past five years, has resulted in the University being approximately 8 per cent over the funded student threshold (i.e., the corridor) which has resulted in a corresponding reduction in government grant funding per student. At present, this represents an annual unfunded gap of $22 million in grants related to domestic student enrolment for the University. Together, with a number of provincially imposed unfunded and under-funded mandates around student and community supports, the gap between government direction and government funding has grown significantly.

The lack of attention of the federal government to actioning systematically identified and longstanding calls for improvements in supports for the indirect costs of research and for research graduate students, has been another ongoing pressure to the operating budgets of research-intensive universities. It is also eroding the ability to continue to buffer multiple challenging circumstances.   

A global pandemic and a number of geopolitical issues have impacted student mobility and enrolment, creating uncertainties that make enrolment management and budget forecasting challenging.

Since 2019, we have managed pressures on our operating budget by implementing constraint measures including holdbacks, cuts, and the redistribution of resources which have helped to balance our operating budget and to maintain our overall financial health. However, the confluence of factors outlined above, along with evolving inflationary and market volatility, have created extraordinary pressures and will now result in operating budget deficits at the University. These factors are threatening the quality and sustainability of the post-secondary education sector across the board, and will require a transformative approach to university funding and operations very soon.

Current Year Pressures and Areas of Uncertainty

At the time of the 2023/24 Operating Budget approval, we identified several areas of uncertainty that would have future impact on the current and subsequent budgets: the Government of Ontario’s response to the Blue-Ribbon Panel (BRP), charged to make recommendations to the government on the financial sustainability of the post-secondary education sector, a report that was anticipated to be released in the Fall of 2023; student enrolment outcomes that were uncertain until November 1; inflationary and interest rate changes; and financial impacts of the settlements reached related to the Bill 124 re-opener clauses in the current compensation agreements with employee groups.

The BRP report has not yet been released, nor has the government provided a response to it. Therefore, it is unlikely that there will be incremental revenue impacts of any outcomes related to BRP until the 2024/25 budget year. 

Domestic tuition fees comprise approximately 30 per cent of the University’s operating budget revenue. Consistent with the trend over the last three years, current projections indicate incremental growth in domestic student enrolment with a smaller decrease in international student enrolment. This trend is unsustainable and causes instability when planning for international student enrolment and financial planning.  

Rising inflation rates have caused general expense pressures with the increased costs of goods and services. Interest rates have risen and have resulted in a $5 million increase in interest income projections for 2023/24, which is welcomed additional revenue but does not come near to offsetting additional costs and furthermore, may not be sustained in future years.

The effect that Bill 124 had on suppressing wage increases had temporarily alleviated salary pressures and had contributed to the ability to balance the University budget during the past three years. But when the Ontario Superior Court of Justice declared Bill 124 void and of no effect, the University activated the re-opener clauses of the faculty and staff salary agreements. Both the faculty salary adjustment and the staff salary adjustment have resulted in a base salary increase and one-time payments for all eligible employees. The base salary increases translate to approximately $16 million (salary and benefits) annual recurring expense, and the lump sum payments amount to an additional $8 million one-time expense, both applicable in the current budget year. Given that higher levels of inflation are forecast to continue for several years, salary negotiations for 2024 and beyond will likely result in further significant expense pressure.

These are trying times, but we will support our academic and research missions, and other strategic priorities, to the best of our ability. As communicated throughout this fiscal year, the University will use central operating reserves to cover operating budget deficits in the current fiscal year. Although this approach will allow us to maintain the current state of operations, it is of course, unsustainable. Depleting these reserves will affect other commitments to which these funds are dedicated, such as infrastructure and maintenance initiatives, IT systems, and strategic programmatic investments, to name a few.

This is a transformative era for the post-secondary education sector in general, and for the University of Waterloo. Significant changes will be necessary in the funding model for Ontario universities, and in how we manage resources and control expenses.

Proactively Moving Forward

Balancing the FY24 budget will require a multi-faceted approach. It is prudent to take new measures due to the magnitude of the short and medium-term challenges the University is facing. We will ensure that we work together to find innovative solutions that will bring us back to balanced budgets, while also expecting significant commitments from federal and provincial governments to help reverse the systematic erosion in the underlying funding frameworks that have occurred in the past several years.

These strategic measures will create capacity to deal with inflationary pressures that are out of our control, while continuing to support the academic and research mission, and other key priorities of the University. We will need to reduce expenses in certain areas, and reallocate resources to other initiatives and priorities, in order to improve efficiency, optimize spending, and streamline operations. Some of these essential initiatives include Campus Master planning, vital capital projects, deferred maintenance, housing projects, and other critical commitments.

It is imperative that we collectively support integrated planning and budgeting processes. These processes will define the rolling, multi-year planning that is necessary to identify operational, strategic, and financial priorities that will require resources. The Integrated Planning and Budgeting model that is being developed will be a foundational support to effective decision-making in these areas, leading to greater awareness and transparency, and efficient planning, priority-setting, and coordination. In the meantime, we will continue our advocacy work for government grant funding and on the domestic tuition framework, and continue to deliver learning and working environments that set the bar for excellence.

The Fall budget update identifies that the current 2023/24 estimated shortfall between the operating revenue and expense budget is $15 million. In light of projected future cost pressures and continued constraints and uncertainty on key revenue drivers, without further University actions and transformative changes to the current Ontario university funding environment, the operating budget deficit would grow significantly in the coming years. Some scenarios of continued revenue constraint and increased expenses, estimate that operating budget deficits could approach $100 million by 2026/27. As we await action on the items that are currently being deliberated by the government, we are closely analyzing how and where we can optimize operations and resources. There will be difficult decisions to make here but there is thorough, thoughtful work currently underway that will help us make these strategic decisions.

More information will be shared with you at the Town Hall, and in the coming weeks and months.

The University of Waterloo is known for solving complex problems with ingenuity and optimism. We will approach this challenge in the same, Waterloo way – with logic, creativity, and flexibility. And we will do it together as One University.