8. Operating and Capital Budgets

From 1977-78 to 1995-96, the universities' share of Ontario's budgetary expenditures (excluding public debt interest payments) fell from 5.92% to 3.93%; if spending on universities had remained at the 5.92% share, the provincial grants would have been higher by about $940 million, which is a full 50% of the current grants in 1995 of $1.85 billion. The Task Force believes it is time to end the decline in the share of the provincial budget which goes to university grants, in recognition of the central role which universities have played and will play in Ontario's economy, society, and culture. The people of Ontario cannot compete and succeed in a knowledge-based society unless our universities are treated as a priority in provincial government budgetary decisions.

Western will continue to make the case at every possible opportunity of the need for more adequate funding of university teaching and research in our province. Nonetheless, we must plan for the future on the basis of forecasts of our revenue which are prudent, given all the information available to us. Given the size of the provincial debt and the upcoming cut in federal transfer payments, the immediate fiscal outlook is extremely difficult.

Western must thus prepare for financial restraint during the coming years which will be even more severe than that of the past decade. To illustrate the fiscal pressures we are likely to face, we have constructed two simple forecasts of real operating revenues over the next decade and compared the forecasts with our actual experience over the past decade. The forecasts represent not what we desire for the University in terms of funding, but rather what we consider to be prudent scenarios of future events. The assumptions of the forecasts are as follows:

• Government grants have been modelled as being cut by 15% over two years (10% in 1996-97 and 5% in 1997-98), or 20% over two years (15% in 1996-97 and 5% in 1997-98).
• Tuition fees increase at 10% a year for three years, beginning in 1996-97, and then grow at 5% a year until 2005. We assume that government-funded student loans will increase in step with tuition.
• Other revenues remain at their current level for the decade.
• The Canadian Consumer Price Index, which is used to convert nominal revenues to real revenues in 1995 prices, is assumed to grow at 2% a year throughout the next decade.
• Western's FTE student population follows the projections provided for the 1995-96 University Operating Budget by SCUP's Subcommittee on Enrolment Policy and Planning, and thus FTE's decline to 21,193 in 1998-99. We assume FTE's will be constant thereafter to 2005.

The provincial election of June 1995 resulted in a new government, and we are likely to learn over the coming months much more about the government's intentions with regard to university grants and tuition. As new information becomes available, our forecasts must, of course, be reconsidered.

With regard to government grants, we believe that the combination of reductions in federal transfers to the provinces and efforts to reduce Ontario's own budgetary deficit are likely to result in cuts to university grants over the next several years. We also believe that once that transition period is concluded, grants may be fixed for some time. We would prefer a scenario in which grants continue to rise, reflecting the importance of higher education to our society and economy, but in Ontario's current circumstances that seems unlikely.

We expect tuition fees will continue to increase. In our forecasts, in today's prices, average tuition fees would increase by about 50% over the next decade, reaching by the year 2005 about $3,750 Canadian in 1995 prices, still less than the fees at many U.S. state universities. Tuition fees in 2005 would be nearly 40% of total revenues, about the same proportion of revenues at Western as in 1960.

Other revenues in our budget consist of recoverable salaries for medical clinicians which flow through the University's Operating Budget (these salaries account for about 60% of other revenues in the 1995-96 budget) and a diverse group of other recoveries, fees, and income. We could see no reason to expect a particular trend in the total of these items, so we have kept this category of revenues constant over the next decade.

The simulations forecast a sharp drop in real operating revenue over the next three years, which would mean that budget cuts to units would be even more severe than during the past three years. Real revenue per FTE student falls over the next decade by 1.4% in the "Low Grant Cuts" scenario, and 5.9% in the "High Grant Cuts" scenario.

The Task Force also considered the shares of the budget devoted to various activities. For the purposes of this analysis, the breakdowns used in the Council of Ontario Financial Officers (COFO-UO) data were used. Western spends proportionately more than most other Ontario universities on libraries and central computing. Western's expenditures on student services are proportionately greater than those at eighteen other Ontario universities; however, this category of expenditures includes those services funded through ancillary student fees in addition to expenditures on scholarships, bursaries and awards. In the case of expenditures on administration and all support areas, Western continues to spend proportionately less than most other Ontario universities.

Historically low expenditures on physical plant and academic equipment renewal, however, may well compromise the future of scholarly activity at Western. The University has accumulated a deferred maintenance backlog that exceeds $100 million. More resources must be devoted to essential infrastructure support, or the University runs the risk of not being able to continue to offer certain programs or the more immediate risk of endangering students, faculty and staff. Development of a University strategy that would see a greater portion of operating budget resources directed to maintenance, renewal and adaptation of its physical plant will be necessary. The single most important issue identified in the Capital Budget is that of deferred maintenance of the University's physical plant.

The University has an accumulated deficit of about $4 million in the unappropriated reserve of the Operating Budget. The Board's target for this reserve is a positive accumulated balance of 1% of the Operating Budget, or about $2.5 million. Given the strong commitment which Western must make to funding the deferred maintenance problem, the Task Force suggests that the approach to the unappropriated reserve target be gradual, with the University adding $250,000 a year to the reserve until it reaches the 1% target.

Budget cuts have produced a significant reduction in the level of employment at the University over the past five years. These reductions have taken place without a commensurate reduction in the teaching and research responsibilities of the University. In view of the fiscal issues identified by the Task Force, it seems clear that this downward employment trend will continue. In percentage terms, the decline in employment has been greater in Support Units than in Faculties, and greater among staff members than among faculty members.

In recent years, initial unit cuts have been across-the-board. In 1995-96, for example, cuts to Faculties are 0.83% for the Social Contract recovery, 0.75% for the Academic Redistribution Fund (ARF), and 0.70% to balance the budget; similarly, cuts to support units are 0.83% for the Social Contract recovery, 0.75% to support the "UWO Scholarship for Graduate Study", and 0.70% to balance the budget. We believe that the average overall budget reductions for the next three years will be greater, and perhaps significantly greater, than those required in 1995-96. The Provost-designate has indicated that, beginning in 1996-97, it is his intention to construct annual budgetary recommendations in a differential rather than an across-the-board manner. Future recommendations of budget reductions to Faculties and other units will be selective and sufficient to accommodate strategic redistribution initiatives as well as the overall budgetary expenditure cuts necessitated by revenue reductions.

Across-the-board reductions will no longer be used to support particular initiatives (e.g., the Academic Redistribution Fund). Instead, specific budgetary reductions will be recommended differentially for each Faculty and support unit. This revised approach to the annual planning process will be reflected in the planning guidelines distributed by the Vice-Presidents in the fall of 1995 and will follow the established course of planning meetings and subsequent recommendations from the Provost to the Senate and Board of Governors. Differential budget reductions are best done on the basis of multi-year planning. Where possible, the Provost will give particular Faculties an indication of his plans with regard to budget changes on a multi-year basis.

We should anticipate the argument that in light of the budgetary difficulties of the University, provision for deferred maintenance or redistribution should not be made in next year's budget. We disagree strongly with this argument; rather we feel it is vital that the University maintain its ability to fund important new initiatives, and redistribute funds to outstanding units, whatever the degree of financial constraint we face.

The cost structure and experience of the University dictate the need for policies and strategies to better control and manage operating costs. A broad range of strategies must be examined if Western is to meet the coming fiscal challenges successfully. A particular challenge for the University lies in the area of employee benefit costs and the University needs to be concerned at the rate of growth and cost of overall benefits. The University should also recognize significant projected future liabilities in the area of its responsibility to provide benefits to retirees. Currently, the University expenses benefit costs for retirees when they are actually paid; changes in practices by the Canadian Institute of Chartered Accountants may require the costs of post-retirement benefits to be expenses during the working career of employees. This change would result in recording an unfunded liability estimated to be as high as $45 million in the University's 1995-96 Operating Budget.

In support of openness and accountability, the University should continue to report quarterly on the progress of the annual operating and capital budget, as approved and modified in- year. This reporting should continue to be a matter of public record, with wide and convenient availability, including in electronic formats.

The Task Force identified the need to ensure a sound fiscal base for planning of acquisition and replacement of academic equipment, with particular emphasis on teaching equipment. Western is accumulating significant academic equipment renewal deficit, and this is of concern to all Faculties. Deans are expected to provide for renewal of academic equipment, and these issues should continue to be formally integrated into the annual and multi-year operating budget planning process. Some Faculties have established reserves that are used to replace equipment as required to maintain the quality of academic programs, but others would have to forgo operational resources to fund these equipment needs.

The Task Force also reviewed the past performance of the University's 25 ancillary operations and related companies. It is clear that many of these are operating successfully and do not represent risks to the University's Operating Budget. However, some operations do have significant accumulated deficits, and these deficits could represent a long-term risk, which must be addressed.

Related Graphs

• Figure 24: Expenditures Per Client Served in Ontario
• Figure 25: Ontario Universities' Share of Provincial Budgetary Expenditures
• Figure 26: Western: Real Operating Revenue
• Figure 27: Western: Real Operating Revenue per FTE Student
• Figure 28: Western: Tuition Revenue as a % of Total Operating Revenue
• Figure 29: Deferred Maintenance at Western Funding Deficit Forecast
• Figure 30: Operating Employment at Western (Index of FTEs, 1989-90 = 1.00) (Support Units and Faculties)
• Figure 31: Operating Employment at Western (Index of FTEs, 1989-90 = 1.00) (Staff Members and Faculty Members, excluding clinicians)
• Figure 32: Western: Fall 1994 Classroom Use by Period of the Day

Recommendations

i. ending the decline in university grants as a share of the provincial budget. The Province should acknowledge that over the last two decades, universities have seen their real expenditures per student significantly reduced while other major sectors of provincial spending have experienced significant increases in real expenditures per client served;

ii. granting the universities far more flexibility in setting tuition fees. Such flexibility would support a larger number of full or partial cost recovery programs in the professional areas and the setting of differential program fees based on factors that could include demand, potential financial benefits for graduates, and the costs of mounting the program;

iii. supporting an effective and fair Income Contingent Loan Repayment Program (ICLRP). Models proposed by the Council of Ontario Universities promise to provide reasonable access to financial support and a system of repayment that recognizes variations in post-graduation incomes.

8.3 The University should examine options for controlling other costs to assist in meeting the future fiscal challenges, such as: elimination or merging of support services where possible without compromising the academic mission of the University; exploring restructuring alternatives for all services; examination of alternate methods of providing service, including decentralization, contracting-out services, or encouraging privatization of services.

8.4 The Vice-President (Administration) should ensure that cost structures within ancillary units are subject to the same rigorous examination as the Operating Budget units. The results of such examination for all student-funded ancillary units shall be summarized and presented to the Student Services Committee during the annual budgeting process.

8.5 Western's policies with regard to employee redundancy should be reviewed to ensure that a broad range of options remains available to individuals who lose their jobs as a result of future budgetary restrictions.

8.6 An annual base budget transfer of $750,000 should be made from Western's operating budget starting in 1996-97 to a Deferred Maintenance Fund, and maintained for the next ten years; at the end of the decade the annual transfer would then be $7.5 million. Progress on deferred maintenance projects should be reported to Senate and the Board of Governors as part of the annual budgeting process.

8.7 Beginning in 1996-97, SCUP should recommend to Senate a single University Budget, including both operating and capital budgets.

8.8 Each Faculty should submit a specific plan to renew and maintain its academic equipment as part of the Annual Operating Budget approval process.

8.9 The Vice-President (Administration) should prepare the necessary action plans for the Board of Governors to deal with those ancillary operations that represent substantial risk to the Operating Budget. In particular, the Task Force endorses an in-depth review of the funding arrangements for Windermere Manor, at the University of Western Ontario Research Park.

8.10 The Provost, in conjunction with the Deans, should investigate the feasibility of increasing undergraduate course and program availability in the summer term. The Provost should also assess the utilization of classroom facilities across the campus to ensure that appropriate scheduling makes the greatest possible choice and flexibility of courses available to students. Optimum space utilization will also enable the University to use its existing facilities most efficiently and minimize the need for new construction.