DBRS Confirms University of Toronto at AA, Trend Stable

DBRS has today confirmed the Issuer Rating and Senior Unsecured Debentures rating of the University of Toronto (the University or UofT) at AA, both with Stable trends. The University continues to benefit from a solid academic profile, which has led to sound enrolment growth, substantial endowment assets and prudent management practices. However, sizeable unfunded pension liabilities, deferred maintenance needs and a tight operating environment greatly limit flexibility within the current rating.

Financial performance deteriorated in 2011-12, as the University recorded a consolidated deficit of $34.5 million, or 1.4% of revenues. Revenues rose by 3.5%, driven by enrolment growth of 2.2%, average tuition increases of 4.3%, and a boost in tuition receipts and government operating grants, although declining investment income provided an offset. Expenditure growth continued at a solid pace of 5.4%, spurred by continued salary and benefit pressures, and additional costs related to higher enrolment, research activities and an expanded capital base. The budget is balanced for 2012-13, with revenues 6.7% higher than the prior year, supported by sustained enrolment growth of 2.3%, which will continue to drive tuition and operating grant revenues, but will also lead to increased cost pressures. Cost-containment measures are planned within the shared-services portfolio to help maintain fiscal balance.

As expected, the University issued $200 million in debt in 2011-12, raising its debt burden to $727.7 million, or $10,688 per full-time equivalent. The interest coverage ratio declined to 2.6 times, its lowest level in recent years, on weak operating performance and increased debt charges. Endowment assets dipped slightly to $1.5 billion during the year, but remain the largest endowment among Canadian universities. In recent years, extensive capital projects have been undertaken, adding capacity to support enrolment growth. As such, no meaningful debt needs are foreseen in the near term, which should keep the debt burden stable, albeit elevated for the rating.

The most significant challenge the University faces is its unfunded pension liabilities. The latest actuarial valuation of UofT’s pension plans was conducted as of July 1, 2011, and shows a going concern deficit of $1.02 billion (down from $1.07 billion in prior year). This poses considerable downward pressure on the University’s financial flexibility and resources, as extra special payments of $110 million annually will eventually be required by 2015-16. As part of recently concluded negotiations, UofT secured employee pension contribution increases that will help address the future sustainability of the pension plans. Nonetheless, further deterioration in the deficiency, failure to secure Stage 2 solvency relief from the Province of Ontario (rated AA (low)), or material new debt needs would likely have negative rating implications, as even greater demands would be exerted on the University’s operations. UofT will adopt accounting rule changes in 2012-13, which will meaningfully boost the net asset position and consequently increase the University’s debt capacity relative to its current internal debt policy (although the debt policy may change pending Board approval in November 2012). Yet DBRS believes that the strained operating position, cash flow pressures resulting from increased pension funding costs, and an uncertain provincial funding environment limit the University’s ability to raise additional debt without meaningfully eroding financial flexibility.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Public Universities, which can be found on our website under Methodologies.