DBRS Confirms Queen’s University as AA, Trends Stable

DBRS has today confirmed the Issuer Rating and Senior Unsecured Debt rating of Queen’s University (Queen’s or the University) at AA with Stable trends. The University’s solid academic profile and significant endowment resources provide resilience to the credit, as does the new budget framework set to be adopted in 2013-14. However, concerns are growing over the steadily rising costs associated with the sizable unfunded pension liabilities and tight operating conditions faced by all Ontario universities.

Queen’s posted an operating deficit of $3.8 million, or 0.5% of revenues, in 2011-12, an improvement from the $8.7 million deficit posted the prior year. Revenues were up 3.7%, driven by student fee increases and investment income. Expenditures rose by 3.0% with salary and benefit costs being the main driver. Long-term debt outstanding decreased slightly to $231.6 million due to the amortization of a debenture and a mortgage. Combined with a 3.2% increase in full-time equivalent (FTE) students, the lower debt burden allowed the debt per FTE to fall to $11,015, which remains among the highest for DBRS-rated universities. Interest coverage was down, although still adequate for the rating at 2.9 times. The University’s sizable endowment stood at approximately $27,800 per FTE as of April 30, 2012, the highest among DBRS-rated universities but still down from its peak in 2007.

The board of trustees has mandated that a balanced budget be achieved in 2012-13. As such, although operating expenses are projected to surpass operating revenues by $10.4 million, drawdowns from both the University’s central reserve and reserves at faculties and schools will be used to balance the budget. The University is set to introduce a new activity-based budget model which will better incentivize faculties and departments to raise revenues and manage expenses. While this is encouraging, considerable headwinds persist as steadily increasing budgetary deficits were initially projected over the next three years, partly driven by higher pension funding expenses. The upcoming 2013-14 budget planning process is expected to address these concerns and put the operating position on a more sustainable footing. Given the fiscal realities facing the Province of Ontario (the Province) and restrictions on tuition increases imposed by the provincial tuition framework, increasing enrolment is one of the few options available to raise additional revenue. Queen’s guarantees every first-year undergraduate student a place in student housing, if so desired. Therefore, any meaningful growth in enrolment would require additional residence spaces. The University is considering the construction of a new residence building with approximately 550 beds, which will position Queen’s to take advantage of enrolment growth, should it decide to do so. The project was not anticipated at the time of DBRS’s last review and is yet to be approved. Total project costs are estimated at $55 million and could push debt per FTE up to approximately $12,500 and pressure other financial metrics. DBRS views the new residence project as potentially affordable given its revenue-generating nature through residence fees, along with the additional tuition and government grants that would accompany the increased enrolment.

The biggest financial challenge facing the University is the status of its pension plans. The most recent actuarial valuation as of August 31, 2011, showed a going-concern deficit of $151.6 million (up from $86 million in 2008). The University was granted Stage 1 solvency relief under the provincial framework for public-sector employers. To fund its pension deficiency, the University is required to make going-concern payments of $14.4 million per year for three years starting in 2012-13; these payments could eventually rise to $39.4 million annually for ten years, when solvency payments start in 2015-16, putting a significant strain on the operating budget. As such, given the tight funding environment, failure by the University to restore fiscal soundness in preparation for rising pension funding requirements could erode financial resources and adversely affect the rating.

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

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

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.