DBRS Confirms York University at AA (low)

DBRS has today confirmed both the Issuer Rating and the Senior Unsecured Debentures rating of York University (York or the University) at AA (low), with Stable trends. The ratings are supported by York’s track record of prudent financial management, sound academic reputation and sizable expendable resources equal to long-term debt. However, DBRS notes that a reduction in government funding, a weak enrolment outlook and persistent inflationary pressures have combined to create a challenging structural budget deficit that will need to be overcome in order for York to return to a balanced operating position.

A 4.1% year-over-year increase in expenses outstripped revenue growth of 2.7% in 2012–2013. The spending increase was tied primarily to growth in salaries and benefits, as most other expenditure areas remained stable or declined. On the revenue side, enrolment expanded by 1.3% in line with expectations driving student fee revenues higher. Stronger investment returns and other grants also supported revenues, while ancillary services remained flat. Overall, the University reported a DBRS-adjusted operating deficit of $1 million, excluding a positive post-employment benefit remeasurement of $59.9 million stemming from the adoption of new accounting standards. York’s long-term debt burden fell slightly in 2012–2013 to $305.9 million, or $6,247 per full-time equivalent (FTE), among the lowest of DBRS-rated universities. Interest coverage declined to 2.3 times, while pension deficiencies have eased slightly as a result of stronger asset returns.

York’s most recent four-year plan includes base budget cuts of 3.5% for each of the next three years and 2% in 2016–2017. The University forecasts that domestic enrolment will fall slightly, though this will be partially offset by international student growth. As a result, a net decline of $3.5 million in combined tuition and grant revenues and a $1.9 million net reduction in academic expenditures is budgeted for 2013–2014. Recent policy changes from the Province of Ontario (rated AA (low)) have further constrained flexibility, with the new tuition framework limiting annual fee increases to an average of 3%, down from 5%, depending on type of program and year of study.

In response to these pressures and widening budget shortfalls each year, the University is expected to temporarily defer provisions to fund non-pension post-employment benefits, reduce maintenance and suspend sinking fund contributions. Additionally, a comprehensive academic and administrative prioritization exercise has begun that aims to restore balance by streamlining services and could include rationalizing program offerings. The University is also implementing an activities-based budget model to support stronger spending discipline. DBRS is encouraged by the University’s efforts to address this misalignment and will monitor this initiative closely.

Capital spending is anticipated to fall as major projects have been limited to those that have secured external funding, including senior government grants and upfront donations. However, the University is currently contemplating raising up to $100 million in new long-term debt to refinance a portfolio of internal loans and take advantage of a low interest rate environment, though the plans are yet to be finalized. DBRS expects the proposed issuance to push debt-per-FTE to approximately $8,200, with interest coverage potentially falling below 2.0 times. Although DBRS views this as manageable, further debt growth beyond this level could pressure the rating, especially if the pension deficiency fails to improve and the operating environment remains challenging due to falling enrolment and constrained government funding.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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.