DBRS Confirms Queen’s University at AA

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 ratings reflect the University’s improving operating performance, sizable endowment resources and a solid academic profile. The recent implementation of a new activities-based budget model should support spending discipline and more stable operating performance over the medium term. Notwithstanding these strengths, Queen’s continues to face a tight operating environment amidst provincial funding restraint, rising costs associated with employee future benefit obligations, and growing debt needs to address capacity constraints.

In 2012-2013, Queen’s posted a DBRS-adjusted operating surplus of $22.9 million or 2.9% of revenues. After remeasurements for actuarial and investment gains on employee benefit plans from the adoption of new accounting standards, however, the reported operating surplus stood at $67.1 million. Revenues grew by 7.5%, driven primarily by growing enrolment and maximum fee schedule increases within the Province of Ontario’s (rated AA (low)) tuition framework, and by a notable 125% year-over-year increase in investment income on strong capital market performance. Expenditures were well contained, growing by just 1% year over year, as modest growth in salary and benefit expenses of 2.1% were offset by declines across most other spending categories.

The 2013-2014 budget plan (the first plan to employ the new activities-based revenue attribution model) projects a shortfall in the operating fund of $9.3 million. However, as mandated by the Board of Trustees, balance will be achieved through the drawdown of $3.3 million in central cash reserves for non-recurring items and $6.0 million in departmental carry-forward balances. Although departments tend to budget conservatively and have used some of these funds for one-time transitional initiatives, the budgeted drawdowns highlight the continued structural challenges facing the University amid provincial funding restraint and steady inflationary pressures.

Interest coverage for the year remained solid at 4.0 times in 2012-2013, up slightly from the previous year, while Queen’s endowment funds grew by an impressive 15.1% to $33,222 per full time equivalent student (FTE) on strong equity market returns, the highest such level among DBRS-rated universities.

The University’s long-term debt burden eased slightly to $225.3 million, or $10,540 per FTE, owing to scheduled debt repayments and moderate FTE enrolment growth. However, this debt burden is still among the highest of DBRS-rated universities and is expected to increase with new borrowing related to two new student residences. Queen’s intends to borrow $70 million to finance the project, higher than the $55 million indicated at the time of the last DBRS review, which could push leverage above $12,500 per FTE by 2015-2016. DBRS views the project to be manageable within the rating given the moderate projected impact on leverage and the revenue-generating nature of the assets through residence fees, along with tuition and government grants that accompany increased enrolment. However, should operating results deteriorate or if pension and benefit costs grow markedly above expectation, the higher debt burden could pressure the current rating.

Liabilities associated with the Queen’s Pension Plan and non-pension benefit plan remain the most serious financial challenge facing the University, with the most recent estimated actuarial valuation results indicating a solvency shortfall of $292 million and a going-concern deficit of $108 million. Assuming the University qualifies for Stage 2 solvency relief, recently announced regulatory measures will provide three years of additional relief, allowing for interest-only payments for three years with the deficit balance to be amortized in equal monthly payments over the remaining seven years, instead of the previous requirement to make solvency payments of approximately $16.0 million and additional going-concern payments beginning in 2015-2016. A number of options are being considered to manage these future obligations, including further plan reforms and the potential use of a letter of credit (LC) to fund the solvency deficit, as is contemplated in draft provincial legislative amendments for employer sponsors of public-sector pension plans.

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.