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. UofT benefits from a track record of sound financial management and an excellent academic reputation, which has led to healthy enrolment growth and substantial endowment assets. However, amid growing pension funding costs and a tight operating environment, proactive management will have to be sustained to prevent undue erosion in operating results.

Consolidated results rebounded strongly in 2012-13, on solid financial market performance, better-than-expected full time equivalent (FTE) enrolment growth of 3.3% and prudent expenditure management. A consolidated surplus of $173.3 million was reported. However, DBRS makes adjustments to exclude the gains from the remeasurement of employee benefits ($46.1 million) resulting from the adoption of new accounting standards, translating to an adjusted surplus of $127.2 million, or 5.0% of revenues in 2012-13. The University’s debt burden fell to $726.0 million or $10,326 per FTE in fiscal 2012-13. Endowment assets benefited from resurgent financial markets, rising to roughly $1.7 billion by April 30, 2013, the highest level among Canadian universities, which translates to $23,662 per FTE. Expendable resources remained substantial, accounting for 128% of debt and providing considerable flexibility to address financial obligations. A balanced budget was presented for the current fiscal year, including the elimination of the operating fund accumulated deficit.

The medium-term outlook points to continued balanced results. However, DBRS expects budget pressures to remain elevated, especially in light of a more restrictive tuition framework and the squeezing of government funding. Unfunded pension liabilities remain the most pressing challenge facing the University. Encouragingly, a recent estimate of the University’s pension plan shows improvements on both solvency and going concern bases, which bodes well for the upcoming valuation, as the interest rate environment and financial markets show signs of picking up. However, the current pension contribution strategy calls for pension special payments to increase to $110 million per year by 2015-16, up more than threefold from several years ago. The University will be applying for Stage 2 of the Province of Ontario’s (the Province; rated AA (low)) solvency relief program, which would allow the solvency deficit to be amortized over ten years, rather than five years as otherwise required. DBRS notes that failure to attain Stage 2 relief would exert even greater pressures on the University’s operations, though the increased employee contributions secured during the last round of labour negotiations meets the conditions required for approval.

Capital expenditures are set to increase in the coming years to accommodate further enrolment growth. Several large projects are underway, and others are in early development stages. The University has indicated that no new external debt is required over the near term. A new “build to budget” approach is being used to better manage the scale and associated debt needs of capital projects, and some early success has been found in the implementation of this new approach. Furthermore, the University is looking to the ongoing fundraising campaign as a key source of future capital funding.

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.

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

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