Like other Ontario universities, McMaster is preparing to face some significant fiscal challenges in the next three years. The University has always taken a prudent approach to budget planning and forecasting which traditionally serves us well for short and long term fiscal planning. Although there are challenges to be addressed, our goal is to continue to be prudent and to maintain our focus on the University's strategic goals as established in Refining Directions.

The Budget Committee (a sub-committee of the University Planning Committee charged with advising the President on the annual operating budget for approval by the Board of Governors) believes that it is important to share the nature and extent of the challenge with members of the McMaster community at this early stage of the budget process. To this end, we have scheduled two public information sessions as follows:

• Wednesday, March 31, 1:30 to 2:30 p.m. in Council Room, Gilmour Hall-111
• Monday, April 5, 1:30 to 2:30 p.m. in Council Room, Gilmour Hall-111

To set the context for the information sessions, our best estimate at this time is that aggregate revenue in 2004/05 will be a minimum of $4 million less than the amount that would be necessary to sustain operations at current levels. As a result, budget managers have been asked to prepare 2004/05 budgets based on funding allocations that will fall short of their expected increases in costs. Further, unless circumstances change markedly, the revenue shortfall is likely to be substantially greater in 2005/06 and 2006/07.

The genesis of the fiscal challenge lies with both revenues and costs. On the revenue side, two factors are paramount. First, the government has indicated that it will freeze all domestic tuition fees at their current levels. McMaster was planning to increase tuition fees in regulated programs by the permissible amount, and to introduce larger increases in selected deregulated programs. Thus the freeze implies significant foregone revenue. When the tuition freeze policy was first proposed, it was coupled with a promise to compensate institutions for the implied revenue loss. To date, however, we have no assurances on even the existence, much less the amount, of compensation. True to our budget principles, we have not included this item in our revenue forecasts.

The second significant revenue factor relates to projected enrolment. The government has just indicated its intention to sign new Enrolment Target Agreements with universities. We do not yet know what our numbers for 2004/05 will be in these new agreements, but for capacity constraint reasons if nothing else McMaster will almost certainly have to reduce our Level I intake from the 2003/04 level. Total enrolment will still rise as the double cohort works its way through upper levels, but by a lesser amount than if we had maintained or increased Level I intake. Thus even assuming, as we have, that the government funds all students admitted under Enrollment Target Agreements, incremental revenue growth will inevitably slow. In our preliminary planning for 2004/05, this anticipated reduction in incremental revenue was more than offset by a provincial commitment to provide an increasing amount of funding to enhance the quality of post secondary education. At this time, the continued provincial commitment to this initiative is unclear and once again, consistent with our budget principles, we have not included this increase in our revenue forecasts.

On the expenditure side, there are the predictable increases in the costs of compensation and other familiar items such as utility charges and the cost of maintaining expanded academic and research space. But cost pressures are even greater in 2004/05 and beyond because of some significant new, unavoidable expenses. The first is the need to resume employer pension contributions to the salaried pension plan (the Plan). Since the mid 1990's there has been an excess surplus in the Plan and the University has been restricted by legislation from making contributions to the salaried pension plan. More recently, a combination of rising pension service costs and significantly lower revenue from investments has meant that the University must once again make contributions to the Plan. The need to resume employer contributions to the Plan should not be seen as a signal of concern about the financial health of the pension plan, but rather should reassure the University community that the prudent financial management of the Plan continues to be a priority for the University. The estimated amount for 2004/05 is about $7.5 million, with significantly greater amounts projected for future years.

The other notable cost pressure is undergraduate scholarships. The good news is that McMaster has been very successful in attracting and retaining top quality students, an explicit goal of Refining Directions. But this success comes at a cost; we project an increase in expenditures for the Honour Awards program of $4.8 million over what is currently budgeted.

Even in times of revenue shortfall, perhaps especially in such times, it is essential that McMaster continues to focus on its strategic directions. Thus the Committee has constructed the budget so as to leave some scope for investing in key priority items coming out of the Refining Directions exercise and has encouraged budget managers to align their detailed budget plans with the broader strategic directions for their areas.

As you can see, these are significant issues to address. The Budget Committee has asked Faculties and administrative support units to indicate in their 2004/05 budget submissions how they will deal with increases in revenue that will fall short of their expected incremental costs. Further, we have asked managers to do this planning with the expectation that the pension contribution challenge will be significantly greater in 2005/06 and 2006/07.

We ask for your support, co-operation and ideas as we address the current budget challenges and look for further creative ways to ensure that our decisions are strategic and equitable.

Thank you.

Ken Norrie, provost

Karen Belaire, vice-president (administration)