University budget update
[img_inline align=”right” src=”http://padnws01.mcmaster.ca/images/UH_GH.jpg” caption=”McMaster University faces financial challenge with new budget plan. Photo credit: Deborah McIvor”]Dear members of the McMaster community,
We are writing together to provide you with the most recent information concerning McMaster's budget. The 2006/07 consolidated budget was received by the Board of Governors at its meeting earlier this month.
In the usual process the budget would have gone to the Board for approval. But this is an unusual year. McMaster is facing a financial challenge that it has not seen since the early days of the Common Sense Revolution in the mid 1990s. The budget for 2006/07 is running a structural deficit. It has been balanced but this was only achieved by making funding decisions that cannot be sustained in the medium or long term. We need to make some significant changes to the way we operate and we are now committed to creating an action plan that will provide a truly balanced budget within three years. This plan will be presented to the Board in December. The Board has expressed its full confidence in management's ability to resolve the financial situation and while the Board is willing to assist if asked, it will be up to the University to find solutions.
For those who've been at McMaster for some time, the message that this is a tough budget year may appear to be a familiar refrain. But let us assure you, there are fundamental, structural problems with funding and spending at the University that must be addressed in a systematic way.
Before we get into some of the details, here are a few key points:
It is also important to remember that McMaster, like all universities, must do its financial planning in the context of a provincial funding model that limits tuition increases, has not always set provincial grants based on student numbers, guarantees student access and until very recently has made predicting financial resources quite difficult.
McMaster is not alone in facing financial challenges, but a number of important issues make our financial situation particularly problematic. We are going to be frank about the challenges we face. For the 2006/07 fiscal year the ongoing structural deficit within the overall university budget is almost $10 million. Four out of our six Faculties and a number of other key divisions such as the Library will be running deficits. While our overall revenue is predicted to increase by about $40 million, the new revenue comes with many strings attached regarding how it can be spent.
Every year our incremental costs for our current level of activities go up by about $16 million. This is mainly due to salary and benefit costs increases and rising utility prices. In the government grant there is no allowance for inflation so this money must be found within the existing budget. In addition, this is the third and final year to fully restore the current service costs of the salaried pension plan in the operating budget at a cost of over $7 million. Much of the new money we receive is not available to fund these cost increases and is tied to new and expanded programs such as the growth in graduate numbers and the expansion of the medical school
The Budget Committee under the strong and dedicated leadership of John Berlinsky has met these challenges head on. In order to balance the budget, discretionary spending has been restricted, including money set aside to implement new programs under Refining Directions. The use of reserves and carry-forward departmental funds have allowed us to balance this year's budget.
In addition to the full current service costs of the pension plan referred to above, another significant expense the University faces is funding the pension deficit. We will receive the updated evaluation early this fall, but we anticipate that funding this deficit will cost approximately $13 million for each of the next three years. Funding for this cost cannot be absorbed by the operating budget and must, unfortunately, be funded through internally restricted net assets within the Universitys endowment. This loan will be repaid from the operating budget over a number of years. Furthermore, using some of our endowment funds reduces the amount of money the endowment is able to contribute to the operating budget on an annual basis. This lost revenue will amount to approximately $1 million a year within three years.
You are probably aware of the new fundraising campaign that the University is launching. We have found alternative ways of financing the majority of the new comprehensive fundraising campaign which means that only a small amount of its funding will come from the operating budget.
So where do we go from here? The changes that will be required will be substantive, and there is an urgency to preparing the three-year plan to create sustainable and balanced budgets. The provost has already been meeting with the deans and Faculty business managers to explore new ways to reduce costs and increase revenue. Sessions drawing together expertise on campus will continue throughout the summer. Karen Belaire, vice-president, Administration, has taken similar steps within her portfolio. We will be looking to engage faculty, staff and students from across campus in finding solutions. Some of the best outcomes come out of the toughest challenges.
Our fiscal situation does not change our goals as outlined in Refining Directions. It does highlight the urgency of getting our fiscal house in order so that we have the flexibility we need to continue to provide students with the best possible learning environment, to advance our areas of research excellence, and to build an inclusive community with a shared purpose.
Right now one of our shared purposes needs to be the financial health and sustainability of the University to ensure that the learning and research mission can be achieved. We do need to change and we all need to work together to find solutions. More details about the process and opportunities to participate will be communicated over the coming weeks. We urge everyone to get involved as we develop recommendations to meet our budget challenges.
Yours sincerely,
Peter George, President
Don Green, Chair McMaster Board of Governors
