Posts tagged with endowment.

Bad credit ratings might kill university programs

Joey Coleman, March 10, 2010 at 4:52 PM

Coleman's Campus blog: The second wave of financial bad news is about to hit universities

 

The Great Recession is effecting post-secondary institutions right across the country and is forcing higher education to make tough choices. McMaster University, in my hometown of Hamilton, is no exception. Recent events at this university are illustrating the current reality and behind-the-scenes preparations for more financial constraints that are occurring at every Canadian university.

 

The planned end of McMaster's Art History program is a good example of the complexity of decision making within academia. In short, the Dean of Humanities at McMaster, Dr. Suzanne Crosta, has proposed a realignment of programs within the university's School of The Arts, which will result in the end of Art History as a major at McMaster.

 

The funding that is required to continue Art History as a major will instead by used to create a program offering both a bachelor's- and master's-level fine arts degree as part of an expansion of McMaster's studio arts program.

 

(The Hamilton Spectator has a good article summarizing the situation.)

 

On the surface, there are no budgetary cutbacks involved in this decision. Scratch beneath the surface and financial considerations are clearly visible - McMaster's Dean of Humanities is strengthening her faculty in preparation for the coming fiscal restraint that will determine the direction of the sector for the next five years.

 

There will be financial cutbacks coming at most universities in Canada and McMaster is no exception. However, the causes will not simply be government funding restraint, nor the decline in endowments played up in the media (as these aren't used for operating funds, anyway). Instead, it will be fiscal problems caused by the financing habits of the past that are going to be the primary drivers of the coming austerity.

 

Pension plan deficits, heavy debt loads from decade of borrowing, and severe drops in the size of endowments are creating the "perfect storm" that is about to hit universities.

  

Another future potential danger is a drop in universities' credit ratings. As endowments have dropped with the markets, they have become smaller assets, which can make universities look like greater risks for loans. This could affect the credit rating of institutions as measured by Dominion Bond Rating Service and Standard and Poors. Any decrease in credit rating will increase interest charge cost for an institution - charges which will have significantly more impact on budgets than the temporary stop of interest payouts from endowments (in other words, universities with lower credit ratings might have to spend more paying off interest costs on loans and less on operating budgets).

 

This brings us back to our example: McMaster Art History.

 

Last year, McMaster's AA credit rating was confirmed by DBRS but not without the university having its trend classification listed as "negative." Noting the downturn in the financial markets will both decrease endowment assets and increase pension deficits, DBRS was not optimistic about the university's future credit rating. Combined with other financial concerns the report states "DBRS expects the downward pressure on the University's rating to continue to intensify over the coming year." 

 

McMaster's credit rating report for 2010 will be released by DBRS in late March or early April. If McMaster's credit rating drops, it will create serious financial problems for the university.

 

The closure of the standalone Art History degree at McMaster must be seen in the overall financial context of the university. For decades, Canadian universities have been allowed to be unfocused and offer a wide range of degrees - in short, to be all things to all people. With fiscal constraint now the theme, universities have started closing down small programs that do not fit into the interdisciplinary areas that institutions are starting to focus themselves on. Programs that cannot be justified based upon enrolment or contribution to the research focus of the institution will be cut by central administrations during the next few years.

 

Instead of waiting for the central administration at McMaster to cut Art History due to its low enrolment and lack of fit within the health science focus that McMaster is adopting, the Dean of Humanities sees the writing on the wall and is acting proactively in preparation for the coming financial cuts. By reallocating the faculty's current School of the Arts budget into high demand studio arts programs, the School of the Arts will be spared the worst of coming budget cuts by no longer being the low-hanging fruit on the budget tree.

 

While student politicians are upset at the Dean and accusing her of betraying the humanities, they are failing to see the storm just over the horizon. She is moving her faculty into the future model that will have to be adopted by all Canadian universities - they have to be focused and cannot offer every possible niche program.

 

Emotions are high at McMaster and the current Art History students are naturally upset to see a good program which they love being shut down due to forces outside their control - finances and low enrolment. The Dean is guaranteeing every current Art History student will be able to graduate and receive the courses they need to continue into graduate programs; even three years from now, when enrolment in the program will be down to a handful of fourth-year students.

 

Universities across the country will be forced by fiscal reality to cut programs and this story will be repeated many times over the next few years.

 

What is most concerning about the McMaster example is that the institution's financial fundamentals - while bad - are in better shape than most other institutions. According to my sources, McMaster's long-term debt per full-time student is only in the $6,600 range and the AA credit rating the university has held is the second highest possible rating and the highest level achieved by universities in Canada.

 

What will happen at other universities?

Tagged with interest, budget, cuts, rating, credit, program, endowment | Comments (24) |