McMASTER UNIVERSITY CONSOLIDATED BUDGET

Transcription

1 McMASTER UNIVERSITY CONSOLIDATED BUDGET Recommended by Budget Committee May 17, 2006 (Received by the Board of Governors, June )

2 Executive Summary McMaster University has a clearly defined strategic plan: Refining Directions. The goals set out in this strategic plan are: to provide an innovative and stimulating learning environment where students can prepare themselves to excel in life; to achieve the next level in research results and reputation by building on existing and emerging areas of excellence; and to build an inclusive community with a shared purpose. The implementation of the strategic plan is supported by the resource allocation as established in this 2006/07 Consolidated Budget. The context of the budget is in large part set by the Provincial Government s plan for higher education, Reaching Higher, Plan for Postsecondary Education, and by the research and learning goals of our faculty and students. In the Ontario Budget 2005, the Province announced a funding plan intended to advance postsecondary education in the Province of Ontario with the Reaching Higher, Plan for Postsecondary Education. The provincial government signaled that Universities will migrate from the historic provincial funding model to a new multi-year funding plan that invests in student assistance, access and quality. More recently, the Province announced a tuition fee setting policy, which permits the University to increase tuition fees by no more than 5% per year on a weighted average over current levels. These significant announcements have resulted in an increase of almost $40 million in new revenue. Notwithstanding the increases in Government funding and the tuition increase, McMaster faces difficult years. In addition to meeting predictable cost increases, the Budget Committee was concerned with the challenge of managing potential salaried pension deficit payments of approximately $30 million, and the third and final budget increment of approximately $7.5 million to meet the current service cost of the pension plan. The costs of post-retirement benefits, which are funded out of the current operating budget, also continue to rise. High quality teaching at world class research intensive universities like McMaster is particularly exposed to personnel cost pressures because of global competition for the best academics and the need for a world-class research infrastructure. Like many Ontario universities, McMaster has an aging and inefficient physical plant inventory which makes the University more vulnerable to increasing energy costs and significant unscheduled maintenance issues. The University is also expanding and this increase in space entails an increase in operating and utility expenses. The University continues to experience undergraduate enrolment increases resulting from the flow through of previously expanded Level I intakes and new programs. This flow through and new program expansion are unlikely to be fully funded by the government. Even during these difficult financial times, McMaster continues to explore opportunities to enhance the quality of the student experience. On a positive note, the Province has announced plans for a major investment in graduate 2 of 59

3 education to meet the increased demand of the double cohort as they move into graduate programs. Plans for the expansion of graduate student enrolment are still under discussion with the Ministry, but the budget assumes that this will be fully funded according to the existing formula. Regardless of budgetary concerns the University continues to be a leading institution with a bright and positive future. McMaster s strength is reinforced through generous donations from members of our community. In 2006/07 McMaster will launch an exciting fundraising campaign focused on achieving our vision for excellence and enabling the University community to reach the next level in innovative teaching, learning and research. The University is challenged to weigh the need for existing operations to be in a balanced position while at the same time investing in new bold initiatives that have been presented to the University. McMaster continues to work with the City of Burlington, the province and other private and public sector partners to complete planning for the Burlington Campus of McMaster University. The increased focus on commercialization, alignment with provincial and federal initiatives, and the purchase in 2004/05 of the former Camco site to develop the McMaster Innovation Park (MIP), that is expected to operate without subsidy from the University, are evidence of the outstanding work in this area. Working in partnership with the federal government, province and the City of Hamilton, MIP will be vital to the growth and support of the research and development arm of a number of key industries. Despite the success of attracting students to McMaster and the success of research at McMaster and the budget planning that has taken place, there is an overall in-year operating deficit projected to rise from $5.5 million in 2005/06 to $14.9 million in 2006/07 (of which $9 million is not funded by appropriations). There are structural operating deficits in the Faculties of Business, Humanities, Social Science and Science. In the short term, the financial situation has been dealt with in two ways. First, a short-term pool of resources, which are sufficient to deal with the deficits on a one-time basis, has been established. This pool includes modest support for initiatives leading to improved efficiency. The source of this funding results from reallocating a portion of discretionary funds and some reserves, as well as utilizing appropriations in budget envelopes. The short-term nature of these remedies underlies the urgency of instituting a long-term planning exercise. Second, with respect to the pension deficit, payments incurred, will be made from internally restricted assets. Options for future repayment of these funds are provided in the Funding of Salaried Pension Plan Deficit Amortization Contributions Section of the document. With regard to non-pension postretirement benefits that are presently funded on a cash basis as they are incurred, no immediate changes are recommended to this present system. The Campaign expenses will be provided through annual payments of $250,000 from operating funds over eight years and the remainder of the expenses will be covered from unrestricted bequests and donations and from interest generated by donations to the Campaign. A most significant feature of the 2006/07 budget is the decision to commit the University to an intense and thorough planning exercise to review academic and support areas. This planning exercise will lead to strategies that focus on long-term financial sustainability to support the goals and critical success factors outlined in Refining Directions. It is the intent of management to present this plan to 3 of 59

4 the Board in the Fall of In summary, there are several key issues: 1. McMaster University continues to achieve new levels of success in both its academic and research initiatives. Faculty and staff are to be complemented for their continuing efforts. 2. Costs are rising faster than revenues resulting in operational deficits that are not sustainable. 3. Short-term funding strategies will result in a balanced operating position for 2006/ A detailed planning exercise will be undertaken this summer. A presentation to the Board in the fall of 2006 will outline the long-term strategies to create a financially sustainable operating environment for the University. 4 of 59

5 Table of Contents CONSOLIDATED BUDGET... 6 MISSION, VISION, GOALS AND TARGETS... 8 OPERATING BUDGET 2005/06, 2006/07 AND 2007/ THE CURRENT BUDGET ENVIRONMENT SHORT-TERM BALANCING STRATEGY LONG-TERM STRATEGY GROWTH AND DIVERSIFICATION OF THE OPERATING REVENUE BASE SOURCES OF OPERATING INCOME STRATEGIC DEPLOYMENT AND INVESTMENT OF RESOURCES INVESTMENT IN TECHNOLOGY FUNDING OF SALARIED PENSION PLAN DEFICIT AMORTIZATION CONTRIBUTIONS NEW CAMPAIGN BUDGET MANAGING RISKS OPERATING BUDGET FRAMEWORK ANCILLARY FUND INCOME AND EXPENDITURES RESEARCH FUND INCOME AND EXPENDITURES EXTERNALLY RESTRICTED ENDOWED TRUST & INTERNALLY RESTRICTED ENDOWED FUNDS CAPITAL FUND MCMASTER INNOVATION PARK BURLINGTON CAMPUS of 59

6 Consolidated Budget The 2006/07 Consolidated Budget continues the integrated financial planning process begun in 2003/04. The Consolidated Budget as presented on the following page illustrates the revenues and expenditures of the following funds. Operating Fund Ancillary Fund Research Fund Trust Fund Endowment Fund Capital Fund This information is presented on a cash basis. Each column highlights a source of funding received by the University and the expenditures that relate to those revenue streams. Each fund is discussed in detail within the budget document. 6 of 59

7 McMaster University 2006/07 Consolidated Budget Operating Fund Ancillary Fund Research Fund Trust Fund Endowment Fund Capital Fund Total Total 2006/ / / / / / / /06 * 2006/ / / / / /06 Budget Income Summary Provincial grants 175, , , ,660 1, , ,172 Research and other grants , , , ,255 Tuition 121, , , ,412 Research overhead grants 14,799 14, ,799 14,946 Sales by ancillary operations ,357 67, ,357 67,770 Investment income 10,467 10, ,550 16,854 2,600 3, ,000 29,992 31,622 Other donations and grants 1,195 1, ,685 43, ,140 16,840 58,020 61,535 Other income/transfers 4,413 3, ,600 5,440 56,013 9,063 Subtotal--Budget Framework Income 327, , Recoveries and other income 54,677 48, ,677 48,101 Total 382, ,516 72,357 67, , ,255 59,235 62,054 2,600 3,301 73,775 24, , ,876 Budget Expenditure Summary Academic Salaries 92,591 82, ,430 40,193 13,685 14, , ,335 Support Salaries 76,211 70,310 11,444 11,750 34,792 35, , ,862 Wages 8,196 7,816 3,229 3, ,425 11,075 Teaching Assistants 13,978 13, ,978 13,385 Employee Benefits 52,453 39,378 4,583 4,111 12,572 10,368 3,615 3, ,223 57,623 Total Salaries,Wages and Benefits 243, ,776 19,256 19,120 84,794 86,363 17,300 18, , ,280 Physical plant and utilities 33,801 34,033 10,720 9, ,030 70, , ,583 Library acquisitions 7,359 7, ,359 7,197 Operating expenditures (academic) 44,141 28, ,141 28,244 Research expenditures 5,189 4, ,961 83, ,150 88,609 Scholarhips, Bursaries, Work Study 23,513 22, ,000 11, ,513 34,392 Operating expenditures (general) 20,968 16, ,539 10, ,507 27,945 Cost of goods sold ,271 21, ,271 21,619 Other expenditures 3,057 3,369 14,457 10, ,514 13,814 Debt payment/finance charges 7,380 7,380 6,135 5, ,815 12,555 Strategic Priorities 4,186 2, ,186 2,445 Pension 4,012 1, , ,312 1,750 Contingency Funding for Programs in Transition - 2, ,144 Total operating expenditures 153, ,179 53,583 46,389 81,961 83,892 21,539 22,437 7,600-76,030 70, , ,298 Total expenditures 397, ,956 72,839 65, , ,255 38,839 40,458 7,600-76,030 70, , ,578 Difference (14,876) (9,440) (482) 2, ,396 21,596 (5,000) 3,301 (2,255) (45,420) (2,217) (27,702) Fund balances, beginning of year 20,322 11,880 1,880 1, , , , , , ,054 11,989 56, , ,530 Fund balances, end of year 5,446 2,440 1,398 4, , , , , , ,355 9,734 11, , ,828 * Excludes the pension deficit and campaign expenses of $16.3 million that are being funded from outside of the operating budget. ** Restated to reflect current years presentation. 7 of 59

8 Mission, Vision, Goals and Targets Refining Directions - Strategic Planning and Managing In June 2003, the Board of Governors reaffirmed the mission and vision as set out in Refining Directions and confirmed the University s strategic position as a student-centered, researchintensive university. Mission: At McMaster our purpose is the discovery, communication and preservation of knowledge. In our teaching, research, and scholarship, we are committed to creativity, innovation and excellence. We value integrity, quality, inclusiveness and teamwork in everything we do. We inspire critical thinking, personal growth, and a passion for lifelong learning. We serve the social, cultural, and economic needs of our community and our society Vision: To achieve international distinction for creativity, innovation and excellence. To achieve this mission, the Board of Governors has approved the Refining Directions strategic framework that articulates three strategic goals with broad institutional targets that will guide the University s course for the next five to ten years: Strategic Goals approved by the Board of Governors in June 2003: To provide an innovative and stimulating learning environment where students can prepare themselves to excel in life. Target: to be consistently among the top three Ontario Universities in terms of the quality of students we attract and graduate from our programs. To achieve the next level in research results and reputation by building on existing and emerging areas of excellence. Target: to be consistently among the top three Canadian universities as measured by appropriate indicators of research excellence. Target: to increase the importance of graduate education so that McMaster s graduate population reaches 20% of total full-time enrolment and is highly ranked in indicators of graduate educational excellence. To build an inclusive community with a shared purpose Target: to ensure that all members of the McMaster community feel recognized and valued for their contributions to this shared purpose. In addition to Refining Directions, the operating plan of the University is supported by the Academic Plan , the Graduate Education Plan 2001, and the Campus Plan of 59

9 The University Planning Committee has overall responsibility for implementing Refining Directions. Under its leadership, each academic, research, ancillary and administrative area of the University has developed a strategic plan focused on achieving the goals set out in Refining Directions. The 2004/05 Budget began the critical process of aligning resource allocation and investment decisions with these detailed implementation strategies. While the 2006/07 and 2007/08 budgets are even more focused on ensuring that the University can meet this commitment, all available resources in the next two years will be dedicated to achieving a balanced position. This document outlines both short and long-term strategies that will guide us to a sustainable fiscal structure while achieving the Refining Directions goals and improving the quality of student education. 9 of 59

10 Operating Budget 2005/06, 2006/07 and 2007/08 The Current Budget Environment The 2005/06 Budget Document for McMaster University describes the 2005/06 fiscal year as a year of transition. Following on a year of transition, 2006/07 is best characterized as a turning point. In the Ontario Budget 2005, the Province announced a funding plan intended to advance postsecondary education in the Province of Ontario with the Reaching Higher, Plan for Postsecondary Education. The provincial government signaled that Universities will migrate from the historic provincial funding model to a new multi-year funding plan that invests in student assistance, access and quality. More recently, the Province announced a tuition fee setting policy, which permits the University to increase tuition fees by an average of almost 5% per year over current levels. These significant announcements have resulted in an increase of almost $40 million in new revenue. While this increase in revenue is impressive, it is not sufficient to cover increased costs which include: the cost of expansion of graduate education estimated at $8.3 million the final year of increased pension costs estimated at $7.5 million needed to fully restore current service contributions into the operating budget expected deficit payment contributions to meet legislative pension funding requirements estimated at $13 million for each of 2006/07 and 2007/08 unfunded cost of growth and increased resource intensiveness of undergraduate enrolment as the double cohort makes its way into its final year expenditures related to the new campaign budget of $3.3 million in each of 2006/07 and 2007/08 investments needed to enhance academic quality consistent with the strategies to achieve the Refining Directions goals and to meet the Provincial Government funding criteria for improving quality. inflationary increases in the cost base estimated at $16 million In the University s budget envelope system, accountability for financial decisions resides at the unit level. The budget process required envelope managers to balance their budgets by 2007/08. Each envelope manager was required to clearly specify the changes they required to balance revenues and expenditures, with the resultant impact on activity, quality and staffing. The cost saving and revenue generating strategies that have been presented are not sufficient to produce a balanced position. Excluding pension deficit payments and the costs of the upcoming campaign budget, expenditures in 2006/07 and 2007/08 will exceed envelope allocations by $9.8 million or 3.5% and $10.9 million or 3% of total revenues respectively. It is most concerning to the academic mission that the direct academic budget envelopes make up a significant portion of that deficit. 10 of 59

11 The University is at a financial turning point. It has been unable to balance expenditures with revenues by 2007/08 within the current structure and current academic and administrative service delivery models. For that reason, the Budget Committee has developed a short-term strategy designed to generate a balanced position in 2006/07 and 2007/08. During this time, the University will work toward a longer term strategy, starting with an organization-wide quality and process review that will begin immediately. The objective of this comprehensive review, the first of its kind in Ontario, is to reform organization-wide structures and processes to achieve both financial sustainability and progress towards the strategic goals articulated in Refining Directions. 11 of 59

12 Short-term Balancing Strategy In the short-term, the University will employ three main strategies, identified in the following chart to achieve a balanced financial position in the 2006/07 and 2007/08 operating budgets. $ millions 2006/07 Budget Short Term Balancing Strategies 2006/ /08 Allocation Net Surplus/ Balancing expenditures (Deficit) Strategy Allocation Net Surplus/ Balancing expenditures (Deficit) Strategy In-Year Revenue $327.5 $327.5 $0.0 $348.7 $348.7 Prior Year Commitments - Funding Carried Forward * $6.6 $6.6 Total Funds Available $327.5 $334.1 $6.6 $348.7 $348.7 $0.0 Expenditures Faculties & Academic Priorities $180.1 $186.8 ($6.7) $0.4 A $191.7 $202.1 ($10.4) $0.4 A Academic Support $32.6 $33.9 ($1.3) $1.5 A $33.0 $33.4 ($0.4) $0.3 A Student Support $27.0 $27.6 ($0.6) $0.6 A $30.4 $31.0 ($0.6) $0.6 A Institutional Support $76.7 $77.9 ($1.2) $1.3 A $81.7 $81.2 $0.5 $0.1 A Strategic Priority Allocations $5.6 $5.6 $0.0 $4.1 $4.1 $0.0 Prior Year Commitments - Expenditures * $6.6 ($6.6) Allocations Restricted to Manage the Deficit $5.5 $3.9 $1.6 $3.4 B $7.8 $4.8 $3.0 $7.8 B Use of Reserves $2.6 C $1.7 C Sub-Total Budgeted Operating expenditures $327.5 $342.3 ($14.8) $9.8 $348.7 $356.6 ($7.9) $10.9 Pension Deficit and Campaign Budget Costs $16.3 ($16.3) $16.3 C $16.3 ($16.3) $16.3 C Total Operating expenditures $327.5 $358.6 ($31.1) $26.1 $348.7 $372.9 ($24.2) $27.2 Excess (deficiency) of Funding over Expenditures $0.0 ($24.5) ($24.5) $26.1 $0.0 ($24.2) ($24.2) $27.2 Balancing Strategies: A. Use of Appropriated Funds B. Restrict Allocations to Manage the University Operating Deficit C. Use of Accumulated Operating Fund Balances, Endowments and Reserves * reflects expenditures funded in 2005/06 but not spent until 2006/07. Funding has been carried forward into 2006/07. A. Use of Appropriated Funds /07 $3.8m and 2007/08 $1.4m Many departments and budget units have been reserving carry forward funds, called appropriations, to assist them with balancing in 2006/07. The total amount of appropriations expected to directly offset in-year deficits in specific budget envelopes totals $3.8 million in 2006/07 and $1.4 million in 2007/08. These appropriations are mainly generated through short-term vacancy savings and if they were not being reserved to pay for future deficits, they would be used to renew capital equipment or other onetime expenditures in the department. B. Restrict Allocations to Manage the University Operating Deficit 2006/07 $3.4m and 2007/08 $7.8m Funds which are normally discretionary and which are typically allocated for new expenditures, such as Strategic Priorities/Refining Directions Funds, will be used instead to offset the operating in-year deficit for 2006/07 and 2007/08. This is intended to be a short-term strategy, and it is expected that this base funding will be available in the future for investment in opportunities identified in the comprehensive review. 12 of 59

13 C. Use of Accumulated Operating Fund Balances, Endowments and Reserves 2006/07 $18.9m and 2007/08 $18.0m To relieve the pressure on the operating budget, the University has identified alternative funding sources for both the deficit amortization payments to the salaried pension plan and the costs of the new campaign budget. With the exception of a $250,000 annual contribution, both of these cost items will be financed through internally restricted funds and endowments. Details of the plan to finance the deficit payments to the salaried pension plan can be found on page 33 and details of the campaign budget can be found on page 36. The University will be required to utilize the projected operating component of the health and dental reserves to balance its in-year deficit. The remaining reserve in 2007/08 is sufficient to meet the target level of 10% to 15% of annual expenditures. 13 of 59

14 Long-term Strategy The University is faced with the challenge of balancing the in-year budget by 2007/08. Given the budget implications of the Reaching Higher, Plan for Postsecondary Education announcement by the McGuinty government and the regulations surrounding tuition rate increases, and given predictable inflationary and benefit cost pressures, this is a formidable challenge. McMaster must review academic and non-academic budgets and develop an integrated plan that will lead to long-run financial sustainability. McMaster and many other universities face similar budget challenges for 2006/07 and onwards. We must face this challenge and move towards a sustainable operating model. This goal can only be accomplished through a well-developed planning process that supports the goals articulated in Refining Directions and supports strategic areas and values of McMaster. McMaster has a culture of planning and innovation and it would not be prudent to simply discard or replace our current plans. However, they must be reviewed and updated and possibly changed to deal with fiscal reality. The University is embarking on a planning process that will lead to a plan for shared vision of sustainability based on the goals and critical success factors outlined in Refining Directions. A series of focus group meetings will take place during May and June The meetings, focusing on McMaster core values and what distinguishes it from other Universities, will discuss the following topics: What should McMaster plan to deliver in teaching, research and delivery of services? What opportunities are there for addressing the financial problems in the short and longterm? Review structural changes that might lead to new revenue sources and reduced costs by altering the way we conduct our core activities of teaching and research as well as the ways in which we provide administrative support Find ways to deal with the current budget situation and to develop a sustainable model for the future and clearly outline the consequences of these recommendations for the various areas and the University as a whole Suggest strategies for implementing change Determine how support will be obtained for these strategies from McMaster s internal and external communities Suggest themes for internal and external communications. A planning document will be developed and presented to the Board of Governors Finance Committee in September The plan will address the immediate fiscal situation in a way that facilitates longer term structural change and maintains the quality and reputation of McMaster. 14 of 59

15 Table 1 below provides a detailed explanation of all the incremental revenue received in 2006/07 over the approved 2005/06 budget and how those revenues were allocated within the envelopes. Table 1: McMaster University 2006/07 Budget Potential 2006/07 Incremental Income and Incremental Budget Envelope Allocations $ millions 2006/07 Increases in Revenue from the 2005/06 Budget: Reaching Higher MTCU Funding Accessibility Funding 1.7 MTCU Adjustment Funding 5.9 Quality Improvement Funding 10.0 MD and Post Graduate Expansion 5.9 Graduate Expansion Operating Funding 7.1 Base Provincial Grant (assumed 2% inflation in 2005/06 budget) (2.4) 28.2 Increases in Tuition Income 11.1 Share of Increased MRSc. Revenue due to Mohawk College 0.8 Total Increase in Revenue 40.1 One time funding used in 2005/06 budget, not available for 2006/07 (3.2) Total MRSc. Revenue share for Mohawk College (1.0) Release budget for one time items in 2005/06 budget 2.5 Total Increase in Funding Available for Allocation 38.4 Investment in Continuing Operations: Increase in Faculty and Academic Priorities and Contingency 16.2 Increase in Academic Support Envelopes 0.2 Increase in Student Support Envelopes 0.7 Increase in Institutional Support Envelopes 2.2 Increased Utility Costs 2.6 Increase for historic pension commitments Graduate Expansion Cost Allocation Direct Academic Costs 5.1 Scholarship and Student Support 1.6 Academic and Institutional Support Cost of Expanded Operations - Athletics and Recreation Center Operating Costs Strategic Priorities & Quality Fund Quality Improvement Initiatives 4.5 Investment from Operating Funds into Fundraising Campaign 0.3 Strategic Priorities Fund New Revenues restricted to manage deficit 1.1 * Total Increase in Envelope Allocations 38.4 * Does not include $0.5 million of contingency from the 2005/06 budget which has also been reserved to manage the deficit. 15 of 59

16 Student Enrolment Targets McMaster continues to experience strong demand for its programs and is confident that it will achieve the student enrolment targets set in the 2006/07 budget while continuing to attract the best qualified students through strict enforcement of minimum entrance requirements. The 2006/07 budget is based on an undergraduate enrolment target that maintains Level I intake at the 2005/06 level. It is expected that total 2006/07 undergraduate enrolment will rise by 1.5% over 2005/06 levels and remain stable in 2007/08 as the double cohort flows through upper levels. It should be noted that the double cohort step increase has been followed by equally larger cohorts resulting in a significantly larger University than pre-double cohort. The 2006/07 and 2007/08 undergraduate enrolment targets are 53.9% higher than the pre-double cohort enrolment level of 1999/00. Consistent with Refining Directions and the Provincial Government s Reaching Higher, Plan for Postsecondary Education Strategy, graduate student enrolment is expected to increase in 2006/07 by 19.15% over 2005/06 levels and an additional % in 2007/08. A detailed Graduate Expansion plan is currently being developed in compliance with the Ministry of Training, Colleges and Universities (MTCU) funding regulations to the extent they are known. This plan will be communicated to the University community as soon as possible. 20,000 Full Time Enrolment - Graduate and Undergraduate (Revised) 15,000 10,000 5,000 - Undergraduate 11,890 12,127 12,805 14,123 15,882 16,850 18,043 18,308 18,282 Graduate 1,599 1,594 1,834 2,024 2,236 2,208 2,277 2,713 3,194 * Estimate ** Forecast 99/00 00/01 01/02 02/03 03/04 04/05 05/06 * 06/07 ** 07/08 ** 16 of 59

17 Growth and Diversification of the Operating Revenue Base Strengthening and diversifying the operating revenue base continues to be an important financial objective for McMaster University. Total 2006/07 Operating Revenue is currently projected to be $382.2 million up by 13.9% over the 2005/06 budget. As a result of the growth in students funded by the MTCU, the previous two year freeze on tuitions and the lack of capacity to increase Visa enrolment, the University has become more dependent on MTCU funding over the past few years. Proportionately, Provincial grant income, including Accessibility and Quality Assurance funding, has increased to 45% of the 2006/07 operating budget revenue while tuition has dropped by 1% to 32% of the total operating revenue budget. 2004/05 Budget Operating Revenue $319.3 million 2005/06 Budget Operating Revenue $335.5 million Other Inc. & Recoveries 16% Operating Grant 43% Investment Inc. 3% Other Inc. & Recoveries 16% Operating Grant 44% Investment Inc. 3% Researh Overhead Grants 4% Tuition 34% Researh Overhead Grants 4% Tuition 33% 2006/07 Budget Operating Revenue $382.2 million Investment Inc. 3% Other Inc. & Recoveries 16% Researh Overhead Grants 4% Tuition 32% Operating Grant 45% As indicated above, the two main sources of operating funding are grants from the provincial government and tuition fees paid by students. As more of the grant income has been targeted to specifically funding activities such as the Access to Opportunities Program (ATOP), the Accessibility Fund, the continued expansion of the MD program and the expansion of our Nursing program, less grant funding, in real terms, has been available to support base operations. With the decline in the real value of the Basic Grant, tuition income has become an increasingly important component of operating funds. Figure 1 clearly shows the rise in tuition income over the past 10 years and the corresponding reduction to the operating grant in the mid-1990's. Note that our Basic Grant has been relatively flat in nominal dollars since the 1996/97 budget year; any government grant increases to the University have been specifically targeted. In 2007/08, 27.08% of the provincial operating grant is specifically targeted, up from 23.61% in 2005/ of 59

18 Figure 1 Budgeted Grant and Tuition Income in Nominal Dollars 140, , ,000 80,000 60,000 40,000 Basic Grant Targeted Grants Tuition 20, / / / / / / / / / / / / / / /08 Sources of Operating Income Government Operating Grants (2006/07 $175.1m and 2007/08 $189.1m) Table 2 shows the budgeted year over year change in the various provincial grant income items in the operating budget. As the largest component of operating funding, changes in the components of the provincial grant can have a significant impact on McMaster s level of revenue. Table 2: 2005/06, 2006/07 and 2007/08 Comparative Grant Income 2005/ / /08 (in 000 s of dollars) Update Budget Plan Basic Grant (including Disability Grant) $94,561 $102,788 $102,788 Accessibility Grant 32,361 32,361 32,361 Graduate Expansion (estimate) 734 7,076 16,136 MTCU Adjustment Fund 3,003 5,883 8,763 Performance Grant 1,536 1,536 1,536 Grant in lieu of tuition 5,297 Added to Basic Grant Quality Assurance Fund 4,727 4,727 4,727 Quality Improvement Fund 4,862 9,982 10,572 MD and Post Graduate expansion 8,602 10,426 11,813 Grant for ATOP program 2,930 Added to Basic Grant Grant for expanded Nursing program Total grant income $158,904 $175,070 $189, of 59

19 Basic Operating Grant (2006/07 and 2007/08 $102.8m) The Basic Operating Grant funds the official corridor enrolment of the University. The value of this funding component has been set at around $94 million for many years. University corridor levels in Ontario have had minor adjustments over the past years but are significantly out of date. The MTCU and the Council of Ontario Universities (COU) have been engaged in ongoing discussion of enrolment levels and the appropriate level of compensation for that enrolment. The outcome of these discussions could result in an increase in the Basic Grant, with a corresponding decrease in Accessibility Funding (see further below), or even a complete revision of the current funding formula. In 2005/06 McMaster received additional Disability Grant funding of $104,000; this funding was allocated directly to the Student Services budget. The lack of any inflationary increase in the Basic Grant over time has required the University to implement cost saving strategies and use volume-related funding to cover unavoidable and inflationary cost increases. The need for additional funding to allow Universities to make investments that maintain and enhance quality was recognized in the Ontario Provincial Budget and some additional funding has been made available in the Quality Improvement Fund. The government s Grant in Lieu of tuition ($5.3 million ongoing) compensated Ontario universities in 2004/05 and 2005/06 for the income lost due to the provincial freeze on domestic tuition. The calculation of this grant is based on a compensation increase of 1.4% for eligible students in regulated programs (undergraduate programs excluding professional programs) and 5.6% for eligible students in de-regulated programs (professional programs and graduate programs). This $5.3 million grant has been included in our base grant on an ongoing basis. The Access to Opportunities Program provided some additional, targeted funding, for high demand programs of interest to the government Computer Sciences, Media Studies and an electronic MBA program. The understanding was that the funding for these programs would be added to our base grant when the programs were at steady-state. The $2.9 million received in 2005/06 has been added to the Basic Grant on an ongoing basis. Targeted Operating Grants Over the past five years, the MTCU has tied increases in operating funding to specific outcomes based on either performance measures or activity levels in specific government priority programs. These targeted operating grants are based on the following specific funding sources that the government treats as separate funding envelopes. The Accessibility Fund (2006/07 and 2007/08 $32.3m) The Accessibility Fund was designed to provide additional funding to universities as they increased enrolments as a result of the double cohort and increased participation rates. The amount each university receives is based on its year-over-year growth in weighted undergraduate enrolment. McMaster received an additional $5.8 million from this Fund in 2005/06 for a total of $32.3 million. In discussion with staff from MTCU and COU, universities have been told that there is 19 of 59

20 no additional Accessibility funding for growth that occurs in 2006/07. Hence, we have made no adjustment to this grant item in either 2006/07 or 2007/08. The lack of additional growth funding will be a significant issue for Ontario universities: the majority of the students who account for the double cohort will be entering the last year of their academic programs in 2006/07. Depending on Year 1 intake this September, total enrolments will likely increase above 2005/06 levels. Further we have been informed by MTCU that the full funding of enrolment growth in 2005/06 was provided on a one-time basis only. The amount of Accessibility funding to be flowed into 2006/07 has yet to be determined. There is a possibility of an $11 million reduction in 2006/07 in the total Accessibility envelope system-wide. This could result in a $500,000 reduction in McMaster s Accessibility grant in 2006/07. The possibility of this reduction has not been built into the budget framework. Also at risk is the Medical Radiation Sciences Program, a shared program with Mohawk College. Total accessibility funded revenues related to this initiative are $1.9 million in 2006/07 and $3.0 million in 2007/08. Graduate Expansion (2006/07 $7.1m and 2007/08 $16.1m) The government has committed to a five-year funding plan for graduate education that will invest a total of $220 million by 2009/10. The investment is designed to substantially increase graduate enrolment by upwards of 14,000 students over 2002/03 enrolment. The Ministry will distribute this funding based on a model proposed by the COU. MTCU has told universities that it is possible that some new approach to the allocation of this expanded graduate funding will be developed. In our estimates for 2006/07 and 2007/08, we have used the COU model and cannot, at this time, comment on what if any changes would occur if a new approach is implemented. Expenditures equivalent to the budgeted amount of graduate growth funding have been included in both the 2006/07 and 2007/08 budgets. The MTCU Adjustment Fund (2006/07 $5.9m and 2007/08 $8.8m) This funding is part of the government s plan to improve the quality of each student s university experience. A portion of the Provincial funding set aside for quality improvement was provided in the form of the Adjustment Fund to address historical anomalies created when institutions like McMaster responded to the increased demand for a university education by increasing enrolments at a time when additional government funding was not available. Sixty-five percent of this funding will be fully allocated to the academic budget envelopes by 2006/07, but will be received by the University over a three year period with the first instalment in 2005/06. The Performance Fund (2006/07 and 2007/08 $1.5m) The Performance Fund allocation is based on the key performance indicators (KPI) established by the government, specifically, student graduation rates and student 20 of 59

21 employment rates six months and two years after graduation. The Performance Fund grant is a fixed envelope of funding distributed to all universities and allocations do not change significantly from year to year. We anticipate receiving $1.5 million in 2006/07 and beyond, slightly lower than the amount received in previous years. Quality Assurance Fund (QAF) (2006/07 and 2007/08 $4.7m) The QAF was intended to addresses concerns raised by universities regarding both the challenges of the double cohort and the lack of funding to assist with inflationary cost pressures. McMaster received $4.7 million from the QAF in 2005/06 and we anticipate receiving this funding on an ongoing basis. The Quality Improvement Fund (2006/07 $9.9m and 2007/08 $10.6m) Funding from this envelope has been specifically identified for initiatives aimed at improving the quality and excellence of teaching, research and the student learning experience. An Advancing Quality and Supporting Excellence submission is required from each university detailing plans to address the issues of quality, access and accountability on an annual basis. Our income estimates for 2006/07 and 2007/08 are based on the portion of the funding actually received in 2005/06. Expanded MD/Post Graduate Program Grant (2006/07 $10.4m and 2007/08 $11.8m) Expansion plans for the MD/Post Graduate programs at five Ontario universities are designed to increase the number of physicians in the province. Student enrolment in the three-year program at McMaster will continue to increase as this expansion program is implemented. The estimated budget for 2006/07 and 2007/08 reflect this growth (based on the government s commitment to fund additional medical school spaces) as well as enhanced funding that recognizes the significant cost of training Ontario s next generation of physicians. Expanded Nursing Programs (2006/07 $0.3m and 2007/08 $0.4m) The graduate Nursing program will prepare students with a Masters degree in Clinical Health Sciences. The program will develop nursing researchers and care providers at the post-graduate level. The Second Entry Nursing Program is a specifically funded initiative to provide more nurses for Ontario. The program will graduate a cohort of students in three years rather than four as in the traditional undergraduate Nursing program. Funding for these expanded Nursing programs is based on actual enrolments each year. 21 of 59

22 Research Overhead Grants (2006/07 and 2007/08 $14.8 m) Research Overhead Fund (2006/07 and 2007/08 $2.9m) McMaster expects to receive $2.9 million from the province s Research Overhead Fund to help offset the indirect costs of research. This overhead amount reflects our researchers success in obtaining research grants from the Natural Science and Engineering Research Council (NSERC), the Social Sciences and Humanities Research Council (SSHRC) and from the Canadian Institute for Health Research (CIHR). Research Performance Fund (2006/07 and 2007/08 $3.1m) $3.1 million is anticipated from the province s Research Performance Fund the same amount received in 2005/06. This fund is allocated through the Ministry of Enterprise, Opportunity and Innovation and further offsets the indirect costs of provincially funded university research. Federal Indirect Costs of Research (2006/07 and 2007/08 $8.9m) Additional funding for the indirect costs of research is allocated from the Federal Government to fund the indirect costs associated with federally sponsored research. McMaster received $8.9 million from this fund in 2005/06. As we have done in past years, this same level of funding is budgeted for 2006/07 and 2007/08 pending official notification of our actual funding level. Tuition Income (2006/07 $121.5 m and 2007/08 $129.8m) Based on the enrolment targets outlined previously, 2006/07 tuition income is projected to increase by $7.9 million (7.0%) from the 2005/06 updated projection. A further increase of $8.2 million (6.8% over the 2006/07 budget) is anticipated for 2007/08. The enrolment targets are based on the anticipated flow-through of the high 2003/04 intake. Table 3 details the various sources of tuition income for 2006/07 and 2007/08 with a comparison to the 2005/06 updated projection of tuition income. Table 3: 2005/06, 2006/07 and 2007/08 Comparative Tuition Income 2005/ / /08 (in 000 s of dollars) Update Budget Plan Domestic tuition undergraduate Domestic tuition graduate $73,731 9,980 $78,606 11,925 $82,642 14,464 Visa tuition undergraduate Visa tuition graduate 16,351 5,480 16,429 5,663 16,952 5,898 Summer School tuition 3,624 3,769 4,076 Tuition for the BHSc program 2,472 2,925 3,047 Tuition for expanded MD program 1,791 2,040 2,496 Tuition for Nursing program Total tuition income $113,609 $121,537 $129, of 59

23 Domestic tuition fees for 2006/07 and 2007/08 have been increased in line with the government s recently announced tuition policy. The policy allows first year fees for undergraduate general arts and sciences programs to be increased 4.5% and subsequent years fees to be increased 4%. First year fees for professional and graduate programs are permitted to increase by 8%. As well, the policy stipulates that the total year-over-year increase, net of enrolment changes, must not exceed 5%. In taking the maximum allowable tuition fee increase, McMaster is well within the 5% limit for 2006/07, and we will be very close to the maximum allowable total increase in 2007/ /07 domestic tuition fees income (for Canadian and Landed Immigrant students) shows an increase of 8.6% compared to the 2005/06 updated number. Increased enrolment levels, as the double cohort of students works its way into upper years, and higher tuition fees contribute to this overall increase. Summer School tuition is projected to increase by 4% which is in line with the growth experienced in recent years. The BHSc program is continuing its planned enrolment expansion and tuition income is expected to increase significantly in 2006/07. Tuition income from visa students totalled $21.8 million in 2005/06. In 2006/07 and 2007/08, we estimate that total visa income will increase marginally over this 2005/06 total. In 2006/07 both visa undergraduate and graduate tuition fees have increased by 4%. McMaster will maintain its $1.8 million allocation of tuition income to the Quality Enhancement Fund (QEF) in 2006/07. The QEF is allocated as follows: 30% for student financial aid and 70% to areas of the University that most directly affect student activities. Investment Income (2006/07 $10.4m and 2007/08 $9.5m) There are two components of investment income included in the Operating Budget; Interest earned on working capital balances associated with the Operating Fund, and Investment Income earned from Internally Restricted Endowments which is used in the Operating Fund. Interest earned on working capital balances. (2006/07 $4.9m and 2007/08 $4.6m) It is anticipated that an additional $365,000 will be earned in 2006/07 that will offset the loss of endowment interest revenue. This loss is due to the payment of pension deficit amortization from endowed funds as noted below. For 2007/08, this income has been estimated at $4.6 million. Investment Income earned on Internally Restricted Endowments (2006/07 $5.5m and 2007/08 $4.9m) As illustrated in Table 3 the General, Hooker and Pension Surplus endowments are expected to total approximately $135 million at the end of April Approximately 4% of the income earned on each Endowment is transferred to the Operating Budget to fund specific expenditures. 23 of 59

24 Table 3: Breakdown of Internally Restricted Endowment (in millions of dollars) Name Hooker General General (Business School) Description 1979 Bequest from Dr. Hooker and the income is used to enrich academic milieu Undesignated Bequests rec d by the University, and the income is used to support academic purposes Portion of General Endowment allocated to Business School Estimated MV as of April 06 Income Available to Operating Fund in 2006/07 Income Available to Operating Fund in 2007/08 $ 58.8 $ 2.2 $ Pension Surplus University s share of 2000 Pension Surplus distribution and which is used to offset interest incurred on bond debt Total $ $ 5.5 $ 4.9 It is anticipated that the Board will be asked to approve a loan of approximately $7.6 million in 2006/07 and $13.0 million in 2007/08 from the internally restricted endowment to fund the required Pension Deficit amortization payment. The impact on the operating fund is a loss of investment interest of approximately $365,000 in 2006/07 and a further $659,000 in 2007/08. Further information on the pension deficit requirements is included on page 33 of this document. Other Income and Operating Transfers and Allocations (2006/07 and 2007/08 $5.6m) The University operating fund also has other sources of income. These include income derived from sources such as: interest on accounts rental of facilities application income other sundry sources Transfers from trust accounts, Telecommunications and Media Production Services Contract Research and Centres of Excellence overhead. These latter payments help cover some of the indirect cost of contract research work done on campus. Recoveries and Other Non-Framework Income Supporting Operations (2006/07 and 2007/08 $54.7m) Recoveries and other income, including income from cost recovery programs, costs recovered for utilities and staffing from our partner hospitals, income from the nuclear reactor and the recovery provided by Canada Research Chairs make up the bulk of this source of funds. The income is projected to be up by 13.7% in 2006/07 over 2005/06. Total Operating Income, including Recoveries (2006/07 $382.2m and 2008/09 $403.4m) Total operating income, including recoveries for 2006/07, is estimated at $382.2 million an increase of $46.6 million or 13.9% over the approved 2005/06 budget. In 2007/08 the total operating income will increase a further $21.9 million or 6.7%. Other than the increase of $6.6 million in recoveries and other income in 2006/07; all increases are due to operating grants and tuition. 24 of 59

25 Strategic Deployment and Investment of Resources The increase of $38.4 million in the 2006/07 budget envelope allocations (net of the additional income from specific recovery items) has been allocated to achieve a balance between base funding required to provide inflationary relief to budget units and investment in strategic priorities consistent with Refining Directions. The 2006/07 budget process continues the implementation of a revised allocation methodology for incremental revenue increases that was initiated in the 2005/06 year. This methodology allocates incremental enrolment based funding as follows: Domestic undergraduate (excluding summer school programs): 50% to Faculties and Academic Programs 15% to Academic Priorities 8.5% to Academic Support 2.5% to Student Support 20.5% to Institutional Support and 3.5% to Strategic Priorities/Refining Directions Domestic graduate: 50% to Faculties and Academic Programs 25% to Graduate Scholarships (through the School of Graduate Studies) 20% to Institutional Support and 5% to Academic Priorities Visa undergraduate: 50% to Faculties and Academic Programs 15% to Academic Priorities 8.5% to Academic Support 2.5% to Student Support 20.5% to Institutional Support and 3.5% to Strategic Priorities/Refining Directions Visa graduate: 70% to Faculties and Academic Programs 10% to Scholarships (through the School of Graduate Studies) and 20% to Institutional Support. 25 of 59