Northern Economist 2.0

Thursday, 25 February 2021

What Drives Ontario University Deficits?


In the wake of the Laurentian insolvency, there is growing interest in the state of university finance in Ontario – at least amongst universities.  For the most part, for the Ontario government Laurentian and its plight  might as well be on the moon.  They would undoubtedly be much more preoccupied had the insolvency happened to the University of Toronto or Ryerson and then maybe not given at least one pundit has suggested that the current government really knows nothing about universities.


In any event, the final report on what happened at Laurentian that might shed a definitive story of what has happened there  is still to come though one media account summarizes it as too many programs, too many instructors, too many managers, too few students and not enough money.  And the previously mentioned pundit would add that tenured professors are overpaid while part-timers are underpaid, though relative to who or what is never elaborated upon.  That is essentially the level of financial debate regarding universities in Ontario.


So, what can we learn from  the information available on the recent state of university finances?  Well, an examination of university financial reports for 2020 is one way to start by comparing the deficits (-) or surpluses (+) of 20 Ontario universities.  It turns out that in 2020 a surprising number of universities did run a deficit – seven to be precise – but the majority ran surpluses.  The range runs from a deficit of -$21.5 million for Ryerson to a surplus of +$441 million for University of Toronto.  The interesting thing is how could both the largest and the smallest university deficit both be in downtown Toronto institutions given the similarity of the operating environment but there it is.


Comparing deficits for Ontario universities really needs to be adjusted for the scale of institutions in terms of enrollment given that total enrolment in 2020 (as taken from the AUCC web site) ranged from a low of 1,370 for Algoma University to a high of 93,081 at University of Toronto.  Using absolute deficit numbers is not going to tell you much.  Figure 1 thus presents the deficit (-)/surplus (+) per student.  The largest deficit per student is actually Wilfrid Laurier at -$527 per student in 2020 followed by Ryerson at -$455 and then Nipissing and Laurentian at -$374 and -$339 respectively.  Deficits are not a specific northern Ontario problem given the list includes Wilfrid Laurier, Guelph, Ryerson, Windsor and Ontario Tech. 




Are there any characteristics that might explain why these institutions  had deficits in 2020 while the others had surpluses – the largest at Algoma and University of Toronto respectively, now there is an interesting juxtaposition – at $5364 and $4,738 respectively.  The first and the last in terms of total enrollment both have the largest surpluses per enrolled student.   Who would have thought?  Algoma and U of T as the Alpha and Omega of Ontario universities.


Why not address the elephant in the room.  Do deficits or surpluses have anything to do with how generous faculty salaries are?  Figure 2 provides a ranking of average faculty salaries (all ranks) for these 20 universities taken from Statistics Canada with the exception of Algoma, which for some reason is not in the salary statistics for universities from Statistics Canada.  However, I took an average of the salaries provided in the latest Ontario salary disclosure (which I would imagine actually biases the number upwards a bit).




The results here are also interesting.  Unlike the steepness of the deficit/surplus profile, this profile is rather gentle going from a low of $111,000 at OCAD to a high of $176,550.  University of Toronto not only manages to generate the largest surpluses in both absolute and per student across all of Ontario universities, but it has managed to do it with the highest average faculty salaries. Laurentian, is decidedly middle of the pack when it comes to faculty salaries along with Wildfrid Laurier and Western.  Indeed, if you plot the deficit/surplus against the average faculty salary for these 20 universities, you get Figure 3 which gives the counterintuitive result (especially if you are an Ontario cabinet minister) that higher faculty salaries are correlated with bigger university surpluses.




Of course, Figure 3 is only an association.  What you really want to see is if there indeed is a statistically significant relationship between the two variables after controlling for some confounding factors.  Figure 4 presents the results of a very simply linear regression of the surplus per student on average faculty salary (avgfacsal), per student tuition revenue (perstudenttuition), whether or not the university has a medical school (medschool)  (which can be an expensive proposition), and the ratio of government grant revenue to tuition revenue (granttuitionratio) for the university.  Moreover, to account for the scale of institutions it is a weighted regression with the weighting factor being total student enrolment. 




The results show that arguing that higher faculty salaries will give you a better financial position is indeed not the right call.  On the other hand, the coefficient is also not negative nor significant for that matter.  In the general scheme of things, universities are not so dopey as to go around paying more than they should for the help nor are they captives of fiscal terrorist faculty associations when it comes to compensation.  Guess what? Having a medical school is not significant to a deficit/surplus position.  More interesting,  neither is the ratio of grant revenue to tuition revenue.  That is to say, government support of universities has stagnated so much that it really was not a statistically significant determinant of a university’s financial health in 2020. That is not to say it could not be or never was but in 2020 it is not.


What is the most significant determinant in this albeit limited set of variables?  Tuition revenue per student.  The regression coefficient is positive and quite significant.  Figures 5 shows that there is indeed a nice positive slope to the relationship between surpluses per student and total tuition revenues per student.  And who are those two high-flyers at the far northeast corner of the chart? Why the Alpha and Omega of Ontario universities - you can decide which should be which.  Figure 6 shows it is little Algoma U – obviously the little university that could - and big U of Toronto – which is really not a surprise.  They appear to have boosted their enrolment as well as got the right mix of students (i.e. higher paying international students) to ensure their financial survival – at least for 2020.  Who knows what the future will bring?





Tuesday, 23 February 2021

COVID-19 In Thunder Bay Skyrocketing

 Today's announced new COVID-19 case amount in Thunder Bay District stands at 41 bringing the total since the start of the pandemic to 1,418 and the current number of active cases is at 273.  The District's Chief Medical Officer has suggested that we could be headed back to lock-down though given that the surge over the last two weeks was obviously incubated during the last lock-down one wonders if it will matter.  The problem is apparently largely tied to an outbreak among the homeless population in Thunder Bay though given the crowds packing shopping malls and a local ski resort over the last week in the wake of the lifting of the lock-down, it is likely the surge is going to continue.  In addition, while the recent surge is tied to the city's homeless population, it remains that there have now been several good-sized outbreaks in local schools the biggest at McKellar Park.

This is a pretty grim situation.  We can draw only limited comfort from the fact that the total outbreak to date has resulted in a total case count per 100,000 population as of February 23rd still substantially below that of the province as a whole - at 971 cases per 100,000 versus 2003 cases per 100,000 for the province as illustrated in Figure 1.  However, while the provincial total finally seems to be flattening out a bit, Thunder Bay's appears to have picked up steam as Figure 2 illustrates more  clearly.  


Figure 2 plots plots the daily change in cases per 100,000 for both Ontario and the Thunder Bay District since the start of the pandemic and here one can more clearly see that since the start of January, we have been definitely bucking the provincial trend.  While Ontario actually began trending down starting the first week of January, that is when we began to move in the opposite direction.  One wonders aside from the shutting of businesses, how much compliance there really has been with requests to not socialize on the part of the general public in Thunder Bay.  



This is exceedingly worrisome because even if the surge to date is a result of close contact with some of the other outbreaks - such as those affecting the jail and correctional center - the fact that it appears to be spreading more broadly amongst both the homeless population as well as in the schools makes it ever more likely it will spread further.  The flouting of social distancing and safety protocols this last week at local big box stores and the mall as well as the gathering of hundreds outdoors at a local ski resort have merely provided further opportunities.  If cases spike even further over the next two weeks, it will be unlikely that we can rein things in.  After all, in terms of the current daily increases in cases per 100,000, we are at the peak that Ontario was at in early January and there is no evidence it is slowing down.

Friday, 19 February 2021

The Messages of Perseverance


Yesterday’s successful landing of NASA’s Mars Rover Perseverance and the broadcast of early pictures was indeed a triumph of human perseverance made all the more uplifting because of the current travails of the coronavirus pandemic.  It remains that the long-term future of humanity will increasingly rest above and beyond with the first tentative steps into the solar system of the last 50 years being inevitability followed over the course of the next century by interstellar probes and more.  Yet, it is the name of the Rover itself which was drawn to my attention by a close friend who texted me today and said that the first pictures reminded him of the Northwest Company whose motto indeed was Perseverance.   This reminded me of perseverance in terms of both national and personal history.


First, the Northwest Company of Montreal was a vast fur trading enterprise that for nearly two decades more than held its own, against the Hudson Bay Company as a result of its perseverance against incredible odds.  While the HBC had the advantages of shorter north south supply routes and a charter from the Crown, the Northwest Company’s superior management, organization and entrepreneurship via its profit-sharing system enabled it to construct a web of forts and trading posts along Canada’s east-west river systems the crown jewel of which was the vast sprawling inland headquarters at Fort William (now Thunder Bay) that served as the rendezvous point for company business.  Having spent numerous student summers working as a historical interpreter at the modern reconstruction of Fort William, I can attest to its size and grandeur.


The NWC shareholders were field traders and doubled as European explorers with names that resonate in Canadian history such as Simon Fraser, Alexander MacKenzie and David Thompson.  It was perseverance indeed that in the face of a vast rugged geography and harsh climate allowed a trans-continental east west business arrangement using birch bark canoes to prosper and that according to Harold Adams Innis was the forerunner of the Canadian federation.  As my friend noted in his comparison, it was also about going forth into an endeavor away from the "comforts of their usual surroundings", which the harshness of space definitely is for humans.


Of course, it is not considered politically astute these days to celebrate the business achievements and role of male European fur traders in nation building.  And yet, the Northwest Company was ahead of its time in that unlike the hierarchical Hudson’s Bay Company, it was a partnership of sorts between Anglo-Scottish and French-Canadian businessmen, French Canadian labour and Indigenous peoples and their technology – canoes, pemmican, snowshoes.  Moreover, the trade was directly with Indigenous peoples who harvested the furs and until the decline of the fur trade were bargainers on par with Northwest Company.  Indeed, it was the decline of the fur trade that was the first step in undermining the economic and social welfare of First Nations as an important source of the livelihood they had grown dependent on vanished – an important lesson for all resource extraction economies.


Second, perseverance also marks friendships and how those acquired at the dawn of one’s life persist, persevere and grow over time.  I am still in touch with my two best friends from high school – Harold and Rob - and though we all now live in separate cities we still manage to Rendezvous in Thunder Bay so to speak from time to time and update each other on our course and progress.  It was Harold’s text that triggered this post.  Everyone’s high school years are of course formative, but I cannot help but think back fondly to the numerous activities we participated in and how they ultimately shaped the work and life we all lead.


As teenagers, we even then had a strong interest in public policy.  Along with the usual debates and class discussions and projects – we actually ran a QUI Campaign for the Quebec referendum in 1980 at our Thunder Bay high school - we made a point of attending election rallies from all three visiting leaders with the 1979 election being especially memorable.  I had the car the evening we went to hear federal NDP leader Ed Broadbent and the most interesting part of the evening was the drive home when for whatever reason another vehicle chased us a bit while they brandished a tire iron out the window (My memory may be faulty here as the tire iron incident may have been after a City Council  meeting and I vaguely recall being in a van for that one). Anyway, on the way home the brakes on my dad’s car failed. 


As I was driving, along with keeping me calm they also helped slow the car by sticking their feet outside of their doors.  It was an evening out of a James Bond film I suppose though given our ages I suppose it was a bit more rural Alex Rider.  We persevered and did get home in one piece but in the hindsight that emerges, it was obvious that continuing to drive was the wrong thing to do. I should have let the car come to a halt or steer it into a snow bank given how badly things might have ended.  I suppose 16-year-olds do not always make the best decisions.  Still, it is the stuff of memories though naturally I somehow curiously neglected to share this story with my children when they were teenagers.


Still, perseverance is important when it comes to life’s experiences and challenges whether it is humanity’s attempts to understand the cosmos or people simply engaged in the ordinary business of life.  Perseverance is about getting through life’s challenges and persevering is helped a lot by having persevering friends.  



Tuesday, 16 February 2021

University Insolvency in Ontario: Who Might Be Next?


Laurentian University’s filing for insolvency and creditor protection has of course sparked some concerns that other Ontario universities may also be close to the brink.  Alex Usher in his HESA Blog has done a number of posts on Laurentian and university finances in general as of late and did some digging looking at Canadian universities in general with an emphasis on their deficits.  While much has been made about the impact of COVID-19 on university finance, it remains that in the case of Laurentian, the problems appear to be long-term and structural with years of repeated deficits combined with weakness in in tuition revenue and student enrolment growth.  This of course raises the question as to how the other universities in Ontario have been faring with these types of indicators.


Using consolidated financial statements for Ontario universities, the following figures plot three variables and rank the performance universities from highest to lowest.  With the exception of Ryerson university, which only posts the last three years of financial statements, all of the other universities have them posted with some going back nearly two decades.  Figure 1 plots the ratio of long-term debt to university revenues to provide an indicator of the indebtedness of universities.   




While interest rates are currently quite low and debt service costs not a large burden, it remains that some universities face higher burdens than others here.  Figure 2 plots the number of deficits since 2010 (with Ryerson* based only on the last three financial statements).   




Finally, Figure 3 works out the average annual growth rate of student fee revenue from 2015 to 2020 as an indicator of recent revenue growth (with Ryerson* again only available for the last three years).




In terms of debt to revenue ratios, the most indebted universities are Ontario Tech, Ottawa, Wilfrid Laurier, Lakehead and Windsor.  In the best shape are Guelph, McMaster, Toronto, Carleton and Waterloo.  Interestingly enough, Laurentian is mid-ranked with respect to long-term debt suggesting it is not a key source of its current problems.  While long term debt is not all of a university’s long-term labilities (for example, the cost of pensions and other employee liabilities are omitted), it nevertheless suggests that some have acquired a lot more debt than others – much of it before 2010 during a capital expansion phase.  However, long-term debt acquired for capital projects has not been the source of problems per se given that interest rates are low and debt servicing costs for most universities not that substantial.


In terms of deficits since 2010, the winner is Laurentian which has accumulated nine.  Closely following is another northern Ontario university, Nipissing, which comes in at seven.  After that are the Ontario College of Art Design, Brock and Windsor though it should be noted Brock’s four deficits were before 2015. At the other end of the spectrum, Carleton, McMaster, Waterloo and Western appear to have not had a deficit since 2010.  This is a key part of the problem for university finances given that some universities appear to have been persistently unable to balance their budgets over the long term indicating a deeper structural imbalancebetween revenue and spending.


Finally, when one looks at the average annual growth rate of student fee revenue since 2015, it is a northern Ontario university – Algoma – that does the best in the wake of it opening a satellite campus in Brampton.  Following it with annual tuition revenue growth well over 5 percent annually are Toronto, McMaster, Waterloo, Queens, Trent, Lakehead, OCAD and York.  The weakest performers are Ontario Tech, Laurentian and Nipissing.  Tuition revenue growth is important given that government grants have been frozen.  Even if there is a bit of a tight situation between revenue and spending, keeping the student fee revenues up by increasing enrolment keeps you ahead of the problem.  Falling behind here simply allows the other problems to add up.


The consistently worse performers across the deficit and tuition revenue categories are Laurentian and Nipissing.  Ontario Tech does not do so well on the tuition revenue growth front while OCAD has had deficit issues.   If there are future problems in the Ontario university sector, they may likely emerge first across these universities but who knows. Life can be full of surprises.    Much of course depends on the continued flow of students and tuition revenue and the interesting development this year is the fact that first choice Ontario applications were down for all but six of Ontario’s universities. Of course, these application statistics do not take into account out of province applicants or international students but nonetheless they are a cause for worry. 


Can any university expect any government assistance if enrolment tanks? Probably not.  The provincial government was aware of Laurentian’s problems and to date has chosen to let them resolve their issues via insolvency and restructuring no doubt pour encourager les autres.  In any event, government has been a contributing factor by cutting tuition ten percent and then freezing it to score political points while freezing grant revenue for years.  Universities are asked to operate like a business and be more customer oriented but their prices are regulated. Universities caught in financial difficulties may really have no option in the wake of a fall in student demand but to cut costs and in the case of Laurentian that may result in layoffs and program reductions. However, the reforms should not focus simply on short term cost cutting.


At least one astute observer has noted that many universities are over governed with high administrative and overhead costs and part of reforms of the university sector to reduce costs need to address this over governance.  There is simply too much middle management with numerous faculty Deans, Executive Deans and Vice-Provosts and their associated retinues of assistants, coordinators and facilitators.  Part of this is self-induced empire building but part of it is also federal and provincial regulatory make work environments.  Getting rid of middle management and decentralizing more to Department levels or simply combining faculties is one way to go.  A case in point, many smaller universities like my own which two decades ago had simply one faculty for Arts and Sciences and another for Professional Schools each with a Dean now have many more faculties. 

Wednesday, 10 February 2021

The Mining Frontier in Northwestern Ontario: Second Star to the Right, and Straight On Till Morning


Northwestern Ontario is seeing some good news with respect to the mining sector.  One recognition of this was the recent announcement regarding Lakehead University and Impala Canada launching a new mining research project.  The five year project involves the creation of an industrial research chair in mineral exploration to be held by Lakehead University geologist Peter Hollings and it is good to see investment in regional knowledge.  The prospects for continued growth have also been put forth by the Community Economic Development Corporation in their new mining readiness strategy which was announced this week.


The strategy is designed to help Thunder Bay capitalize on opportunities from the projected continued development in the region’s mining sector.  It estimates that continued development of the sector with Thunder Bay benefiting from supply chain spillovers in mining supply, workforce training, transportation and electrical infrastructure, and research will be substantial.  The current six operating mines in the region may double to 15 essentially doubling the workforce from the current 3600 with peak employment reaching just over 7000 by 2028.  However, there are challenges, not least of which is ensuring a supply of electricity as well as transport infrastructure.


This strategy is laden with optimism and good news as  befits a municipal community economic development organization. The employment forecast is probably a bit rosy given that mining is not really a labor intensive activity and benefiting from the employment opportunities requires a lot of knowledge and skill intensive labor not least of which are skilled trades such as carpenters and plumbers – already in short supply in Thunder Bay given they are spending their time fixing leaky pipes – as well as trained technologists and scientists. 


They could probably also use some economic expertise but sadly many in government economic development organizations still do not understand the distinction between a business and economics graduate and prefer the boosterism and optimism of a business graduate rather than the more realistic analysis of an economist.  Bosses generally only like to hear what they can do rather than what they cannot or should not do.  Just ask the management at Laurentian University how things are going so far?


As well, included among the new projected projects is of course the Ring of Fire chromite deposit which has been on the verge of development for a decade now and we are still waiting.  The real challenge in developing the deposit is not even transport infrastructure or resolving negotiations with affected First Nations.  All of that would actually fall into place rather quickly if the key variable trended dramatically upwards –the price of chromite.  Indeed, all of the rosy projections for mining development hinge on a continued upturn in commodity prices.  It is easier to negotiate something and develop it if you know there is indeed a big payoff coming and what size it might be.


The good news is commodity prices seem to be doing well.  Silver, for example, is at an eight-year high. Gold rose dramatically in 2019 and 2020 though it seems to have declined a bit for 2021.  Palladium, nickel, copper and zinc are all up – however, chromium is down about 14 percent for the year.  Indeed, the price of high-carbon ferrochromium appears to have come down about 40 percent over the last two years.  Will the demand for chromium pick up as economies recover in the post-pandemic period?  Chromium is used to harden steel and make stainless steel, so it depends on what the demand for things that use stainless steel is going to be like.  Given the shift away from commuting, it certainly won’t come from the demand for automobiles.


In the end, the mining readiness strategy is a business case rather than an economic case with the economics consisting largely of the perfunctory economic impact study as the ceremonial accompaniment justifying the recommendations.  The recommendations include such potboilers as “promote Thunder Bay as a full-service community” – something right out of the 1970s -  as well as “regular government communications on mining”, “prioritize municipal infrastructure development” and “enhance existing mining supply/service directory”.  One suspects that ultimately the mining boom will occur more as a result of rising commodity prices and private sector initiative than anything a community economic development organization can do.


One more thing.  The mining readiness strategy is mainly concerned with getting things in place to help support and capitalize on mining development that in the end is really out of the hands of the Economic Development Corporation. It is important to be ready for when it happens. It is also important to be ready for after it happens.  Economic development thinking in Thunder Bay and the region is entirely focused on short term up front economic and employment benefits.  That is understandable given the generally low growth in the region and the hunger for jobs.   It is also the legacy of a natural resource extraction mentality that has always assumed that there is a vast stock of resources and once one larder has been emptied, you can move to the next one. Where the next larder will be is usually not on the radar until the first one is empty.


How can the benefits of a growing mining sector be channeled into long-term benefits via either investment of resource rents and revenues or the use of acquired expertise to service mining projects around the world and create future high-end employment locally? What is the plan for when current mines near the end of their production in terms of creating opportunities based on those employed in a project that is wrapping up?  I suppose no one is really thinking about that but then I suppose one of the features of a natural resource economy is boom and bust and one enjoys the boom and then worries about the bust when it happens and hopes it is somebody else’s problem.   In northern Ontario, it is always clear sailing ahead and one cannot rightly imagine a morning without economic challenges for its children.