Northern Economist 2.0

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.

 


 

Sunday, 7 February 2021

Municipal Budgets, Facts, Debates and Bullying

 

The 2021 Thunder Bay City budget should finally be ratified this week and getting there has been an interesting process on a number of fronts.  First, is the sudden epiphany that struck city administrators by the fall that business as usual tax levy increases in the 3-4 percent range were not going to work this year given the push back from both business and residential ratepayers.  Second is the rather assertive tone of debate adopted by some councilors in response to presentations and discussion during the budget process.

 

With respect to the actual budget, the initial 2021 budget request came in with a proposed tax levy increase of just over 2 percent.  However, rather than go up from there, which has often been the case in past budget seasons, councilors have managed to whittle it down slightly to 1.83 percent.  Ratepayers in Thunder Bay however should not relax and assume this is a new era whereby the City of Thunder Bay has finally realized its limitations and will begin a new transformative vision of more sustainable municipal government.  Rather, one suspects the long game of the part of Administration is still that this is a short-term one-off event and next year with the pandemic subsiding, it will be time for larger tax increases to recover lost ground.  This will be a mistake given that Thunder Bay needs to engage in a major exercise to bring its costs especially for government administrative services and protection more in line with other jurisdictions.

 

As for the tone of debate, well here we were treated to the spectacle of one councilor effectively interrupting a presentation to vigorously challenge debate the presenter’s facts and opinions rather than ask questions in a manner more akin to a court proceeding rather than a council meeting.  In response to the presenter’s call for a review of police service spending which has accounted for half the tax levy increase since 2018, the councilor in question countered with the immense workload of the Thunder Bay police service in that it had responded to 5,000 incidents which “in his mind” equaled the amount that Toronto officers attended.

 

This in itself was an interesting empirical point given the data for 2019 comparing total criminal code violations excluding traffic reported in Toronto and Thunder Bay provided below in Figure 1.  Needless to say, the total volume of incidents in Toronto vastly exceeds Thunder Bay. However, perhaps the councilor in question was being more nuanced and meant incidents per 100,000 population in which case Thunder Bay comes in at 7,046 and Toronto at 3,471 – at double the rate.  In either case, where the number 5,000 came from and what it really means is probably best answered by the councilor.   

 


 

 

However, if the councilor was trying to make a case supporting the police service, he was certainly not doing them any favors in his presentation of the data and facts.  If one can be permitted yet another colorful marine metaphor, In launching argumentative torpedoes at presenters, the inability of councilors to effectively target and launch runs the risk of sinking their own ship.  While one may think they are conducting an in-depth analysis while floundering under the water, it is probably wiser to begin from well above the surface and first survey the potential hazards.

 

More serious however was the debating of the presenter rather than simply asking questions and what in essence amounted to a form of bullying and badgering the presenter.  Needless to say, this did not go unnoticed by several other councilors and to their credit they did attempt to rein the offending councilor in.  Needless to say, the presenters provide input and answer questions to provide clarification and it is the councilors who are then supposed to debate the evidence amongst themselves rather than engage in self-congratulatory speeches and grandstanding.

 

This is not just a Thunder Bay phenomenon at the municipal level. City councilors and administration in Hamilton, Ontario for example are developing a reputation for being rather pugnacious towards their ratepayers and have been called out for hostile attitudes towards residents appearing before council.   In Hamilton, there is a proposal supported by legal advice from their lawyers and administration to ban public letters critical of city council behavior from the public record of their meetings.  This has prompted concerns that councilors in Hamilton may be trying to shield themselves from criticism. 

 

Of course, in Thunder Bay, the response to criticism or questions on some matters - such as the leaky pipe sodium hydroxide fiasco – is simply to hide behind their lawyers and not answer questions.  It would appear that in both Hamilton and Thunder Bay, lawyers appear to be hard at work in making sure there is less democracy.  Coming on the heels of pandemic lock downs and social distancing that reduce personal and direct access to your representatives, it would appear we have entered a new era of government dictates from on high. And one gets the impression that many politicians do not seem to mind.

Friday, 5 February 2021

COVID-19 Cases Trends: Where Next for Ontario and Thunder Bay?

 

The news on COVID infections in Ontario has become quite positive in recent days with counts showing a decline.  Indeed, as Figure 1 shows,there is a definite downwards slope to the daily count profile but we are still some distance away from the lows reached circa the first week of August when daily counts average about 100 per day.  Given the total number of current cases of 275,330, 100 cases per day constitutes a growth rate in cases of about 1/3 of one percent whereas it is currently about 15 times higher at 0.6 percent.  However, the apparent downward trend will start the call for a relaxation of restrictions.

 

 


 

Needless to say, there are reasons not to start relaxing restrictions given the spread of the more contagious new variants as well as some erratic performance of the numbers with widely shifting daily case counts as new reporting systems are implemented.  As well, as Figure 2 shows, deaths have yet to exhibit a substantial downward trend in Ontario.  

 


 

 

At the same time, the new unemployment numbers released today suggest that protracted lock downs come at a great economic cost.  However, the slow and reactive nature of Canadian governments to the pandemic has now put us in this place.   In the absence of substantial high rates of vaccination - given that Canada is lagging other countries substantially - as well as more available rapid testing that would allow business to test and isolate their staff -  it is difficult to see what the other options are?


As for Thunder Bay, well the daily case count trends there do not look too good.  As Figure 3 shows, we have gone up and still appear to be quite high.  While the majority of the recent cases have been confined to the institutional settings of the prison and correctional center, it remains that with the staff going back and forth to home and work and the release of some prisoners into the community, the potential for rapid community spread is still high.  

 

 


 

Needless to say, the move by the Mayor to declare a second state of emergency makes perfect sense given the need to isolate and protect vulnerable populations.  At the same time, the Mayor also called for relaxation of lock down restrictions for small business a few days before which appears somewhat inconsistent with what followed, but politicians are known for changing their minds.  Sometimes, it is even based on evidence.

 

Given its low population density and relative isolation, Thunder Bay should be able to create a reasonably good bubble.  However, as isolated as it is, it would appear that cases continually pop up and quite a few are linked to travel.  While it is true the number of cases directly linked to travel are small, it remains that those cases have spread the virus whether the case counts and testing catch it or not.  The best thing Thunder Bay and the District Health Unit could do right now is help the move to implement more rapid testing starting with everyone who gets off a plane at the Thunder Bay Airport.  

 

It would be more useful to catch them as they arrive rather than several weeks later with the subsequent announcement that someone on a flight tested positive.  Rapid testing services should also be provided to businesses and institutions that want to open up more generally.  As well, why not innovate a testing version of the "Ride" program?  The District Health Unit with a mobile van in conjunction with the Thunder Bay police should pick locations around town where continually shifting traffic stop points are set up.  Traffic stops would be conducted and the driver and passengers pulled aside and asked what "essential business they are up to" and then provided with a rapid test and must await the result in their vehicle.  Indeed, given there are limited ways to drive to Thunder Bay, the odd random checkpoint at the City limits might also be a good thing to try.

 

No doubt there will be many who argue that this is "authoritarian" and an infringement of "Freedoms." Okay. Make the rapid test voluntary if you want.  It can be declined. However, it is still an opportunity for health unit officials to stop and provide information and get the message out in a more direct way to a public that often still does not get it.  The inconvenience of being stopped in itself may make people think twice about going out for non-essential reasons and help slow transmission.





Tuesday, 2 February 2021

Why Laurentian Has Filed for Creditor Protection and Not Lakehead

 

Yesterday’s news that Laurentian University is facing insolvency and has filed for protection from its creditors in the wake of a deteriorating financial situation brought about by the impact of COVID-19 is an important development in Ontario’s university sector.  Laurentian’s President Robert Haché said the move was necessary to put Laurentian on a firm footing after years of deficits and that: ““We are facing unprecedented financial challenges and our financial health is currently amongst the weakest in the province compared to other universities.”

 

Among the compounding factors to the impact of COVID-19 on the university’s finances were years of recurring deficits, the poor demographics in northern Ontario, the closing of the Barrie campus project and the Ontario governments decision to first cut and then freeze tuition fees.  Needless to say, the recent Ontario University application numbers showing a drop in first choice applications for nearly two-thirds of Ontario universities and surges in applications for the remainder – McMaster, Waterloo, Toronto, Western, Ottawa and York - has not helped matters.  Obviously, given the COVID situation, all the GTA students really want to stay in the GTA next year though how they are all going to be accommodated is beyond me.  There may be online recruitment opportunities for the smaller universities outside the GTA.

 

Of course, Laurentian’s predicament and that of smaller universities in Ontario in general is not that surprising.  As noted over a decade ago, one of the perils of being a small university was the bigger burden of debt acquired in the first decade of the 21st century as universities undertook massive capital spending projects to deal with rising enrollments, infrastructure renewal and program expansion even though long-term demographic projections suggested that enrollment growth would eventually ebb .  Long term debt as a percentage of total university revenue was higher in smaller Ontario universities though a decade ago, Wilfrid Laurier, Lakehead and UOIT seemed in worse shape than Laurentian.

 

So, why is Laurentian in trouble and not say Lakehead? Using data from annual financial statements, it is fairly easy to piece together some answers.  The two universities are fairly similar, in terms of their total enrollment, though Laurentian is slightly bigger at just over 9,000 students in total enrollment while Lakehead is just over 8500.  Total revenues and spending are shown in Figures 1 and 2 and they also show similar size total revenue and spending envelopes over time.    

 


 

 

They also now have similar stocks of debt.  On the surface, Lakehead has a bigger stock of long-term debt than Laurentian (see Figure 3) but the stock of debt has gradually diminished since 2011-2012 whereas Laurentian appears to have acquired its debt more quickly in recent years. 

 

 


 

 In a sense, Lakehead has had more time to deal with its debt stock in the wake of the rapid acquisition prior to 2006. Most of it is also the result of capital projects rather than cumulative deficits.  Since 2006, Lakehead has only run deficits three times (Figure 4) whereas Laurentian has managed to run one 11 times. Continual deficits have a nasty habit of adding up over time.

 


 

 

Given nonexistent growth in government grants, a big difference between the two institutions has to do with where the recent revenue growth.  Laurentian as a bilingual university has had difficulty maintaining and staffing the range of programs necessary to attract enrolment to offset weak grant revenues and the tuition freezes.  Offering programs in both languages in a sense has harmed potential economies and the cancelled Barrie campus was supposed to be an avenue for growth though how successful it might have been is an interesting question.  Lakehead on the other hand has been able to expand into international enrolment and particularly graduate international enrollment and attract them to their campus.  Unlike residents of the GTA, international students seem willing to try out Thunder Bay. 

 

 


 

As Figure 5 shows, Lakehead’s tuition revenue since 2006 has been consistently above Laurentian – even though it is the slightly larger university – and it has actually grown rapidly over the last few years.  Laurentian has not and its persistent deficits mean that it will need to take some steps to deal with its finances though advertising to potential students you are insolvent is probably not the best recruiting tool.  Given the application drops across the Ontario system for smaller universities, the Ontario government will be facing increasing issues in its university sector in the wake of it deciding to hamstring university revenues on the tuition front.  In the end, universities need to make sure that their costs are balanced by their revenues and that will be a challenge in the current environment.