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University Budgets and the Case for Fairer Cost Sharing

It’s September, and if you are an undergraduate student like me, that means you are likely paying tuition, figuring out your budget for the coming year, and spending at least a small amount of time with your head in your hands thinking about your financial situation. For many students, this can be incredibly stressful as university education becomes more unaffordable, and it can be difficult to know where to start if you want to see changes. My suggestion is to start by looking at university budgets, which helps to frame how universities make decisions and the role that the provincial government plays in how much your tuition costs.

For many students, revenue sources include wages, OSAP grants, scholarships, or parental contributions. There are also expenses, such as tuition, rent, textbook costs, and fees. My expenses have generally been higher than my revenue. That’s normal for university students, and for many it means the introduction of OSAP or private loans into the equation, often resulting in an accumulation of debt. Students take on this debt in the hope that we will go on  to well-paying jobs, allowing us to pay it off down the road, but universities can’t afford to take on debt for prolonged periods.  For this reason, universities try to balance their budgets every year. This means looking at their expenses and their revenues.

Before getting into university expenses and revenues, we should talk about scale. Universities can be big operations: the smallest OUSA school (by budget) is Laurentian University, which spends approximately $195 million a year in its audited financial statements; and the largest OUSA school, the University of Waterloo, spends about $1.2 billion a year in its financial statements. University budgets are typically approved by the Boards of Governors, their most powerful body, in the spring. Most of their funding flows through what is called a general operating budget. Universities also have what are called budget models, which determine how revenues match expenses and allocate certain amounts to strategic initiatives and other areas. There is a lot of complexity there, and it varies from school to school, so this blog will only explore the basics.

 

Expenses

First, let’s take a look at typical university expenses. I’m focusing on operating expenses, which includes both salary and non-salary expenses and is where you’ll find most university funding. At most universities, paying staff is by far the biggest expense. At McMaster, for example, salaries and benefits make up 67.5% of their planned expenses. Salaries and benefits are also subject to increases: at Waterloo, non-academic salaries increased by 1.95% in 2016-2017. Bigger increases in this area happen when universities add new staff.


Source: The McMaster University 2020-21 Consolidated Budget

Non-salary expenses can include acquiring equipment, academic journal access, spending on scholarships, and other costs like administrative budgets and running events, and are broken down further in the next figure.

Source: The McMaster University 2020-21 Consolidated Budget

These graphs, from the McMaster budget report, illustrate the size and breakdown of the institution’s operating budget.

Universities will also often have separate budgets for capital projects, like erecting new buildings, and other budgets for handling research grants. However, we can safely ignore those for now unless I get some burning fan mail begging me to explain them. I’m not holding my breath.

Revenue

Now that we know what universities spend money on, we need to understand where it comes from and how much control they have over it. While the biggest and most recognized source is tuition, universities also get funding from other sources. I want to look at six of these sources and how much they are under the university’s control.

First, tuition. Tuition comes in two categories, international and domestic, split between graduate and undergraduate tuition rates, and usually makes up 45-65% of university revenues. The amount of control universities have over tuition rates depends on whether the provincial government has regulated it. Historically, domestic tuition increases have been “capped,” meaning most undergraduate programs couldn’t increase tuition by more than 3% to 5% per year, depending on the program. Universities can choose to set tuition rates below the cap, but often choose not to in the face of increasing costs. Recently, the provincial government cut domestic tuition rates by 10% without offering additional institutional funding, leaving universities struggling to look for other, unregulated revenue streams. In the face of limited financial support from the government, universities have turned to international students to fill in these gaps. Because international tuition remains unregulated, universities are free to raise these rates quickly and unpredictably, making university increasingly inaccessible for many international students.

A second source of funding I want to highlight is Basic Operating Grants. While, as a student, you may never actually “see” this funding source, for every domestic student, the government kicks in about $6000 per year. Together, tuition and Basic Operating Grants make up around 85% of university budgets, although this will vary by program and university. Like domestic tuition, this revenue stream is regulated, as the government caps how quickly universities can increase domestic student enrollment while still receiving operating grants. Government funding, predominantly through operating grants, used to make up a much larger amount of university funding, but has fallen from 83% in 1982 to what is now lower than half of the average Ontario university’s budget.

A third source of revenue is performance-based funding. I’ve written , but in short, the government is moving to determine a large portion of university funding based on how well they meet certain targets, which have yet to be fully determined. The government decides how large this amount is, but it looks like the current plan is to cut one dollar of Basic Operating Grant funding for every dollar put into performance-based budgeting. This hasn’t come into full effect yet, but when it does it will have a massive effect on the landscape of post-secondary education.

A fourth revenue source comes from fees. Some fees are considered ancillary fees, which are paid by students for non-academic expenses like athletics or student buildings. Universities can set their own fees, so long as they are not used for academic salaries. In addition to ancillary fees, universities can also charge for things like residence or parking. Since these fees can’t cover academic expenses and are specific to certain areas, they don’t make up a large a portion of university budgets (for example, at Waterloo fees are around 2.5% of the budget).

A fifth revenue source comes from special purpose grants. These are targeted grants that the provincial government can give to universities to meet government priorities or support particular goals, including meeting accessibility needs, expanding graduate student enrollment, and increasing access for Indigenous students. The vast majority of these grants don’t need to be applied for, but others, typically those with smaller funding pools like the Campus Safety Grant (which OUSA played a pivotal role in expanding this past year), may require universities to take extra steps to apply and show how the money will be put to use.

Finally, I want to highlight a few other revenue sources. While this article cannot identify all sources of revenue, if you include these last three miscellaneous categories, you can account for almost 100% of university budgets. First, there are research grants and research overhead. Research grants are used to pay for graduate and research assistants, and research overhead is the money from those grants that professors and graduate students apply for that is given to the university to maintain research space and utilities. Second, universities invest their reserves, and the size of university pension plans means they typically earn big returns on those investments. However, because most investment income is related to pensions, relatively little of that income can be spent on miscellaneous expenses. For example, the University of Waterloo earned about 80 million dollars on its pension investments in 2016, but only about 14 million in unrestricted interest (which comes mostly from investing internally restricted funding, since most Ontario universities don’t sit on large reserves of unrestricted funding). The last notable funding category is donations. A lot of donations come from corporations or wealthy alumni, and once you graduate you’ll start fielding emails and calls from your university soliciting donations to support institutional goals. In Canada, donations make up a very small percent of most university budgets (for example, donations make up only about 1% of total revenue at Waterloo).

 

LEVERS AND TAPS

Looking at these funding sources, it is clear that there are very few things that universities have direct control over, and what they can control is getting more and more restricted. To help illustrate this, I like to use the analogy of funding sources as either levers or taps.

What is a lever? A lever is a funding source that the university determines itself. The university decides to “pull the lever” by choosing to engage in activities, like soliciting donations or setting prices like tuition or fee rates. However, recently one of those levers was locked when domestic tuition was cut and frozen, and another has been locked for a while by the provincial government’s fee protocol. Enrollment levels are also a form of lever, but it’s one that, as we’ll see in the next paragraph, has also been locked.

What is a tap? A tap is a source where the government controls the flow (amount) of available money; these are generally shared by all universities. Like levers, some of these taps are less than ideal for universities, with government unwilling to open the tap wider. We can see an example with basic operating grants, where universities could address cost increases through bigger enrollment. But the government put in the restrictions on growth. Even with these restrictions, the number of Ontario students has been growing faster than the money available through Basic Operating Grants, so  grant funding per student has been declining over time. Other taps, like performance-based funding, is net zero-sum for the system, since the funding for performance-based funding will be coming from the basic operating grant tap. There is little information available on special purpose grants, but their limited size and scope makes them a trickle that can never make up for the decrease in basic operating grants.

Between restrictions on levers and taps, universities are left with few options to cover costs.

 

Revenue Source

What Can it Pay For?

Who Controls It

% Budget (average of Waterloo/McMaster)[1]

International Tuition

General Expenses

Universities

19%

Domestic Tuition

General Expenses

Universities, with provincial government controls

28%

Fees[2]

Specific Non-Academic Expenses

Universities, within provincial government controls

5%

Basic Operating Grants

General Expenses

Government

21%

Performance Based Funding

General Expenses

Provincial government-set goals, university performance

4%

Special Purpose Grants

Specific Expenses

Provincial Government

1%

Donations[3]

Depends on Donation

Donors, unlocked with university effort

1%

Research Grants and Research Overhead[4]

Research Costs & Space Upkeep

Federal Granting Agencies and private businesses and foundations

21%

Investment

Largely Pensions

Investment Markets

Not included[5]

 

 

With this understanding, it is clear that our provincial government needs to not just manage levers, but also widen the funding streams within their taps, and support universities so that the financial burden to cover increasing expenses does not fall on the shoulders of students who are struggling. There is certainly a role for universities to play in making tuition predictable and transparent, especially for international students. But if you’re interested in making post-secondary more affordable, the most effective place to put pressure is the provincial government, and you can do this is at the ballot box and in your MPPs inbox. As long at universities continue to face expenses, they will continue to seek revenue from whatever source is available to them. If we want to take unfair or unchecked tuition increases off the table, we need to put other options on the table. The path to more affordable education requires increases to core operating grants, not performance-based funding at the expense of core operating grants, and new special purpose grants, all paired with government action to restrict increases to both international and domestic tuition. This is the path to making the chequebook balance, not only for our universities, but also for ourselves.

 

 

Notes:

[1] Some other universities didn’t have the available data to make this comparison, which shows why good financial reporting is key. These averages can vary a lot from school to school, but are here to give a basic idea about what tools universities have to fund themselves

[2] The 5% figure is likely be too low, depending on whether universities have separate budgets for their housing systems, but those numbers are not readily available

[3] In some years, this may be significantly higher when donations are made for large projects or buildings

[4] May be significantly lower depending on how much a university focuses on research or teaching, McMaster and Waterloo are both research-intensive universities

[5] Investments are difficult to measure year-to-year because of stock market fluctuations, and in the financial statements used for these calculations

 

If you want to check out financial reports from your university, I’ve included links below:

University of Waterloo (starts on page 36)

Wilfrid Laurier University

Queen’s University

Western University (most useful pieces start on page 32)

Trent University (most useful chart on page 12)

Laurentian University (most useful chart on page 15)

McMaster University (most useful chart starts on page 48)