Weathering market turmoil
University watching investment revenue closely

October 31, 2008

By Colleen MacPherson

Even though the University of Saskatchewan's traditional investment strategy—conservative and long term—is shielding the institution somewhat from the effects of the current volatility on world financial markets, colleges and units are being asked to be prudent with their spending until the full impact of the situation can be assessed.

Speaking to University Council Oct. 23, Provost and Vice-President Academic Brett Fairbairn said the university has investments of about $550 million in endowment and general funds, and another $760 million in pension plans. Earnings from the invested general funds make up about three per cent of the annual operating budget."That means $9.5 million in revenue is at risk under these kinds of market conditions (and) we're not likely to be able to solve this problem on the revenue side of our ledger."

Instead, the university is looking at one-time measures within the central budget to cover any shortfall in investment income. A memo sent to senior leaders across campus Oct. 24 by Fairbairn and Richard Florizone, vice-president of finance and resources, also asks colleges and units to carefully consider discretionary expenses and major commitments this fall.

Kennedy

Fairbairn assured council the university's strong overall financial position means it will not likely be as seriously affected in the short term as other institutions in Canada. Over the past few weeks, a number of universities have said they are taking dramatic steps to mitigate the situation, the most recent being a freeze on hiring and major spending announced by the University of Waterloo.

Noting that financial markets do recover over time, Fairbairn said the university is taking"a short-term approach to a short-term problem." This includes assessing how an investment revenue shortfall this year might be covered using the flexibility built into the budget, funds earmarked for capital projects or operating reserves,"but this is a well we can only go to once, and all these funds would have to be replenished in the future."

That is Plan A, he said, but there is a Plan B taking shape. It would include permanent budget adjustments to be made"if this is a problem that persists beyond about 18 months."

In an interview with On Campus News, both Laura Kennedy, associate vice-president of financial services and controller, and Marion Van Impe, director of student accounts and treasury, agreed on the importance of avoiding panic in times of financial market uncertainty.

"The university remains fully invested," said Van Impe, adding the university's investment goal has always been to find the right balance between returns and manageable levels of risk for its portfolio. By taking a long-term approach to investing,"our strategy is flexible enough to withstand one-time blips." She also pointed out the university's investments are handled by external fund managers who are held to a high standard of performance in terms of annual rates of return.

The main concern right now is endowments, which fund things like scholarships and research chairs, Kennedy said. According to university spending policy, returns on those funds must reach nine per cent before spending can begin in order to protect the initial capital."These endowments are in perpetuity and we want them to stay that way."

When rates of return drop below the nine per cent level, it could take years before spending can begin, she explained. Some of the endowment funds that have already started paying out are also at risk. Kennedy said Financial Services staff will be working with the colleges to assess the status of all endowments, and the overall spending policy will be reviewed to ensure it is sustainable.

The pension fund situation is also being watched closely. The university has two types of funds, differentiated by who bears the investment risk and rewards - $320 million in defined contribution plans where individual employees and retirees assume the risk and rewards, and $440 million in defined benefit plans where the risk and rewards belong to the institution.

Like all investments, pension assets are handled by professional managers taking a long-term conservative approach, but any shortfall in the defined benefit plans must be covered by the university using operating funds, Kennedy said. She encourages employees with defined contribution plans to consult their financial advisor to ensure they have an appropriate mix of assets and a tolerable level of risk in their portfolio.

In terms of the operating budget for 2008-09,"we're thinking about this as a one-year problem and trying to minimize the effect on the university and on programs. We're coming up with all the options for dealing with a shortfall and looking at the advantages and disadvantages of each one."

At its December meeting, the university Board of Governors will be updated on the situation, she said, and will be asked to consider options and recommendations on how best to weather the storm.