THE ROLE OF THE GOVERNMENT IN THE FINANCING OF DEFERRED
MAINTENANCE COSTS IN CANADA’S POST-SECONDARY INSTITUTIONS
Standing Senate Committee on National Finance
Chair: The Honourable Lowell Murray, P.C.
Deputy Chair: The Honourable Isobel Finnerty
October 2001
COMMITTEE MEMBERSHIP
Standing Senate Committee on National Finance
Chairman:
Senator Lowell Murray, P.C.
Deputy Chairman:
Senator Isobel Finnerty
Members:
Senator Tommy Banks
Senator Roch Bolduc
Senator Sharon Carstairs, P.C.(or Robichaud, Fernand)*
Senator Anne C. Cools
Senator William Doody
Senator Marisa Ferretti-Barth
Senator George Furey
Senator Noel Kinsella,
Senator John Lynch-Staunton (or Kinsella, Noel)*
Senator Frank Mahovlich
Senator Terry Stratton
Senator James TunneyOther senators who participated in this study:
Senator Joseph A. Day
Senator Pierre DeBané, P.C.
Senator Ione Christensen
Senator Joan Fraser
Senator Wilfred P. Moore
Senator John (Jack) WiebeFrom the Parliamentary Reseach Branch of the Library of Parliament
Mr. Guy Beaumier,
Research Officer
Tõnu Onu
Clerk of the Committee
*Ex-Officio Members
ORDER OF REFERENCE
Extract from the Journals of the Senate of Wednesday, June 13, 2001
The Honourable Senator Moore moved, seconded by the Honourable Senator Andreychuk:
That the Standing Senate Committee on National Finance be authorized to examine and report on the role of the government in the financing of deferred maintenance costs in Canada’s post-secondary institutions; and
That the Committee reports no later than the 31st day of October, 2001.
The question being put on the motion, it was adopted.
Paul C. Bélisle
Clerk of the Senate
The Deferred Maintenance Issue
The Consequences of Accumulated Deferred Maintenance
The Role of the Federal Government
- The Association of Universities and Colleges of Canada and Canadian Association of University Business Officers Proposal
- The Canada Infrastructure Program
- The Medical Equipment Trust Fund Model
- The Canadian Alliance of Student Associations Proposal
- The Maintenance Reserve Fund Program
- Possible Role for Canada Mortgage and Housing Corporation
- Tax Proposal
ROLE OF THE GOVERNMENT IN THE FINANCING OF DEFERRED
MAINTENANCE COSTS IN CANADA’S POST-SECONDARY INSTITUTIONS
The 1990s were a period of budgetary restraint for all levels of government. As the federal government reduced its transfers to provinces, these governments in turn reduced their transfers to universities. Post-secondary institutions adapted to the lower funding levels in numerous ways including by deferring their expenditures on maintenance. Deferred maintenance has accumulated to such an extent that it poses significant health and safety risks to both staff and students on some campuses. It also reduces the competitive ability of many post-secondary institutions to attract top students and professors. According to a study released in 2000 by the Canadian Association of University Business Officers (CAUBO), universities are facing mounting costs for repairs to classrooms, residences and other buildings on campus. The report entitled: A Point of No Return: The Urgent Need for Infrastructure Renewal at Canadian Universities, indicates that the cost of eliminating accumulated deferred maintenance costs could require more than $3.6 billion. This staggering sum must be raised while universities attempt to invest in expensive new learning technologies and at a time when student enrolment is expected to grow by 20 % in this decade.
These concerns led the Senate through an order of reference dated 13 June 2001, to ask the National Finance Committee to examine the role of government in the financing of deferred maintenance costs in Canada’s post-secondary institutions and report no later than the 31 October, 2001. In response to this order of reference the Committee held several hearings in September 2001 where it received evidence and testimony from numerous witnesses. The Committee’s findings are presented below.
There are 90 institutions that make up the Canadian university system. They range in size from a few hundred full time equivalent (FTE) students to over forty thousand. According to forecasts of the Association of Universities and Colleges of Canada (AUCC) for the year 2001, total enrolment will include 625,00 full-time and 252,000 part-time students which corresponds to 697,00 FTE’s. In light of the current forecast that enrolment could increase by 20% in this decade, significant pressures will thus be put on universities to expand their facilities beyond the current 16.8 million gross square meters of floor space. In the academic year 1999/2000 Canadian universities had a total operating budget of $14.16 billion.
In the academic year 1999/2000, universities collected a record $14.9 billion in total revenue, a 15.7% increase over the previous academic period (see Table II). In fact university revenues increased for the third consecutive academic year in 1999/2000, as the three levels of government injected almost $1.1 billion more into the system than they did in the 1998/99 academic year. The government sector provided over $8.2 billion or 55% of all university revenues (see Table I). The growth in government funding of universities follows years of cutbacks during the 1980s and 1990s.
TABLE I
UNIVERSITY REVENUE SOURCES
1999-2000
|
Government grants and contracts |
Student fees(1) |
Bequests, donations and non-government grants and contracts |
Sales of services and products |
Investment revenue(2) |
Miscellaneous(3) |
Total |
|
|
|
|||||||
|
% of total revenue |
$’000 |
||||||
|
Canada |
55.0 |
19.3 |
9.5 |
9.1 |
3.7 |
3.6 |
14,922,436 |
|
Newfoundland |
62.2 |
20.0 |
3.7 |
4.5 |
1.9 |
7.6 |
251,316 |
|
Prince Edward Island |
55.1 |
22.3 |
3.3 |
17.0 |
1.6 |
0.7 |
56,101 |
|
Nova Scotia |
43.4 |
25.5 |
7.8 |
16.5 |
4.7 |
2.1 |
642,267 |
|
New Brunswick |
52.6 |
22.5 |
5.6 |
12.9 |
4.6 |
1.7 |
327,166 |
|
Quebec |
65.3 |
11.9 |
10.4 |
6.5 |
3.3 |
2.6 |
3,335,835 |
|
Ontario |
49.4 |
24.1 |
10.9 |
7.3 |
3.4 |
4.8 |
5,829,047 |
|
Manitoba |
58.5 |
18.2 |
9.3 |
9.9 |
3.0 |
1.1 |
544,950 |
|
Saskatchewan |
57.3 |
15.9 |
7.1 |
15.2 |
3.1 |
1.4 |
574,301 |
|
Alberta |
55.1 |
17.5 |
9.0 |
12.5 |
5.2 |
0.7 |
1,512,050 |
|
British Columbia |
55.2 |
17.3 |
6.5 |
11.5 |
4.2 |
5.2 |
1,849,403 |
|
(1) |
Student fees include fees for both credit and non-credit courses as well as miscellaneous student fees (such as transcripts and late registrations). |
|
(2) |
Investment revenue includes revenue from dividends, bonds, mortgages, short-term notes and bank interest. |
|
(3) |
Miscellaneous revenue includes facilities rental and library fines. |
Source: Statistics Canada, The Daily, Monday, 30 July 2001.
According to Statistics Canada data the largest increase came from provincial governments, which contributed almost $6.8 billion in 1999/2000, up $800 million or 13.5% from 1998/99 (See table II). At the federal level, funding rose for the second consecutive year to just over $1.3 billion in 1999/2000, in support of sponsored research activities. This represents a year over year increase of 23.8%, compared with a 14.3% advance in 1998/99 over 1997/98 levels.
Students continued to pay more for university education as their fees grew by 9.8% in 1999/2000 to about $2.9 billion. This increase comes on the heels of a 7.9% increase in 1998/99. On the other hand, university expenditures on scholarships and bursaries also increased by 11.7% to $1.42 billion in 1999/2000 over the previous period.
Spending on salaries and benefits rose to $8.3 billion in 1999/2000, a 5% increase over the previous year; expenditures on salaries and benefits accounted for 58% of all expenditures, down from 65% in the previous academic year.
According to Statistics Canada most of the increased provincial transfers to universities were allocated to capital spending to address deferred maintenance on Canada’s aging universities, as well as to expand capacity for future growth in student enrolment and faculty. In fact, for a second consecutive year, universities in most provinces (except Quebec, Ontario, Manitoba and British Columbia) allocated more money for infrastructure. Universities in all provinces spent a total of $430 million on buildings in 1999/2000. This represented a 5.7% annual increase, which followed an 8.3% increase in 1998/99, over the previous year. Unfortunately, despite these recent increases in spending on buildings, total spending on buildings is still 17.8% less than it was in 1994/95.
TABLE II
UNIVERSITY REVENUE AND EXPENDITURES(1)
|
|
1994/95 |
1998/99 |
1999/2000 |
1994/95 to 1999/2000 |
1998/99 to 1999/2000 |
|
$ ’000 |
% change |
||||
|
Total revenue |
12,431,645 |
12,903,033 |
14,922,436 |
20.0 |
15.7 |
|
Government grants and contracts |
|||||
|
Federal |
1,129,246 |
1,072,940 |
1,328,781 |
17.7 |
23.8 |
|
Provincial |
6,630,825 |
5,957,091 |
6,762,990 |
2.0 |
13.5 |
|
Municipal and other |
49,904 |
91,767 |
108,612 |
117.6 |
18.4 |
|
Total |
7,809,975 |
7,121,798 |
8,200,383 |
5.0 |
15.1 |
|
Student fees(2) |
1,989,198 |
2,619,058 |
2,874,942 |
44.5 |
9.8 |
|
Bequests, donations, and non-government grants and contracts |
998,047 |
1,256,502 |
1,412,203 |
41.5 |
12.4 |
|
Sales of services and products |
1,064,969 |
1,079,663 |
1,355,861 |
27.3 |
25.6 |
|
Investment revenue(3) |
326,607 |
446,589 |
548,890 |
68.1 |
22.9 |
|
Miscellaneous(4) |
242,849 |
379,422 |
530,157 |
118.3 |
39.7 |
|
Total expenditures |
12,456,296 |
12,675,450 |
14,157,680 |
13.7 |
11.7 |
|
Salaries and benefits |
8,083,760 |
7,873,474 |
8,269,171 |
2.3 |
5.0 |
|
Scholarships and bursaries |
244,488 |
378,471 |
468,811 |
91.8 |
23.9 |
|
Buildings(5) |
523,038 |
407,039 |
430,184 |
-17.8 |
5.7 |
|
Operations(6) |
1,721,852 |
2,032,530 |
2,182,432 |
26.7 |
7.4 |
|
Other(7) |
1,883,159 |
1,983,936 |
2,807,082 |
49.1 |
41.5 |
|
(1) |
Constant 1999/2000 dollars. |
|
(2) |
Student fees include credit and non-credit courses, as well as miscellaneous student fees (such as transcripts and late registrations). |
|
(3) |
Investment revenue includes revenue from dividends, bonds, mortgages, short-term notes and bank interest. |
|
(4) |
Includes commissions, royalties, fees for services rendered, library (and similar) fines and rentals. |
|
(5) |
Includes buildings, land and land improvements. |
|
(6) |
Includes travel, library acquisitions, printing and duplication, material and supplies, communications, space rental, insurance, property taxes, institutional membership fees, meals, advertising and promotion and doubtful accounts. |
|
(7) |
Includes furniture and equipment purchase, rental and maintenance, utilities, renovations and alteration, externally contracted services, professional fees, cost of goods sold, debt repayment (interest and principal portion), internal and external cost recoveries and lump sum payments. |
Source: Statistics Canada, The Daily, Monday, 30 July 2001.
THE DEFERRED MAINTENANCE ISSUE
A review and analysis of the problem of deteriorating university structures requires the adoption of a number of terms that will facilitate discussions. These involve primarily statistics that allow analysts to measure and compare the degree of deterioration in buildings and facilities.
a) Accumulated Deferred Maintenance (ADM): the backlog of unfunded major maintenance and renewal projects that have been deferred to future budgets. It results either from an accumulation of neglected routine maintenance items which evolve into more serious concerns or from failure to carry out major repair or restoration projects on facilities which have reached the end of their life cycle or have become obsolete.
b) Current Replacement Value (CRV): the estimated cost, in current dollars, to replace buildings, utility systems, physical plant and site improvements.
c) Facility Condition Index (FCI): a well-known unit of measure of the state of disrepair of buildings, sites, and even institutions as a whole. The FCI is the ratio of accumulated deferred maintenance over current replacement value. It is usually expressed as a percentage of the current replacement value in a given year that is in need of repair. Therefore:
| Accumulated Deferred | |
| Facility Condition Index = | Maintenance
|
| Current Replacement Value |
Or more simply: FCI =ADM/CRV
A FCI value of 0% might indicate a new or recently renovated or repaired structure. A value between 2% and 5% for a campus is considered a normal level of disrepair. The 5% cut-off value recognises the financial burden that an institution will incur when facilities are allowed to deteriorate beyond that level. Facilities that have FCI value in excess of 5% can still be used, however, greater FCI values represent increasing levels of risk to health and safety.
According to the CAUBO Report, structures and equipment at Canadian universities have deteriorated significantly over the last decade. They found that the average facilities condition index (FCI) at Canadian universities is 11.3%, which compares unfavourably with the U.S. level of 7%. However, neither level is acceptable. While most universities had FCI values that ranged from 9% to 12%, universities in the Atlantic region averaged 17.3%.
It appears that Canada’s universities have not carried out the level of maintenance required to preserve their infrastructure. Consequently, Canada’s post-secondary institutions have accumulated repair and maintenance cost that have reached a level of approximately $3.6 billion in the year 2000 according to the CAUBO report. During the hearings, the representatives of CAUBO suggested that the actual figure might be somewhat greater because the survey returns may have been incomplete. Of the $3.6 billion about 75% or $2.7 billion relates to educational and general facilities. Furthermore, about $1.0-$1.2 billion of the ADM is deemed urgent in order to avoid further deterioration and escalating cost.
The CAUBO Report identifies a number of factors that explain the existence of such a high degree of deferred maintenance in the university community. These include:
- Aging Physical Plant – The average university building in Canada is 32 years old, while the average life cycle of its components and systems is about 23 years.
- Decreasing funding levels – government cut-backs in the 1990s and high inflation and energy costs in the 1980’s squeezed resources available for capital upgrading and renewal. The inadequacy of physical plant operating and maintenance budgets contributes to the problem of ADM.
- Lack of profile – facility maintenance and renewal tends to attract little interest in comparison to new building projects.
- Demands for New Space – Growth in university programs, research and enrolment has continued relatively unabated for 50 years. Universities have had to place priority on expanding their physical plant.
- Facility Renewal and Adaptation – The need to comply with new codes and regulations, together with the pace of change in learning and workplace technology, has further depleted the available capital resources.
- Life Cycle Funding – While budgeting processes are at best based on three-year plans, life cycle renewal of physical plant components requires longer-term planning and fund allocation.
The Committee feels that some university administrators also made questionable judgements when they decided to defer maintenance projects. While all institutions and organizations in both the private and public sector faced difficult budget constraints in the early 1990s, the universities chose, in part, to deal with these fiscal challenges by allowing their physical plant to deteriorate. The Committee questions whether enough was done to find savings in other areas, which would have permitted post-secondary institutions to better maintain their facilities.
THE CONSEQUENCES OF ACCUMULATED DEFERRED MAINTENANCE
Deteriorating facilities can have a serious effect on the functioning of universities. The Canadian Alliance of Student Associations (CASA) provided the Committee with a number of examples of the undesirable effects of accumulated deferred maintenance. First and foremost the health and safety of the students and staff at post-secondary institutions is jeopardized. They noted that in recent years, buildings have been condemned at the University of Saskatchewan during final exams; that puddles from leaking roofs accumulate on the floors of Dalhousie University; and that last winter, a ceiling tile fell on a student’s head in the middle of a lecture at McGill University. In their view, all of these safety problems could have been avoided by proper maintenance.
The accumulated deferred maintenance problem is also affecting the quality of education at Canadian universities. CASA noted that many classrooms are unable to use modern teaching tools because they have not received the necessary upgrade in technological infrastructure. This situation is particularly frustrating as many of the labs in which students are expected to experience hands-on learning involve the use of modern equipment. This lack of proper infrastructure in laboratories can also affect the ability of students to gain meaningful work experience. If a professor’s work space becomes unusable to employ lab assistants, students will be deprived of valuable resume-building opportunities.
The ability of universities to fulfill their missions in teaching and research is seriously compromised by the high degree of accumulated deferred maintenance. As the CAUBO report states:
"Deferred maintenance means classroom and laboratory space will not be utilized – at a time when enrolments are expected to surge. Run-down student residences can disrupt the day-to-day living of students; specialized research equipment can become easily damaged and can hamper students’ ability to learn on specialized equipment; and students with special needs may be unable to fully take part in the university experience. Service breakdowns can also have a serious impact on emergency and life safety systems, putting building occupants at risk."
Such a learning environment is not likely to be attractive to potential faculty and students. CASA reminded the Committee that:
"The quality of a student’s education and the strength of a university’s reputation are reliant upon the quality of the faculty at a particular university. Currently, there is strong international competition for many Canadian professors. If our research facilities do not match up, we could lose many quality professors."
They went on to cite the case of a well-respected biologist who "recently left the University of British Columbia for Stanford University in the United States because UBC’s ventilation system was in such disrepair that it could not keep the constant temperature her research required."
The Committee acknowledges that top-notch staff and students are not attracted to a deteriorating environment that threatens their work and their health. Competent individuals have a great degree of freedom to choose and they are increasingly likely to select other better-maintained institutions to pursue their education or careers. Unfortunately, it increasingly appears that these universities may not be found in Canada. It would be a shame if, in spite of the efforts of successive federal and provincial governments to enhance Canada’s competitive position in the global economy, so much were lost because of poor maintenance practices. If Canada is to compete in the knowledge-based global economy it will have to increase its investments in post-secondary education. This includes repairing and maintaining our aging and deteriorating post-secondary facilities so that they may function properly.
In 2001, the University of Toronto raised $160 million through a public bond offering. Mr Cliff Inskip of the Canadian Imperial Bank of Commerce was involved in the transaction. He explained to the Committee that traditionally universities have been focused on bank borrowings for two particular reasons; for short-term timing difference between receipt of cash and required expenditures, and for various capital projects. Capital loans have usually involved revenue-generating projects, such as residences, parking lots, food service facilities, bookstores etc. The University of Toronto issue is of this sort. It is also the largest broadly distributed university financing in Canada to date.
Mr. Inskip noted that although university issues are generally attractive to investors, there are certain features of university finances that constrain borrowing. While there are various sources of income such as grants, donations and user fees, there are a number of limitations on the funding flexibility for universities. Operating grants typically operate by formulas depending on the province. They may be capped in terms of amounts. With enrolment growth the operating grants may not increase. Tuition fees are typically regulated so there is an inability to increase those beyond the regulated limit. In addition, there are a number of restrictions on how research grants and endowments may be used. As a result, universities typically operate different funds. They have an operating fund, a capital fund, an ancillary operations fund (residences, parking facilities, food services, bookstores, etc.) and restricted funds (endowments and other specified uses) etc.
In spite of these limitations, universities have demonstrated a capacity to borrow in both the bank and the capital markets. Mr. Inskip explained that loans have been limited by the ability of universities to repay. In other words, universities have only borrowed where there has been a revenue source to repay the debt. They have not accessed the markets generally to fund accumulated deferred maintenance because there is no specific revenue source by which to service that debt.
The University of Toronto transaction involved the issuance of 30-year unsecured debentures to raise $160 million. It is expected to be repaid in full in 2031. The interest rate is 6.78% payable semi-annually. This is a very good rate, as it is only 65 basis points, or .65 percentage points above the Government of Canada 30-year benchmark bond. The proceeds will be used to finance capital projects, primarily residences, but also small amounts for a parking facility and for academic buildings. Repayment will be from the revenues generated from those ancillary facilities.
Mr. Inskip believes that there are good opportunities for universities to access the capital markets to raise funds for capital projects at reasonable rates. However, such ventures will have to be backed by proven income streams if the institution hopes to attract the interest of investors. Projects aimed at reducing accumulated deferred maintenance would not qualify.
Furthermore, there was discussion in Committee concerning the topic of private foundations and their role in the funding of accumulated deferred maintenance. Unfortunately, it seems that prospective funding from this source is much more likely to be directed toward endowments and new facilities, rather than addressing the concerns associated with ADM.
THE ROLE OF THE FEDERAL GOVERNMENT
Although the provinces have jurisdiction over education, the federal government has long been involved in post-secondary education. The history of this involvement to 1986 is presented in the first chapter of this Committee’s 1987 Report entitled Federal Policy on Post-Secondary Education. Only a brief outline drawn from that chapter is presented below.
From 1951 to 1967 the federal government offered a grant program to post-secondary institutions through the Association of Universities and Colleges of Canada. In the words of Prime Minister St. Laurent, "These federal grants were designed to maintain the highly qualified staffs and the working conditions which are essential for the proper performance of their functions – in other words, to maintain quality rather than to increase existing facilities." However, the federal government did provide some capital grants to post-secondary institutions in this period. From 1957 to 1967 the Canada Council distributed over $60 million under its University Capital Grants program. The Council shared equally the eligible building construction costs with specific post-secondary institutions and allocated these funds across the provinces on a provincial per capita basis.
During the same period, the Canada Mortgage and Housing Corporation (CMHC) provided loans to universities to build student residences. Mr. David Cluff of the CMHC explained that between 1960 and 1978 there was a specific program under the National Housing Act, called the student-housing program. It provided loan funds to provinces, municipalities, their agencies, hospitals, school boards, universities, colleges, co-operative associations and charitable corporations for student housing. In each case, the province concerned had to approve the loan. The purpose of the program was to make long-term loans to assist in the construction of student housing, the purchase of existing buildings for conversion to this use, or for the improvements to existing residences.
The program itself provided a loan from CMHC, and therefore from the federal government, for up to 90% of the prescribed house price for self-contained projects, and up to $15,000 per bed for hostel projects. These loans were secured by mortgages or debenture. The amortization period could extend up to 50 years and almost all of the loans were made for that period. The loans had an interest rate lower than the rate CMHC was charged by the federal government. About 300 loans were made during the period of the program. The face value of the loans was roughly $400 million. As of today, there are 243 active accounts with an outstanding balance of $246.1 million, and an average interest rate of 6.6%.
Because of fiscal constraints arising in the late 1970s, the federal government decided to refocus its housing policy towards families and lower income groups. Consequently, lending programs for student housing ended.
In 1967, under the Federal-Provincial Fiscal Arrangements Act the federal government began a system of cost-sharing transfers to the province for the purpose of, among other things, the funding of post-secondary education. In 1977, funding for post-secondary education, hospital insurance and medical care were combined under the Established Program Financing Act, (EPF). This program replaced the cost-sharing agreement with unconditional grants to the provincial governments.
In 1995, the federal government decided to combine the transfers to provinces under the EPF program and the Canada Assistance Plan into a single financing mechanism: the Canada Health and Social Transfer (CHST). The CHST, which came into force in 1996-97, created a new block transfer for federal support of health, social assistance, and post-secondary education. The transfers were again provided to the provinces unconditionally.
In the post WW II period federal initiatives in support of post-secondary education were not limited to transfers to the provincial governments. Support was provided directly to students to cover tuition and living expenses, as well as to the institutions through a system of granting councils in support of research activities. Over the years this funding from granting, although welcomed, also gave rise to increased maintenance costs, which the universities found difficult to absorb.
In the 1990s, funding from both levels of government declined significantly and resulted in cutbacks in all areas of university operations. In recent years the federal government has attempted to re-establish a presence in the area of post-secondary education by implementing a number of new programs that transfer funds directly to institutions or students. These include the creation of the Canada Foundation for Innovation (CFI) in 1997, the restoration and increase of funding to the federal granting councils in 1998, and the establishment of the Canadian Institutes of Health Research in 1999 and the Canada Research Chairs in 2000. These initiatives may be signs that the federal government is taking seriously its commitment to making Canada an innovative and knowledge-based society. However, the federal initiatives do not fund renovation, repair and maintenance work. Both Dr. Thomas Brzustowski, President of the Natural Science and Engineering Research Council of Canada (NSERC) and Susan Peterson, Assistant Deputy Minister at the Department of Finance explained that federal assistance to post-secondary education does not extend to the renewal of capital investments. David W. Strangway, President and CEO of the CFI explained that although the programs of the CFI now provide for the first time some assistance for capital works, it does not include assistance for the repair of existing facilities.
The 1997 Report of the Special Senate Committee on Post-Secondary Education noted that: "physical facilities have deteriorated as priority has of necessity been given to academic functions and serious maintenance needs have been deferred." That committee found that there was "an undeniable rundown of the physical infrastructure of universities and colleges." Subsequently, the Special Committee recommended:
That the Federal Government begin negotiations with the provinces on a joint program to arrest the accelerating deterioration of the physical infrastructure and libraries of colleges and universities;
That the institutions be asked to maintain an up-to-date list of their overdue maintenance and renovation needs; and
That the two levels of government commit funds to these projects at the earliest possibility.
As a result of our study, we find that the Special Committee’s observations and recommendation continue to have relevance. The deferred maintenance problems of universities have not vanished and are certain to worsen over time. Left unattended, the problems will clearly become more costly.
However, the National Finance Committee members are also fully aware of the economic, fiscal and national security concerns that have arisen since the terrorist attacks on the United States of America, our neighbour and chief trading partner, on 11 September 2001. The Committee recognises that the Government may need to redefine its budgetary priorities in light of the new challenges facing our nation. The Committee is also aware that the budgetary restraints of the recent austerity period have also affected health care facilities in Canada. Nevertheless, it remains a fact that universities in Canada are facing a significant maintenance problem. In dealing with accumulated deferred maintenance the Committee would like to highlight a number of proposals that were put forward during its hearings.
The Committee is aware that should the government decide to intervene on the question of deferred maintenance at post-secondary institutions, certain of its actions may be carried out within the context of the Framework to Improve the Social Union for Canadians. Under this federal-provincial agreement, the federal government must, with respect to any Canada-wide initiative in post-secondary education, work collaboratively with all provincial and territorial governments to identify Canada-wide priorities and objectives. It must also obtain agreement from a majority of provincial governments before it introduces such new initiatives. Even where the government introduces new Canada-wide initiatives funded through direct transfers to individuals or organizations for post-secondary education, it must, prior to implementation give three months notice to the provinces and offer to consult with them. Notwithstanding all of these factors, the Committee herewith provides the government with the following seven proposals either raised by witnesses heard or drawn from Committee discussions for its consideration:
A. The AUCC/CAUBO Proposal
In their joint presentation, the Association of Universities and Colleges of Canada and the Canadian Association of Universities Business Officers, proposed that the federal government adopt an initiative targeted towards eliminating accumulated deferred maintenance currently affecting core educational and general facilities, as well as site infrastructure and utilities. Ancillary facilities such as residences and parking structures would not be eligible because they are deemed to be self-financing. The proposal is similar to the Federal Infrastructure Program in that the three participants (the federal and provincial governments and the universities) would each contribute to the funding of projects. The total of this proposal is $3 billion, maximum.
Each level of government would contribute 40% of the funds and the universities 20%. On a $3 billion fund the federal and provincial governments would each contribute $1.2 billion and the universities would have to raise $600 million.
To ensure a fair and just distribution of these funds across all provinces and post-secondary institutions the Committee suggests employing a formula using a figure derived from a monetary measure of accumulated deferred maintenance per full-time equivalent student, or $ of ADM/FTE (see CAUBO Report page 46). The Committee feels that the employment of this formula would ensure that any such funds applied to the problem of ADM would be properly and equitably distributed across the country. Employing a per capita formula based on provincial population is not an accurate reflection of the problem of ADM facing post-secondary institutions across the different regions of Canada. This is highlighted by the discrepancy found between Central Canadian post-secondary institutions and those in the Atlantic Region. Atlantic Canada has a much lower population, but a relatively higher student population than Central Canada. Moreover, this is recognized in the brief of the AUCC wherein it is stated that: "the number of people using university facilities is a major factor contributing to the deterioration of those facilities."
B. The Canada Infrastructure Program
There have been suggestions that the government consider using the Canada Infrastructure Program directly to fund the accumulated deferred maintenance cost at post-secondary institutions. In the October 1999 Speech from the Throne the government announced an infrastructure initiative for Canada that would include knowledge, information, cultural, and physical infrastructure. The infrastructure program is aimed at repairing municipal infrastructure through equal contributions from the federal, provincial and municipal governments. The budget 2000 provided $2.65 billion of funding over the next six fiscal years for the physical infrastructure program. The program currently has two components. The first, called the Infrastructure Canada program, provides $2.05 billion for municipal infrastructure renewal. The second component, which is administered by Transport Canada, provides $600 million for highway renewals.
The government could top up the funding in this program, or use the available residue of funds to address this accumulated deferred maintenance problem. Alternatively, the government could establish a new program modeled after the infrastructure program, with the universities replacing the municipalities and assuming one third of the cost of the program. Provinces would make universities eligible to participate on the same basis as municipalities.
Pursuant to the formula set out in Proposal A, the Committee suggests that FTEs be employed as the formula to ensure a proper and equitable distribution of ADM funding among provinces.
C. The Medical Equipment Trust Fund Model
The Medical Equipment Trust Fund was established in 2000 under the Canada Health Care, Early Childhood Development and Other Social Services Funding Act to assist hospitals in acquiring medical equipment. The Government of Canada established a $1 billion fund that provinces and territories can use to acquire and install necessary diagnostic and treatment equipment. The provinces and territories determine the priorities within their own systems, and the funds are allocated across provinces and territories on an equal per capita basis. As part of the accountability provisions of the agreement, provincial and territorial governments will report to Canadians on how they have invested these funds.
It has been suggested that a similar fund be established to assist post-secondary institutions to obtain funding to pay for the accumulated deferred maintenance that they face.
D. The CASA Proposal
The Canadian Alliance of Student Associations proposed a two-pronged approach to the problem of accumulated deferred maintenance at post-secondary institutions. First, they suggest that the federal government establish a $1.2 billion funding envelope to address those deferred maintenance costs that were identified by CAUBO as urgent.
Second, to avoid a reoccurrence of the problem, they suggest that the federal government work cooperatively with the provinces to establish a funding accord to set aside an additional $1 billion for post-secondary education.
E. The Maintenance Reserve Fund Program
Under this proposal, the universities would be allowed to set up special funds dedicated entirely to the maintenance of facilities. Contributions from citizens would be accumulated in the fund. Donors would be entitled to claim a tax credit for the value of their contribution to the fund.
F. Possible role for CMHC
The Committee heard that funding to cover accumulated deferred maintenance may only be available as loans from banks, and then only available if the university can demonstrate a revenue stream to repay such loans. Therefore, the Committee suggests that the leadership and involvement of the federal government is required to facilitate the funding of accumulated deferred maintenance projects through CMHC, whereby CMHC permits the refinancing of its active accounts to cover respective accumulated deferred maintenance projects.
G. Tax Proposal
Under subsection 38 (a.1) of the Income Tax Act a significant tax incentive is temporarily granted to donors who make a donation with publicly traded shares, mutual funds and bonds. Until December 31, 2001, where a donor makes a gift to a registered public charity of publicly traded marketable securities that have increased in value since the time they were acquired, only 25% of the deemed capital gain is taxable—that is half of the normal inclusion rate of 50% implemented on October 18, 2000. The current measure, which was introduced on a five-year trial basis, is scheduled to expire the end of the current year. It appears to have enjoyed considerable success.
Mr. Strangway, a former President of the University of British Columbia reminded the Committee that the government could establish a program that fully protects capital gains on donations of publicly traded shares made for the purpose of assisting post-secondary institutions in dealing with the accumulated deferred maintenance problem. Such a tax measure would be similar to the capital gains exemption enjoyed by U.S. donors to American universities.
Canadian universities face an enormous financial challenge in dealing with the accumulated deferred maintenance of their facilities. The magnitude of the problem suggests that government assistance will be required. While the Committee acknowledges this need for assistance on the part of post-secondary institutions it also recognizes the new budgetary demands that the federal government is facing. In light of the current situation the Committee has chosen to highlight possible ways that the federal government might be able to address the problem of accumulated deferred maintenance at Canada’s post-secondary institutions.
WITNESSES LIST
September 18, 2001:
From the Natural Sciences and Engineering Research Council of Canada:
Thomas Brzustowski, President
From the Department of Finance:
John Connell, Senior Chief, Economic Development Policy Division, Economic Development and Corporate Finance Branch
Susan Peterson, Assistant Deputy Minister, Federal-Provincial Relations and Social Policy Branch
Barbara Anderson, Director, Federal-Provincial Relations Division, Federal-Provincial Relations and Social Policy Branch
Stéphane Hardy, Senior Chief, Education, Social Policy Division
September 19, 2001:
From Canadian Imperial Bank of Commerce:
Mr. Cliff Inskip, Managing Director, Debt Capital Market
September 25, 2001:
From the Canadian Alliance of University Business Officers:
Mr. Tony Whitworth, Vice-President, Finance & Resources University of Saskatchewan;
Mr. Duncun Watt, Vice-President, Finance & Administration Carleton University;
Mr. Maurice Cohen, Former Executive Director;
From the Association of Universities and Colleges of Canada:
Mr. Robert Giroux, President;
Mr. Robert Best, Vice-President, National and International Relations Branch;
From Canada Mortgage and Housing Corporation – Strategic Policy and Planning:
Mr. David Cluff, Director, Strategic Policy and Planning.
September 26, 2001:
From the Canadian Alliance of Students Associations:
Mr. Liam Arbuckle, National Director;
Mr. Rob South, Government Relations Coordinator;
From Canada Foundation for Innovation:
Mr. David W. Strangway, President and CEO.