The tip of the iceberg?

laurentian university sign

Laurentian University in Sudbury has filed for creditor protection.

Despite much evidence to the contrary, some people continue to believe that governments and government entities simply cannot go bankrupt.

In fact, there is a whole school of thought called Modern Monetary Theory (MMT) that promotes the view that governments can spend without constraint, and encounter virtually no downside.  MMT has become increasingly popular during the pandemic, as government spending everywhere has skyrocketed and many public officials and others would like to believe that through some magical accounting tricks and governments creating infinite supplies of money, this will not create massive problems for future generations faced with gigantic government debts.

A recent development in Ontario serves as a reminder that government institutions are not immune to bankruptcy.  This week, Laurentian University in Sudbury filed for creditor protection, the first time any such institution had done so in provincial history.

Many reasons were cited for the university’s financial problems, including such things as an over-dependence on foreign students (who pay much higher tuition than do local Ontario students), the costly failed experiment of a campus in Barrie and revenue losses from the pandemic.  Also cited as a contributing factor was the 10 per cent tuition reduction mandated by the Ford government in 2019, something the left and many post-secondary institutions themselves had been requesting for some time.

The reality, however, is that Laurentian had been in financial trouble for years because of fundamental structural problems, and these recent developments just tipped them over the edge into potential insolvency.  The difficulties faced by Laurentian also plague many if not most other Ontario universities, but as Laurentian is smaller and located outside of major population centres, it lacked the broader financial base to allow it to withstand the financial blows.  This doesn’t mean the larger institutions are immune from the same forces, however, merely that they have the means to keep the wolves at the door a bit longer.

One of the key issues in the university financial base is expensive compensation and benefit expenses, which represent a significant proportion of overall costs.  In recent years, Laurentian had done some downsizing in its staffing complement, but as an entity where most if not all staff are unionized, it is limited in the extent to which it can accomplish the adjustments necessary to achieve financial stability.  When the financial boom fell, Laurentian was apparently in the middle of a collective bargaining process with the faculty association.  Time will tell if these recent developments will convince the union to temper their demands in the face of reality.

Another of the key problems facing all of these institutions is large unfunded liabilities in their defined benefit (DB) pension plans.  DB plans have virtually disappeared in the private sector for good reason – they are unaffordable. The only reason they are on life support in the public sector is that they are being propped up by taxpayer dollars, which doesn’t solve their deficit problems but merely postpones the inevitable reckoning.  An effort to consolidate the university pensions to reduce management fees and streamline their operations is underway, but the only enduring solution is to convert the DB plans to a more realistic Defined Contribution (DC) model which will still be generous to employees and much more affordable and fair to private sector taxpayers.  To date, no government in Canada has had the courage to confront this crucial issue, and the financial pressure on these DB plans has become even more acute because of the pandemic.

Unlike private sector businesses, governments and government institutions have all too often operated on the assumption that if they get into financial trouble, they can always just tap into the ever-generous taxpayer pocket yet again, and avoid the need to formulate and stick to sensible budget practices like the rest of us must do.  We can hope that the Laurentian University crisis will serve as the canary in the coal mine for other public institutions to get started on fixing their own structural problems before they are in the same boat. It is more likely, however, that we’ll have to see lots more bankruptcies, and more damage done to students, university employees and taxpayers, before the real issues are addressed.  More’s the pity.

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