Deferred Maintenance – The Hidden Deficit
There has been much talk on campus lately about cuts to our operating grant and the shortfall in our operating budget. To understand just how severe the situation is, a few days ago I wrote about the additional challenge of McGill’s pension deficit. Today I would like to shed light on another of our significant, yet often forgotten, financial challenges – the growing deficit tied to maintaining our infrastructure. It puts additional pressure on our Capital Budget, and our Operating Budget.
Did you know that Travel+Leisure Magazine, in its September 2012 edition, rated McGill as one of the 16 most beautiful university campuses in the world? It is not hard to see why; I think I speak for many of us when I say that we are lucky to study and work on such lovely campuses. However, like any building, our buildings need regular repairs and maintenance. But they are very expensive to repair, maintain, and adapt to modern teaching and research requirements because of their age and historical status. Among our 156 buildings, 82 were built before 1940 while 95 per cent of the downtown campus is classified as “heritage” and, therefore, protected. This means that whenever we need to renovate or make some changes to buildings we need to obtain approval from various governmental authorities.
In comparison to other Quebec universities, McGill’s infrastructure is indeed unique. You can see from the table below the distribution of buildings at various Quebec universities by year of construction. More of McGill’s buildings were built before 1939 than at all other universities combined.
In addition, McGill has more small scale buildings (under 3000m2) than any other Quebec university which makes our repairs more expensive.
In 2012, our annual shortfall for deferred maintenance looked like this:
$100 million – Estimated annual amount (needed for at least the next six years) to address the most important accumulated deferred maintenance problems in our teaching and research buildings.
$27.6 million – Amount allocated by the government to address accumulated deferred maintenance problems, from the total $48.6 million annual government capital grant. (The remaining $21 million is allocated by the government for modernizing or changing the use of current facilities and for IT infrastructure.)
$72.4 million – Annual shortfall for deferred maintenance. This shortfall means that McGill must borrow money to address the most pressing issues.
In total, it is estimated that McGill is missing $880 million (for buildings that fall under the government grant as well as student residences) to complete our most pressing deferred maintenance projects – the largest shortfall by far of any Quebec university:
In practice, what does this mean? Consider the Strathcona Anatomy and Dentistry Building. The replacement of its 1,129 windows, dating back to the building’s construction in 1909, and masonry would require $30 million. And Strathcona is just one of McGill’s buildings which require significant investment.
Over the past five years, we created a priority plan and spent $230 million on the most urgent repairs. But the problem gets worse every year because our buildings are aging faster than we can find the money to fix them. For buildings that fall under the government grant, we should invest no less than $600 million over the next six years to catch up on the most important repairs.
By now, you may be thinking: “The cost of maintaining infrastructure comes out of our Capital Budget. So why is there an impact on the Operating Budget?”
True, but there is one important detail. We must borrow money to make up the shortfall in the Capital Budget. For every $100 million we borrow, we must pay $ 3 million each year in interest from the Operating Budget to support the debt. And this doesn’t include repaying the principal debt itself, which will also eventually have to be supported from our Operating Budget, unless we receive more funding. Nothing in our funding future suggests that this is likely to happen any time soon.
Next time, I’ll discuss another topic of interest to understanding McGill’s finances: how we use our endowment fund.