Classroom Capital: A Bond for Better Education
By: Ariana Ghavami
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
The Campus Cash Crunch
Unlike households, which were observed to self-insure against income shocks with wealth, structural constraints prohibit universities from accumulating wealth as insurance. As such, universities cannot weather income shocks without augmenting consumption, directly impacting the educational offering to students.
Compared to the American post-secondary education system, which delineates between public and private institutions, Canadian universities draw on a mix of public and private funding. In 2021, university revenues originated from the provincial government, tuition payments, donor support (e.g. grants, donations and investments), and the federal government, representing 35.5%, 32.5%, 12.5%, and 10.5% of university revenue, respectively. Though Canadian university revenues have trended upwards over the last two decades, growth has fluctuated notably. Plotting the annual change in Canadian university enrollment against revenue growth reveals that revenue volatility was likely driven by funding changes at the provincial level.
While Ontario-based educational institutions used to be able to leverage tuition increases to hedge against rising costs, this luxury does not exist today. Between 1998 and 2004, specific undergraduate programs were deregulated to allow tuition increases of up to 20.0% annually. Following this period of deregulation, the Ontario government’s approach to tuition management has varied, from capping increases between 3.0% and 5.0% in 2018, to freezing tuition increases from 2019 to 2027, and a 10.0% tuition cut for Ontario-based students during the COVID-19 pandemic. An example of the contrast between regulated and unregulated programs is the 174.0% tuition disparity—$9,200.0 vs. $25,200.0 CAD—between a business undergraduate degree offered by Western University’s main campus and one provided by the university’s Ivey Business School.
Historical deregulation and recent tuition constraints have left the provincial government and universities at odds. The few previously unregulated programs drive social pressure to cap and universally slow tuition growth. And yet, selectively high program fees are no longer sufficient to support rising operating costs or offset the fact that the Ontario government pays out only 57.0% of what other provinces do on a per-student basis (Crawley, 2023). Notably, several of Ontario’s leading universities are facing significant budget deficits. For example, the University of Waterloo and Queen’s University, ranked 5th and 11th nationally, face deficits of $17 million CAD and $50 million CAD, respectively.
The ABCs of EDBs
To resolve this financial deadlock, Ontario's Colleges and Universities Minister should continue working with the 2023 Blue-Ribbon Panel—a selection of education and governance experts assembled to address the economic challenges Ontario post-secondary institutions face—to create an education development bond (EDB).
Outcome-based financing offers a way out of this impasse as it necessitates goal realization and transparency between the beneficiary and benefactors. A cornerstone of outcome-based funding, and the basis upon which the EDB was conceptualized, is the Social Impact Bond (SIB). Launched in 2010 by the Rockefeller Foundation, the SIB subsect of outcome-based financing entails investors providing initial capital to the beneficiary, expecting a pre-disclosed rate of return whose payout is financed by an outcome payer, and is contingent on the beneficiary’s ability to realize its objectives. If the beneficiary fails to meet its goals, the capital invested in the bond would be treated by investors as a charitable contribution.
While NGOs typically seek SIBs to achieve social outcomes, the EDB aims to provide a mechanism to break the financial deadlock between the cost-conscious Ontario government and universities struggling with resource constraints.
In the wake of Ontario-based Laurentian University’s insolvency in 2021, which eliminated 76 programs (35.1% of program offerings) and 116 faculty members, the EDB is needed more than ever and aims to preserve the quality and accessibility of post-secondary education.
The Price of Progression
Establishing payout benchmarks invites a conflict of interest between the beneficiary and the government. While it would be ideal to have mediation during the creation of every EDB, this would unnecessarily increase transaction costs as the bonds are institution-specific. To minimize transaction costs and conflicts of interest, the government should recommission the Blue-Ribbon Panel to review university funding and develop guidelines for benchmark establishment. Doing so would allow the principal government and universities to minimize mediation needs and reduce costs in a financially constrained system.
Partners in Progress
Ontario universities, the provincial government, and donor-investors are stakeholders directly involved in the EDB’s creation and execution. Students and the public, whose perception and approval impact the behaviour of the acting parties, are additional parties for consideration.
Though the EDB does not bridge the entire funding deficit, it is expected to appeal to Ontario universities because it offers funding faster than traditional government disbursements. Moreover, since universities are currently focused on achieving development objectives, the institutions likely already have the capability to measure benchmarks that would be used for EDB payout.
Dialogue between the Ontario government and its universities in 2023 revealed two things: it is not possible to bridge the entire $4 billion CAD annual funding deficit through the creation of operational efficiencies, and the Colleges and Universities Minister Jill Dunlop is reluctant to provide further funding, stating that “we need to ensure that that money is being spent wisely.” The EDB offers a solution to this deadlock because it necessitates transparency, provides a way to raise funds in the short term, and allows the provincial government a longer-term time horizon to finance this initiative. Further, the introduction of the EDB is politically favourable as it does not contradict previous rhetoric from the provincial government about educational institutions earning funding through demonstrating measurable improvements.
The EDB should appeal to investors through offering an investment vehicle that straddles traditional financial securities and charitable contributions. While it may seem counterintuitive for the provincial government to accept forfeiting tax revenue by classifying the investment as a tax write-off if objectives are unmet, this incentive is a necessary precondition for the success of the EDB in Ontario. Much like social impact bonds, the downside risk of an EDB exceeds that of a traditional bond. As such, offering a tax incentive to would-be investors offers downside protection. Further, the EDB provides more accountability and transparency than conventional donations as the EDB’s structure necessitates the establishment of specific and measurable objectives. However, the EDB’s augmentation of traditional charitable contributions creates the risk of adverse selection as it may convert current donors into investors. Despite this risk, the EDB is expected to capture uncertain donors due to its bond structure, which is based on tangible metrics and potential financial return. The bond structure should convert prospective donors earlier because setting lower face values allows individuals to hold multiple bonds. Moreover, face values ranging from $100 to $1,000 CAD set a point of reference that creates the impression of a more significant impact, as opposed to traditional donations, where publicised figures range in the millions. The bond format should also encourage multiple contributions, rather than one-time lump sum donations from individuals at the end of life.
Graduating to a Brighter Future
Introducing EDBs benefits current and future students, as it should lessen the need for deep budget cuts. As such, offering universities additional funding sources should preserve the breadth of educational offerings and protect programs like fine arts, language and music that are often early targets of program cuts. Further, the introduction of an EDB should be perceived positively by conservative voters as the Ontario government could present the EDB as a way to make universities earn additional funding through demonstrating measurable progress that aligns with current rhetoric around post-secondary funding.
