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Secretariat

845 Sherbrooke St. West, room 313

Montreal, QC, H3A 0G4

Tel: (514) 398-3948 | Fax: (514) 398-4758

The following items arise from the Finance Committee meeting of November 16, 2015. They are

presented to the Board of Governors for its consideration.

I. FOR ACTION BY THE BOARD OF GOVERNORS

1. Board Authorization for Borrowing and Related Transactions associated with Bond

Issuances in support of Deferred Maintenance and Information Technology Initiatives

The Finance Committee reviewed a request to recommend that the Board of Governors authorize

transactions related to borrowing and bond issuances in support of deferred maintenance and

information technology initiatives.

The Committee was informed that since the Executive Committee’s approval of this initiative in

February 2015, an advisory Committee established a financing structure consisting of the issuance

of four tranches of $100 million in bonds over the next four years, which will be repaid within

forty years.

Discussions have been ongoing since April 2015 with the Ministry of Education, which must first

approve the initiative, and with the Ministry of Finance, which must approve of the nature, terms,

and conditions of the financial transactions. McGill’s Chief Investment Officer will be working

closely with the Ministry of Finance throughout the process.

The Committee was informed that the University intends to work with a syndicate of six banks,

which will act as brokers to facilitate bringing the bonds to market. The Royal Bank of Canada

and the Bank of Montreal will serve as co-leads for the issuance, with RBC acting as the sole book-

runner.

The Committee learned that preparations have begun Road Shows in Montreal and Toronto with

the aim of attracting investors. The intention is to issue the first tranche of the bond in January

2016.

In its review of the request, the Committee considered the following risk factors:

First, capital and interest repayments will put considerable pressure on the operating budget

for years to come. Furthermore, the bond issuance would likely affect the University’s

credit rating. An analysis of the impact on the credit rating is expected in the coming weeks.

Second, there is a financial risk in using rate locks. If interest rates decrease, the University

will need to pay the mark-to-market value of the rate locks at their maturity, putting an

additional pressure on the operating budget. An additional risk associated to the issuance

MCGILL UNIVERSITY BOARD OF GOVERNORS

Report of the Finance Committee GD15-21

Board of Governors meeting of November 26, 2015

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of multiples tranches over four years is the McGill credit spread risk that could not be

hedged through the rate locks.

Finally, the unpredictability of government funding both for and within the fiscal year must

be considered.

Overall, the Committee noted that all risks must be measured against the risk of inaction and the

implications of further deterioration of the University’s infrastructure. Following a thorough

review and consideration of the request, the Committee agreed to recommend that the Board

approve the borrowing strategy, as follows:

Be it resolved that the Board of Governors, on the recommendation of the Vice-Principal

(Administration and Finance), approve, further to the Board of Governors resolution number 14.1

[GD14-17] and Executive Committee resolution number 7.2.1 [ED14-14] that:

1) The Chief Investment Officer or the Vice-Principal (Administration and Finance) be authorized

to lock in interest rates prior to the issuance of senior unsecured debentures, and to enter into

any associated agreements on behalf of The Royal Institution for the Advancement of

Learning/McGill University (“RIAL/McGill”);

2) RIAL/McGill be authorized to borrow up to but not exceeding $400 million to be repaid over

the course of a period not to exceed 40 years and to create, issue and sell senior unsecured

debentures, to be issued in one or more tranches pursuant to a trust indenture or supplemental

indenture, between RIAL/McGill and a trustee to be appointed by the Principal and the Vice-

Principal (Administration and Finance), on behalf RIAL/McGill, which debentures shall have

the terms and conditions as may be approved by the Principal and the Vice-Principal

(Administration and Finance);

3) RIAL/McGill be authorized to enter into a trust indenture or supplemental indenture with the

trustee, on terms to be approved by the Principal and the Vice-Principal (Administration and

Finance), and such officers are hereby authorized on behalf of RIAL/McGill to execute and

deliver the trust indenture, on such terms as they may approve, their approval of any such

terms to be conclusively evidenced by their execution of the trust indenture;

4) The Principal and the Vice-Principal (Administration and Finance) be hereby authorized to

execute one or more debentures in an aggregate principal amount not exceeding $400 million

and to authorize and direct the trustee to authenticate and register such one or more

debentures pursuant to a written order thereof to be delivered in accordance with the terms of

the trust indenture;

5) The draft offering memorandum for the offer for sale of the debentures, the certificate annexed

to it, if any, and any French translation thereof as needed, be approved and executed by the

Principal and the Vice-Principal (Administration and Finance) on behalf of RIAL/McGill,

subject to any changes the Principal or Vice-Principal (Administration and Finance) may

approve at their entire discretion, their approval to be conclusively evidenced by their

execution of the certificates attached to such offering memorandum;

6) The entering into, by RIAL/McGill, the engagement letter with RBC Capital Markets (“RBC”),

as its financial advisor, and sole book-runner for the sale of the debentures be ratified;

7) RIAL/McGill be authorized to enter into an agreement providing for the sale of the debentures

on an agency basis (“Agency Agreement”) with RBC and other agents, on terms and conditions

to be negotiated and approved by the Principal and the Vice-Principal (Administration and

Finance), and such officers are hereby authorized on behalf of RIAL/McGill to execute and

deliver the Agency Agreement, on such terms as they may approve, their approval of any such

terms to be conclusively evidenced by their execution of the agency agreement;

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8) RIAL/McGill be authorized to enter into subscription agreements providing for the sale of the

debentures to investors on terms to be negotiated and approved by the Principal and the Vice-

Principal (Administration and Finance), and such officers are hereby authorized on behalf of

RIAL/McGill to execute and deliver the subscription agreements, on such terms as they may

approve, their approval of any such terms to be conclusively evidenced by their execution of

the subscription agreements;

9) The Chief Investment Officer or the Vice-Principal (Administration and Finance) be hereby

authorized to enter into, on behalf of RIAL/McGill, any agreement or financial instrument

ancillary to the issue of the debentures necessary or desirable, for the purpose of hedging of

interest rates or other purposes, including but not limited to bond forwards and interest rate

swap agreements;

10) The Chief Investment Officer or the Vice-Principal (Administration and Finance) be hereby

authorized to enter into, on behalf of RIAL/McGill, any agreement or financial instrument

ancillary to the issue and the re-imbursement of the debentures necessary or desirable, for the

purpose of investing: i) cash from the proceeds of the debenture on a short-term basis and ii)

cash set aside in an amortization fund to reimburse the debentures at maturity. This includes

opening accounts with custodians and entering into agreements with performance

measurement services providers;

11) The Principal and the Vice-Principal (Administration and Finance) be authorized to do all

such acts and to execute or cause to be executed all such instruments, agreements and other

documents as in such officers’ opinion may be necessary or desirable to complete the

transactions hereby approved and authorized, including in order to obtain and required

governmental authorizations;

the whole, subject to receipt of any required authorizations from the Ministre de l’Éducation,

de l’Enseignement supérieur et de la Recherche or the Ministre des Finances.

II. FOR THE INFORMATION OF THE BOARD OF GOVERNORS

1 Outstanding Capital Borrowings at April 30, 2015

The Committee received a report on outstanding capital borrowings. As of April 30, 2015 the

short-term borrowings include amounts due from the province totaling $94.3M.

2. Budget Implementation 2015-2016 (Year to-Date)

The Committee received a report on the implementation of the 2015-2016 budget. The Committee

learned that at the close of FY 2015 McGill received an unqualified clean opinion from external

auditors and that new accounting standards implemented mid-year and applied retrospectively

resulted in a surplus at year’s end.

Members were informed that the “Règles Budgétaires”, which were issued by the provincial

government in early November were largely as expected and that the University was tracking to

budget for FY 2016. While revenues were tracking slightly higher than anticipated and expenses

tracked slightly lower, these variations are due to timing within the fiscal year.

Members were also informed that MEESR funding is insufficient to prevent deferred maintenance

costs from increasing and that the proposed bond issuance would help to address some, but not all,

of the accumulating deferred maintenance issues. The Committee was further informed that the

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effect of the debt issuance on the University’s credit rating would likely be offset by modification

to the funding formula and other regulatory changes.

3. Budget Planning 2016-17 Report I

The Committee received an overview of the budget planning exercise for FY2017. The

presentation in support of the budget planning exercise is attached as Appendix A.

4. University Advancement Annual Report (2014-15)

The Committee received the 2014-2015 Report on Philanthropy. The report showed that overall

performance was quite robust ($119M) and that despite not being in a campaign mode, the

University’s cash position was relatively strong ($122M). Senate received this report at its meeting

of October 21st, 2015.

5. Review of Finance Committee Terms of Reference

The Committee conducted a preliminary review of its terms of reference, as part of the triennial

review of Board Committees’ terms of reference. The general objectives of the current review of

the Board Committees’ terms of reference include implementing further clarity and updates that

reflect current practices. Proposed revisions to the Committee’s terms of reference will be

submitted to the Nominating, Governance and Ethics Committee for consideration and

subsequently to the Board for approval.

6. Finance Committee Orientation Package (2015-16)

The Committee received it 2015-16 Orientation Package, which contained updated reference

materials for the Committee’s information.

END REPORT

November 2015

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Prof. Christopher ManfrediProvost and Vice‐Principal (Academic)

26 November 2015

Presentation to the Board of Governors

Key Considerations

FY2017 Budget Planning Report I

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FY2015 Operating and GAAP Deficits

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Budget snapshot FY2016

• $98M: accumulated financed deficit at the start of the year

– $92M: FY2016 Budget Book projection

• $4.7M: FY2016 deficit as projected in Budget Book

• $102.7M: total projected accumulated financed deficit at year end

• Mid‐year developments

– delay in planned borrowing for deferred maintenance

– changes to admin and support staffing strategy and hiring policy

– new collective agreements

– provincial operating grant only announced 2 November 2015: $325.5M indicated for McGill.  Final figure could be +/‐ 2%

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Budget snapshot FY2017

• $5.9M: FY2017 planned deficit (as in FY2016 BB)• $108.6M: anticipated accumulated financed deficit at year end

• Priorities– support of academic mission, strategic plan, and the Principal’s 5 priorities– address critical deferred maintenance needs– revisit administrative and support staffing strategy and hiring policy– honour admin/support and academic salary policy commitments– diversify revenue generation– longer‐term planned surpluses to address accumulated deficit

• Necessities– reduction of 1A operating budgets across campus (as in FY2016 BB)

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Specific to McGill QC system Macro

Achieving enrolment targets +/‐ known

Stability of gov’t commitments (possible cut of 

$4‐$8M)

‐ knownPersistent low interest rates +/‐ known

Deferred maintenance and IT 

requirements‐ potential

Modif. of non‐QC tuition policies; lack of flexibility 

on tuition 

‐ knownCanadian dollar exchange rate +/‐ known

Pay equity adjustments ‐ potential

Changes to funding formula (chantier sur le financement)

+/‐ potential

Federal infrastructure funds for universities

+/‐ potential

Increased pension fund liabilities ‐ potential

Risks and Uncertainties in FY2017 

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MEESR operating grant: budget vs. actuals

MEESR Unrestricted Operating Grant projections  ($M)

FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Adopted Budget 328.8 346.2  331.9  358.8 323.3 324.0 331.7 340.1 353.7

Actuals 354.7 328.4  350.4  341.6 TBD

Difference 25.9 (17.8) 18.5  (17.2)

FY17-FY20 as in FY2016 BB

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FY2017 salary policies

1) Includes ATB + merit2) Unionized staff with current collective agreements or in negotiations 3) Impact on research funds only

Staff Category Increases

% $TT Teaching Staff¹ 6.2% $11.3MLibrarians & Contract Academic Staff (CAS)¹ 6.2% $2.4MTeaching Assistants² 2.5% TBD

Research Asst. & Assoc.² ³ TBDCourse lecturers² 2.6% TBD

Executives and M‐level¹ TBDMUNACA² TBDTrades & Services² TBDBenefits 5.0%

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Budget Plann

ing:  FY201

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