Multi-Year Forecast: Importance and Accuracy

There continue to be comments and criticism expressed to us about the accuracy of our multi-year forecast – more specifically, that we have inflated our deficit projections and that the budget adjustments we are making are not needed.

The definition of “forecast” according to the Webster dictionary is “to calculate or predict some future event or condition usually as a result of study and analysis of available pertinent data.” This analysis of data involves looking at the recent past, comparators and other key indicators (or drivers) to project future results. Our multi-year forecast is based more specifically on an organizational planning definition for forecast and is a strategic tool that helps the university link its integrated plan with its expenditures. The importance of a multi-year forecast must be considered based on the university’s multi-year teaching and research commitments. For example, a multi-year forecast supports the multi-year nature of the commitment of expenditures required for students to complete their programs. In addition, changes within much of the instructional and research activity supported by the operating budget require significant long-term investment costs to develop and substantial transition costs to adapt, resulting in an increasing importance for universities to prepare multi-year forecasts directly associated with multi-year plans.

We are often asked about the projections made in the 2012-16 multi-year budget framework (MYBF), and more specifically why, at that time, we projected what some are saying were unrealistic annual increases to the provincial operating grant. The MYBF is the basis of our annual operating request to government and until 2012 the government set the grant to cover our cost increases. Therefore the increases in our MYBF were there because they reflected the actual amounts the university’s core operating costs go up year to year and not the costs of new activities or of administration’s “pet projects” as some have said (more to come in a future blog post). When you step back to 2011-12 when the forecast was being developed, you would observe that the base grant increased over 5% in 2011-12 and 2010-11. This past pattern was part of the analysis that went into the 2012-13 to 2015-16 forecast. The forecast does not seem extraordinary or inflated at all when one looks at it from this perspective.

In 2012, we received a clear signal from government (along with others) that we could no longer think this way. It is important to note that we were not completely taken off-guard. We did identify a downward pressure and modelled some reduction in government grant increases, but not as much as has since become clear.

We have also been asked about inflation and why we don’t budget at the standard rate of inflation. In recent years the inflation rate for university expenses has not been CPI and instead is more like 4% or even more some years ago. Our inflation is impacted by faculty and staff salaries, utilities, books and equipment, and so on. In a prior blog item we explained the changes as time progresses in the multi-year operating budget forecast to better ensure future accuracy. These include incorporating changes in assumptions, reflecting permanent expense reductions, and one-time savings or deferred expenditures. We are also modelling changes into the future to understand our current status and provide the best possible forecast of our future position. We are in the process of fully updating the multi-year budget framework as this represents the halfway point in the integrated planning period and an opportunity for a periodic update. We hope to share more with you in the coming months.

It is important to note that there is no plausible scenario in which government will give us a huge increase and our costs are quite predictable if no action is taken. Therefore there is no plausible scenario in which our costs will suddenly turn out to be much lower than projected.

We hope this better explains the efforts that are taken to provide the university with the most relevant and accurate forecast possible. What is important to remember is that projections are not science – they involve taking the best possible data, along with informed assumptions, to come up with a best guess of what the future will hold. A best estimate is the most prudent basis to plan on.

For more on the multi-year budget framework and why we are projecting a deficit of $44.5 million by 2016, please see our earlier blog post, “Why $44.5 million?

Greg and Brett

One thought on “Multi-Year Forecast: Importance and Accuracy

  1. A note to the website adminstrators: why are contributions such as Andatel’s being allowed? There have been a small number of these, but “zero” would be an even better number.

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