LAURENTIAN UNIVERSITY SUDBURY: AUDITOR GENERAL ONTARIO LAURENTIAN UNIVERSITY TERRIBLY SCATHING INTERIM REPORT ISSUED

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Laurentian University Sudbury: About Laurentian University

I have been following the attempt by Laurentian University Sudbury to restructure under the Companies’ Creditors Arrangement Act (CCAA). As notable events occur, I write a blog about this Northern Ontario institution and try to relate the restructuring issues in a way that every entrepreneur can relate to and hopefully, use some of the principles in their own financial management toolbox.

My last Brandon’s Blog on the Laurentian University Sudbury CCAA proceedings was December 6, 2021, and it is titled: LAURENTIAN UNIVERSITY UPDATE: LAURENTIAN UNIVERSITY SPECIAL AUDIT SIMPLY NOT GOING WELL.

In that Brandon’s Blog, I provided an update on Laurentian University Sudbury‘s disagreement with the Office of the Auditor General of Ontario (AGO) over the information and documents the Auditor General was requesting access to.

The AGO recently released its scathing April 2022 interim report titled “Preliminary Perspective on Laurentian University”. Here, in this Brandon’s Blog, I describe the findings of this report. I believe this is very instructive for all entrepreneurs not to ignore danger signals in their business.

An ugly stain for years to come: Laurentian University Sudbury students, staff reeling from cuts

Laurentian University Sudbury filed for creditor protection under the CCAA on February 1, 2021 in the Ontario Superior Court of Justice (Commercial Division), becoming the first public university in Canada to take such action. Laurentian University Sudbury held discussions with its students, faculty, other staff, trade suppliers, research-granting agencies and donors after the issuance of the court order approving the Laurentian University Sudbury CCAA filing. Laurentian needed to make drastic changes if it was to survive going forward. It is the extent of the changes that shocked students, faculty and the local mining industry community resulting in many saying that this will be an ugly stain on the institution for years to come.

Laurentian University Sudbury has closed 38 English-language undergraduate programs and 27 French-language undergraduate programs. This represents a decrease of 39% in the undergraduate programs, be it an English, French or bilingual programs offered as of February 1, 2021. This impacted approximately 772 undergraduate students (557 in English language programs and 215 in French-language programs). In addition, Laurentian closed 11 graduate programs (4 in French; 7 in English).

It follows that if programs are being cut, then teaching costs and other staff costs also need to be reduced. At the start of the CCAA proceedings, around 612 employees were unionized, including both faculty and other staff. The faculty’s union was the Laurentian University Faculty Association (LUFA). Many faculty members had tenure at Laurentian University Sudbury.

After taking part in insolvency negotiations and mediation in an accelerated process, LUFA and Laurentian came to a new agreement on labour terms including job losses. Since academic programs were cut, faculty cuts had to follow. The new agreement calls for a five-year term expiring on June 30, 2025. It eliminates 116 full-time faculty and 42 non-faculty positions.

Furthermore, those faculty and staff who were not dismissed will experience salary reductions. All faculty, whether they were dismissed or not, will have cuts to their pension benefits. That is why everyone affected was reeling from the cuts.

Laurentian University Sudbury: Auditor General’s Office Continues to Work for the Legislature and Ontarians

The Standing Committee on Public Accounts (Committee) of the Ontario Legislative Assembly unanimously passed a motion on April 28, 2021, requesting that the AGO conduct a special money audit on Laurentian University Sudbury’s operations for the 2010-2020 period. The Committee indicated that it wanted the AGO to audit Laurentian University Sudbury due to the many years of financial difficulties the institution has faced.

The Committee said that it wanted the AGO to look into what caused Laurentian to go into the CCAA process, figure out what happened, and learn from it so that something similar doesn’t happen at another academic institution.

Instead of cooperating with the AGO audit, the Laurentian President and Board of Governors, guided by external legal counsel, took unprecedented measures to restrict the AGO’s access to Laurentian’s information claiming solicitor-client privilege on many documents. Even non-privileged information was difficult to obtain.

The senior university administrators put in place protocols that made it difficult for staff to speak freely or provide unfettered access to financial documents and information without fear of reprimand. These restrictive protocols created a culture of fear amongst the university and its staff surrounding interactions with the AGO, putting further pressure on the university. What’s more, the AGO faced an unprecedented legal pushback.

Despite these challenges, the AGO pushed forward with its work. Thanks to the Legislature’s efforts, the AGO was eventually given access to thousands of university documents and emails. However, its ability to communicate freely with certain past and present staff members remains difficult. The delays have meant that the AGO has continued to receive and review information from Laurentian University Sudbury into this month. Eventually, the AGO lost the privileged documents, litigation privilege and settlement privilege fights in the Ontario Superior Court of Justice.

Here are the main findings of the AGO to date disclosed in its interim report.

Laurentian University Sudbury: Poor management, new buildings led to Laurentian University insolvency

The AGO team’s findings are very critical. It shows a long history of poor management and bad financial governance. The AGO found that although external factors such as tuition fees freezes and the COVID-19 pandemic impacted Laurentian, the primary cause of the university’s financial deterioration from 2010 to 2020 was caused by its pursuit of poorly considered capital investments. Procedures were not in place requiring senior administrators to assess the value and viability of expansion plans or to fully consider the risks associated with rapid growth in debt due to the university going on a building spree.

One example of poor governance and lack of financial responsibility is that, in the face of growing debt, Laurentian amended its internal capital debt policy in 2010 to allow it to incur more debt for capital activities. Another example is in 2016, when its primary lender, Royal Bank of Canada, declined to provide more long-term debt, and Laurentian sought short-term lines of credit to fund its long-term capital expansion. Funding long-term assets with short-term debt is a severe mismatch that should be avoided. This is taught in every Finance 101 course!

The university increased its use of money from other sources, such as employee health benefits and funds provided specifically for academic research projects, when access to funding decreased. The restricted funds were not segregated into separate bank accounts and were inappropriately labelled as “internal financing,” obscuring the strategy.

As new capital-project spending took center stage, Laurentian pushed needed repairs and upgrades on existing infrastructure to the backburner. With little immediate return on its capital investments, the university focussed its attention and resources elsewhere. As of December 2020, Laurentian estimated that it had $135 million worth of repairs that had not been addressed.

This AGO audit covers a period of at least 10 years. The provincial government-funded approximately 40% of Laurentian University Sudbury’s revenue requirements. Why weren’t periodic reviews of institutions funded by provincial governments done so that these problems could have been exposed prior to the CCAA filing? I would direct these poor oversight criticisms equally at the provincial government and Laurentian.

Laurentian’s CCAA move a mistake AGO says: Influence from outside parties

The AGO believes that Laurentian did not have to take the steps it did to file for CCAA protection on February 1, 2021. While Laurentian’s financial situation grew increasingly dire, the university did not follow the normal broader public sector precedent by making comprehensive and clear efforts to seek funding from the government. The focus instead was on advocating to elected officials and their staff, as advised by external consultants.

In August 2020, Laurentian brought up the possibility of CCAA to the Minister but did not go into detail about how much financial help was needed from the province to keep from filing for CCAA protection. In December 2020, a request for funding was made to the Ministry, which was significant and the timeline for intervention was short.

If Laurentian University Sudbury had, the AGO believes:

• sought to work earlier and more transparently with Ministry staff;
• not prematurely paid off and relinquished its line of credit in 2020; and
• arranged for and accepted specific temporary funding assistance from the province;

Laurentian would have been given more time, its financial situation could have been reviewed jointly with the province and a plan for moving forward could have been put in place, potentially without the need for filing for CCAA protection.

Laurentian University Sudbury: Professors react

The AGO states that the contract the university had with LUFA contains a clause that is designed to deal with such extreme financial circumstances. It is known as a financial exigency clause. This clause is present in most university faculty labour contracts throughout Canada. Implementing this clause would have required the senior administration to work together with LUFA to address Laurentian’s financial situation.

Also in the AGO interim report is a section stating that LUFA requested in 2020 that Laurentian’s senior administration take action in accordance with that clause and provide additional information on the university’s finances. However, Laurentian’s senior management intentionally delayed providing this information and never put the clause into play.

The AGO stated that the senior administration, with the Board of Governors’ approval, retained external consultants to review strategic options, but focused on the CCAA option almost exclusively. The AGO says that the process of hiring external advisors has been costly in the millions of dollars, less transparent, and has had a greater impact on students, faculty, and this Northern Ontario Nickel Belt community of Sudbury. It is likely that this will continue to be the case, and the university’s reputation will suffer as a result.

The AGO calculates that as of March 3, 2022, the Laurentian University Sudbury has incurred more than $24 million in legal, court-appointed monitoring and other financial consultant fees associated with its insolvency.

Laurentian University Sudbury: Beleaguered University Restructure Operations summary

I hope you found this Laurentian University Sudbury Brandon’s Blog informative. There are a lot of valuable lessons here for Canadian entrepreneurs from the mistakes made by the university. The danger signals were readily apparent and in plain view, but the Administrators and Board of Governors of the university ignored them and put into place plans to circumvent restrictions that would have stopped their poor financial management. If you’re an entrepreneur reading Brandon’s Blog, I urge you not to ignore danger signals that may be showing up in your business.

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