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Financial Statement Discussion and Analysis
This financial statement discussion and analysis (FSD&A) provides supplemental information that should be read in conjunction with Lakeland’s financial statements for the year ended June 30, 2022. The FSD&A and audited financial statements are reviewed and approved by Lakeland’s Board of Governors on the recommendation of the Audit, Risk and Sustainability Committee. Lakeland’s financial statements have been prepared in accordance with Canadian Public Sector Accounting Standards (“PSAS”).
Statement of Operations
(thousands of dollars)
Total revenue Total expense
Annual operating surplus Endowment contributions and capitalized investment income Budget Actual Actual-2021 Variance from Prior Year Actual
67,793 65,025 68,667 62,684 63,429 58,594 5,238 4,090
2,768
300 5,983
39 4,835
1,111 1,148
(1,072)
Annual surplus 3,068 6,022 5,946 76
Lakeland generated an annual surplus of $6 million. This is a slight variance from the $5.9 million surplus reported for the prior year. Although the net variance was insignificant, revenues increased by $5.2 million, expenses increased by $4.1 million, and endowment related income decreased by $1 million. The increase in revenue can be primarily attributed to a reduction in COVID-19 restrictions, a return to more in-person attendance and a corresponding increase in sales and services revenues. There was a modest decrease in enrolment, but there was a seven per cent increase in tuition fees. The increase in expenses can also be attributed to a reduction in COVID-19 restrictions and a modest increase in discretionary expenses such as travel and professional development. Through focused attention on the effects of the response to COVID-19 during the 2020-21 fiscal year, Lakeland was able to offset major revenue reductions with expense reductions. Therefore the net effects of COVID-19 on the college’s financial operations for 2020-21 and 2021-22 were quite modest. These revenue and expense reductions were less severe for the 2021-22 fiscal year. Although there were large variations in revenues and expenses, there was a $1.2 million positive variance between the budgeted and actual annual operating surplus (if the $2 million revenue contingencies in the 2021-22 budget are factored out). On a cautionary note, Lakeland and most other post-secondary institutions have been able to manage their budgets effectively through the pandemic and managed significant reductions in operating grants mainly because salary increases have been effectively frozen for the last few years. Had cost of living increases occurred, these positive variances would have been unlikely. A more detailed analysis of variances follows.
Revenue
(thousands of dollars)
Government of Alberta grants Federal and other government grants Student tuition and fees Sales of services and products Donations and other grants Investment income
Total revenue
Budget Actual Per cent of Total
37,632 38,415 55.94% 783 36,851 1,564
1,998 2,311 3.37% 313 1,818 493
15,864 14,972 21.80% (892) 14,147
825 9,861 8,898 12.96% (963) 7,372 1,526 1,438 2,072 3.02% 634 2,046 26
1,000 1,999 2.91% 999 1,195 804
67,793 68,667 100% 874 63,429 5,238
Actual revenues of $68.7 million were $900,000 higher than budget. The primary reasons for this were: • The Ministry of Agriculture and Forestry transferred a major research program to Lakeland resulting in a positive variance of $783,000 in grant revenue from the Government of Alberta. • Efforts to increase research funded activities continue to be successful, and as a result federal research grant income was $313,000 higher than budget. • The $892,000 negative variance in student tuition and fees was due to a COVID-19 related reduction in enrolments and the related student tuition and fees of about $1.7 million. This was partially offset by the budgeted contingency of $1 million. There was a significant reduction in international students, and some enrolment losses in energy programs related to the Alberta economy. • The $963,000 negative variance in sales of services and products was due to a reduction in residence revenues of almost $1 million, that was partially offset by a $500,000 contingency. Other variances were due to COVID-19 restrictions and reductions in in-person revenues and cancellation of events. Sales of livestock revenue were also lower than budget due to market price reductions to bison. • Donations and other grants were $634,000 higher than budget mainly due to a bequest. • Investment income was higher than budget due to an unexpected dividend payout of $625,000 in November 2021, plus a large operating bank account balance earned significantly more interest than budget. Lakeland’s operating bank account earns more than the short-term investment vehicles such as T-Bills.
Actual revenues were $5.2 million or 8.25 per cent higher than the prior year. The primary reasons for this were: • Grants from the Government of Alberta increased by $1.6 million. The Ministry of Agriculture and Forestry grant transfer of $600,000 per year, plus new micro-credential grants are the primary reasons for this variance. • Federal research grants continue to increase due to added focus in this area. • Student tuition and other fees increased by $825,000 primarily due to the 7 per cent increase in tuition fees ($1.1 million) offset by COVID-19 related reductions to enrolment (although COVID-19 effects on enrolment were relatively consistent with the prior year). • Sales of services and products revenues increased by $1.5 million primarily due to more classes in-person in January 2022 and related ancillary revenues. • The increase of $804,000 in investment income was due to an unexpected dividend payout of $625,000 in November 2021, plus a large operating bank account balance earned significantly more interest than budget.
Government of Alberta grants
Government of Alberta grants are the primary revenue source for Lakeland (55.9 per cent in 2022, 58.1 per cent in 2021). Note 17 to the financial statements provides a breakdown of the types of grants received from the various departments and agencies of the Alberta Government. The primary difference in this note is related to the Mead Building grant of $17.3 million received in July 2020. This grant is not reflected in revenue until the related amortization expense is incurred. The grant from Alberta Agriculture and Forestry of $2.5 million is to be earned over three years. This note also shows the significant increase in federal research grants received.
Student tuition and fees
The second largest source of revenue for Lakeland is student tuition and fees (21.8 per cent in 2022, and 22.3 per cent in 2021). As per Government of Alberta directive, tuition fee increases were limited to a maximum of 7 per cent in total per year, for the current and prior two years. Increases in the future will be limited to the Alberta consumer price index. The primary operational driver for Lakeland is student enrolment. Until the impact of the response to COVID-19, Lakeland was experiencing moderate enrolment increases. Primarily due to COVID-19, full load equivalents (FLEs) decreased from 2,146 in 201819 to 2,032 in 2019-20, and to 1,901 in 2021, with a modest recovery to 1,970 in 2021-22.
Sales of services and products
Ancillary revenues from the bookstore, residence, food services, campus farm, events, athletics and recreation are included here. This revenue source is highly dependent on student enrolments. The variance from budget was $963,000, mainly due to losses in residence income, a reduction in in-person sales, and cancellation of events all due to the response to COVID-19.
Donations and other grants
Actual donations can fluctuate quite significantly from year to year, but restricted donations are not recognized as revenue until they are spent on the purposes intended by the donor. In 2021-22 a bequest of over $500,000 was received. This was earned to income but $385,000 was permanently restricted to endowments by the Board of Governors.
Investment income
As at June 30, 2022 Lakeland held $43.4 million in investments and $29.6 million in cash. The average interest rate for its cash held was about .7 per cent (the interest is based on prime less 2.1 per cent so this rate has increased significantly since year end). The market value of investments held by CIBC at year end was $31 million. The market value decrease related to the CIBC investments, as reflected in the statement of remeasurement gains and losses, was $4 million. The accumulated remeasurement losses were $1.4 million at year end. These losses will not affect income unless an analysis determines whether such losses are permanent in nature. Lakeland’s scholarship and endowment fund is managed by TD Wealth. The market value of this fund at year end was $12.3 million, of which $9.9 million is permanently endowed, and $2.4 million is available for spending on the intended purpose. The market value decrease for the year was $1.2 million and the accumulated unrealized market gains are $1.1 million. Investment income related to the scholarship and endowment fund is externally restricted (deferred) and is only recognized as investment income in the statement of operations when the related expenditure is incurred. Total investment income for all cash and investments, as recognized on the statement of operations, was $2 million. This is primarily comprised of dividend and interest income, and the matching revenue earned against endowment expenses.
Expense
(thousands of dollars)
Expense by object
Salaries and benefits Materials, supplies and services Amortization of capital assets Repairs and maintenance Utilities Scholarships and bursaries Cost of goods sold
Total expense
Budget Actual Per cent of Total
38,641 37,046 59.10% (1,595) 36,448
598 13,339 12,681 20.23% (658) 9,969 2,712 6,971 6,581 10.50% (390) 6,479 2,134 1,809 2.89% (325) 1,840 2,460 2,717 4.33% 257 2,154 102 (31) 563
696 1,214 1.94% 518 1,165
784 636 1.01% (148) 539
65,025 62,684 100% (2,341) 58,594 4,090
Expense by function
Instruction and training Academic support Student Services Facilities operation and maintenance Institutional support Computing and communication Ancillary services Sponsored research Special purpose Budget Actual Per cent of Total
24,813 23,513 37.51% (1,300) 22,857 5,352 5,046 8.05% (306) 5,014 7,252 7,339 11.71% 87 6,667 656 32 672
11,703 11,001 17.55% (702) 10,796 5,933 5,361 8.55% (572) 4,876 3,625 3,346 5.34% (279) 3,122 4,611 4,358 6.95% (253) 3,838 205 485 224 520
1,326 2,062 3.29% 736 854 1,208
410 658 1.05% 248 570 88
Total expense 65,025 62,684 100% (2,341) 58,594 4,090
Lakeland’s expenses totaled $62.7 million in 2022, which represented a significant increase of $4.1 million from the prior year, and a positive variance of $2.3 million from the budget. The year-to-year variance was primarily due to an increase in in-person classes plus an easing of restrictions on discretionary expenses such as travel and professional development. Expenses are presented by function in the Statement of Operations and by object in note 15. The functional breakdown of expenses shows which activities Lakeland is spending its money on. The largest functional expense category is instruction and training.
Salaries and benefits
At 59.1 per cent of total, salaries and benefits is the largest expense for Lakeland. Most of the $598,000 variance from the prior year is related to increased activity in applied research. Most of the variance from budget was due to savings in temporary, sessional and casual staff due to lower enrolments, plus a one per cent decrease in pension rates.
Materials, supplies and services
At 20.2 per cent this is the second largest expense for Lakeland. These expenses were $658,000 lower than the budget, and $2.7 million higher than last year’s actual. Actual expenses were higher than last year but still under budget mainly due to savings in discretionary expenses (travel, professional development) necessary to offset revenue losses due to COVID-19 restrictions. Compared to budget, travel expenses were down by $527,000 and professional development was down by $285,000. On the other hand, actual travel expenses were $440,000 higher and professional development expenses were $250,000 higher than the prior year. Farm related expenses were $700,000 higher than the prior year due to the 2021 drought, inflation and a significant market value price reduction in bison.
Financial position
Lakeland incurred an annual surplus of $6 million resulting in an increase to the accumulated surplus from $78 million to $84 million. Accumulated re-measurement gains decreased by $4.5 million due to market value losses in investments. As per Public Sector Accounting Standards, market value gains or losses cannot be recognized in the statement of operations until they are realized via sale of the related investment or when permanent impairment occurs. After consideration of all the changes to accumulated net assets from operations (aka ‘available surplus’), as detailed in Note 11 to the financial statements, available surplus decreased from $7.1 million to $6.3 million. After the $3 million appropriation to internally restricted net assets (Strategic Investment Fund), the available surplus stands at $3.3 million. Except for 2019-20, Lakeland has generated modest surpluses over the last few years, and as a result, its financial position appears to be relatively healthy. Of the $82.6 million in net assets (see note 11), however, $52.9 million is not available for spending as $9.9 million relates to permanently restricted endowments and $43 million to investments in capital assets. Furthermore, approximately
$16.4 million of Lakeland’s Strategic Investment Fund (internally restricted net assets) is committed to projects in progress (campus revitalization) and over $2.3 million of Lakeland’s operating surplus is committed to future capital expenditures (IT infrastructure, software development, research, etc.). This means that only approximately $11 million is available to fund high priority strategic initiatives. This is not enough for the significant investment that is needed to deal with Lakeland’s aging infrastructure, to revitalize its Vermilion campus, and to modernize labs and classrooms. Although the Government of Alberta has cut Lakeland’s operating grant, it did provide a capital grant of $17.3 million in 2020-21 for the renovation of the WHT Mead Building. Construction will be completed in August 2022. The province also provided $2.1 million for capital renewal (formerly infrastructure maintenance), and a more than $2 million grant for its Lloydminster campus heating plant. Due to anticipated enrolment growth (post COVID-19), prudent financial planning and careful management of cost increases, Lakeland still intends to generate modest surpluses, that if supplemented by capital grants from the Government of Alberta, and possibly donations from third parties, will be sufficient to offset its infrastructure deficit. Most of Lakeland’s annual surplus in the past ($3 million in 2022, $8 million in 2021, $5 million in 2019, and $9 million in 2018) was allocated to Lakeland’s Strategic Investment Fund (internally restricted net assets) in order to fund campus revitalization and modernization of labs and classrooms. Looming on the horizon, however, are significant anticipated increase to expenses, including salaries, due to inflation.
Net financial assets
Included in Lakeland’s net financial assets is $12.3 million that is related to investments restricted for endowments. $9.9 million of this relates to permanently restricted endowments and cannot be spent. These funds generate investment income that can be spent on operations, but only as intended by the donor. A more important indicator of solvency is Lakeland’s net financial assets excluding portfolio investments restricted for endowments. This was $23.6 million as of June 30, 2022 and at June 30, 2021. Other significant variances on the statement of financial position: • Cash increased by $9.6 million – primarily due to the annual surplus of $6 million, but also due to the liquidation of temporary securities for the WHT Mead Building grant (offset by WHT Mead Building expenditures). • Portfolio investments (non-endowment) declined due to market value declines of $4 million and the liquidation of investments related to the WHT Mead Building ($17 million), offset by a transfer from the operating bank account of $10 million in the fall of 2021.
• Accounts receivable include $2.1 million related to the CMR grant that was received in early July. • Accounts payable increased primarily due to the progress claims for the WHT Mead Building construction and residence renovations.
• Debt increased due to the receipt of $6 million of the $13.9 million loan approved for residence renovations. • Deferred revenue decreased primarily due to WHT Mead Building expenditures. • Tangible capital assets and spent deferred capital contributions increased primarily due to the WHT Mead Building construction.
Areas of significant financial risk
Deferred maintenance, campus revitalization, modernization of classrooms and labs
Lakeland has a significant deferred maintenance deficiency. Its buildings (inside and out), roads, and water and sewer lines are old and need significant investment to extend and/or maintain their useful life. Some of this deficiency can be funded by the Government of Alberta Infrastructure Maintenance Grant ($3.1 million in 2021-22). However, this grant fluctuates quite significantly (for instance it was not provided in the Government of Alberta’s 2019-20 fiscal year). The grant was reinstated in April 2020, but there is uncertainty as to how much it will be in future years. In the absence of adequate funding from the Government of Alberta, and operating surplus reductions due to grant cuts, Lakeland has limited options to deal with this critically important issue.
Grants from the province and tuition fees
The largest source of revenue for Lakeland is grants from the Government of Alberta. The second largest source is tuition. These two sources combined represent 77.7 per cent of Lakeland’s total revenue. Lakeland is exposed to significant financial risk if fiscal restraint results in further cuts to grants and restrictions on tuition fee increases. Operating grants will be tied to performance indicators that will be defined in future investment management agreements with the province. If Lakeland does not meet established benchmarks, operating grant funding could be reduced.
