Yale Estimates 25 Percent Endowment Decline, Phases Budget Cuts

Yale disclosed the impact of the financial markets on its endowment, and outlined a series of phased budget-cutting measures.

Yale President Richard C. Levin on December 16 wrote to the Eli community, outlining a negative 13.4 percent investment return on public securities in its endowment from July 1 through October 31, and providing estimates of the value of illiquid investments (private equities, real estate, and so on); combined with further erosion in the public markets, he wrote, the endowment as a whole has probably shrunk by 25 percent, to $17 billion (from $22.9 billion last June 30). That value will be used in budget planning, as will the assumption that endowment returns will be "flat" during the 2009-2010 fiscal year, before returning to a normal rate of growth.

Levin disclosed that endowment income supports 44 percent of Yale's $2.7 billion in annual expenses. (For Harvard's fiscal year ended last June, operating-income distributions from the University's endowment totaled $1.2 billion, or 34.5 percent of the total revenues of $3.5 billion). Accordingly, he forecast an "annual budget shortfall on the order of $100 million in the fiscal year beginning July 1, and growing to more than $300 million by 2013-2014. (Harvard's Faculty of Arts and Sciences [FAS] is building its budget for the next fiscal year on the assumption of a gap of $100 million to $130 million, out of revenues of about $1.2 billion; it currently derives 56 percent of its revenues from endowment distributions.)

Yale will address its perceived gap in stages. Levin wrote, "We need to balance the benefits and costs of acting now against the benefits and costs of postponing action. Markets have been extremely volatile, and the endowment could do better or worse than we are forecasting. Because of this very high degree of uncertainty, it is important that we not overreact. Thus, we deliberately will not reduce our budget immediately to close the entire gap created by the assumed 25 percent decline in our endowment. Instead, in preparing our budget for the 2009-10 academic year, we will seek to achieve half to two-thirds of the reductions required to close the gap now forecast for the years ahead. If markets rebound significantly, we would need to make no further adjustments. If markets remain flat or decline further, we will need to undertake a second round of actions next year."

(As noted in a separate report, on Yale's $3.5-billion capital campaign, it may be benefiting from timely fundraising. During the first four years of the effort, Yale has received gifts and pledges of nearly $600 million annually, for a total of $2.3 billion as of last June 30. Of particular significance in the current environment, cash receipts have been strong, rising from $290 million in fiscal year 2005 to $493 million in the year ended last June 30. That flow of funds might provide a useful cushion. Brown, Dartmouth, Penn, Princeton, and Stanford are also well into large capital campaigns; Penn--which relies relatively little on endowment distributions to fund its operations--and Princeton have issued relatively benign statements about their institutions' financial situations in the current environment.) 

Accordingly, Yale will:

  • maintain its financial-aid commitments (as President Drew Faust said Harvard would do);
  • continue to recruit faculty members, while being "judicious" in initiating new searches (FAS has reduced the number of authorized searches by roughly two-thirds, and other Harvard schools are being cautious as well--see here); and
  • continue to "develop plans and initiate programs" on its new science and engineering campus, albeit it a slower pace (Yale can do so because "the facilities are already in place and we face no significant capital costs," Levin wrote; Harvard is incurring large capital costs as it continues to build its first interdisciplinary science laboratory in Allston).

To close half to two-thirds of its budget gap, Yale will:

  • require review of postings of all new positions (much as Harvard is doing);
  • moderate salary increases to 2 percent for faculty and staff with salaries below $75,000, and to $1,500 for those with higher compensation, while upholding union contract increases (Harvard is essentially freezing nonunion wages and salaries);
  • reduce budgets by 5 percent of the salaries and benefits of non-faculty staff, through attrition, and reduce non-salary, non-wage expenses by 5 percent in each of the next two years by controlling use of consultants, travel, and so on (FAS is building budgets on the assumption of 10 percent to 15 percent reductions next year); and
  • continue all current construction but defer almost all new, major construction and renovation starts (apart from the renovation of two residential colleges, Yale's equivalent of Harvard's Houses) until debt financing or gifts can reliably be secured. Levin hopes to continue raising funds for, and proceeding on schedule to construct, two new residential colleges, the key element in a plan to increase the size of Yale's undergraduate enrollment. A biology building, the new School of Management Campus, and the second phase of renovating the Yale University Art Gallery are all to be deferred. Levin emphasized that "we are not canceling any projects that have been approved."

He concluded that the steps being taken anticipate a return of normal behavior in the financial markets, to wit: "With the exception of the Great Depression, all market downturns of the past century have been followed by at least a partial rebound within one to two years. If such a rebound occurs, we may not need to undertake further budget reductions, but, if such a rebound does not occur, we will need to take additional action. I hope you agree with our decision to avoid a possible overreaction at this time."


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