Endowment may not ease deficit woes

Though Yale’s endowment earned an industry-leading 22.3 percent return this year, the University’s complex spending rules will prevent officials from using much of the revenue to close the current budget deficit.

As administrators spend the next few weeks planning to address a $25 million projected shortfall for 2007, they will work with an operating budget that utilizes about four percent of the University’s wealth this fiscal year. Officials said fiscal conservative spending protects the endowment for future generations, but critics charge that it unnecessarily limits funding for programs in need of support. The disagreement, which has emerged periodically in the past, continues two years after Yale raised its spending target for the first time in a decade.

The Yale Corporation established current spending guidelines in 1982, after decades of economic fluctuations eroded the endowment’s value. The guidelines, or spending rules, allow Yale to cover its expenses far into the future, regardless of inflation and market downturns.

“It is important to remember that while the endowment in recent years has returned stunning yearly increases, there have been other times in its history — the 60s and 70s, for example — where it has lost significant fractions of its value,” Yale Provost Andrew Hamilton said in an e-mail. “The Corporation is charged to take a very long view of these matters, while many faculty, students and administrators, understandably, tend to focus on the short-to-medium term.”

But some students, union leaders and outside experts said they believe Yale can afford to spend more on immediate improvements while keeping an eye to the future.

Local 35 President Bob Proto said spending roughly an extra week’s worth of interest on the endowment would have a huge impact on University life.

“It’s a small price to pay to have a comprehensive preventative maintenance program, to have a proper staffing to raise the level of services they provide and to have a full comprehensive day-care program for all Yale workers,” he said. “We’ll be riding around in spaceships, and Yale will still be wealthy.”

The Yale Corporation, the University’s highest decision-making body, has set a target spending rate of 5.25 percent of the endowment, which is currently valued at $15.2 billion. But in any given year, the administration derives its actual spending rate using a “smoothing rule” that also takes past budgets into account.

The target spending rate is averaged with the previous year’s budget, adjusted for inflation, to get the actual operating budget. The average is heavily weighted — to the tune of 80 percent — in favor of the previous year’s spending, so spending will never reach the target rate as long as Yale’s endowment continues to grow.

Yale officials said weighting toward past spending acts as a shock absorber against market instability.

“By incorporating the previous year’s spending, the rule eliminates large fluctuations, enabling the University to plan for its operating budget needs,” representatives for the Investments Office wrote in the 2005 Yale Endowment Report, which will be released in a few weeks.

The spending target was held at 5 percent from 1995 to 2004, when the Yale Corporation raised the spending target to 5.25 percent due to improving confidence in its investment portfolio. But that same year, it increased the weight on the previous year’s spending — from 70 percent to 80 percent — somewhat blunting the target rate increase.

The ratio alteration reflected a concern that the endowment’s expanding role in spending could endanger the University’s budget. The endowment’s share of operating budget revenues rose from 11 percent in 1985 to 32 percent in 2005, meaning that fluctuations in its value could have more dire consequences than in the past.

Geoffrey Woglom ’68 GRD ’74, an Amherst College economics professor who studies college endowments, said he applauds Yale’s recent target rate increase, which exceeds that of many other schools. But given that the Investments Office predicts Yale’s endowment will grow by about 6.2 percent per year after inflation, the University can probably afford to loosen its belt, he said.

The disagreements about whether Yale is protecting or hoarding its wealth come during the first stage of a capital campaign to raise $1 billion.

“I think it’s hard to justify going out and having capital campaigns to raise more money for the endowment when the endowment has been growing at relatively rapid rates,” Woglom said. “Yale has been raising [the target spending rate] recently, which I think is the right thing to do.”

Woglom said it is better to err on the side of conservative spending, since budget cuts are more damaging than budget increases are beneficial. But excessive caution in endowment spending is a national problem, Woglom said. Yale’s actual spending rate over the last three years has averaged 4.5 percent, compared to 4.8 percent nationwide. The University’s rate is expected to drop to 4 percent in the 2006 fiscal year.

But Damon Manetta, public affairs manager for the National Association of College and University Business Officers, said national media coverage on spending rates tends to unfairly favor the more liberal view on endowment spending.

“You can’t look at this simplistically, which is frankly what a lot of the press has done,” Manetta said. “This is a much more complex business than is written about normally.”

Phoebe Rounds ’07, a member of the Undergraduate Organizing Committee, said Yale should lessen its emphasis on a formulaic spending rate and pay more attention to its current needs.

“Yale has consistently been a leader on getting great endowment returns and not a leader in spending money that’s equivalent to those returns,” Rounds said. “A very small percentage of endowment spending would make a huge difference in terms of the tuition that students owe.”

But administration officials said exercising fiscal discipline will allow Yale to make an even greater impact in needy areas in the future.

The University’s spending rule has underestimated its remarkable investment performance in the past, Deputy Provost Charles Long said, but the improvement will be reflected in upcoming years when the market might not be as friendly.

“We’re spending more than our model thought we would be able spend, but the endowment has gone up faster than our spending, which means next year we can spend even more,” Long said.

The Yale Corporation has raised the spending cap three times since 1982.

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