University officials have not disclosed how much the Yale financial-aid budget will increase as the result of a new financial-aid initiative to be unveiled early this week. But it is now clear how the University will pay for it: by tapping into Yale’s endowment riches.
In an aggressive change of course, the University announced last week it would increase the amount of money it spends from its endowment by nearly 40 percent next year, in part to provide more financial aid to students, launch new research on the West Campus and support growth of the undergraduate student body if the University constructs two new residential colleges. The move comes after months of pressure from members of Congress and other critics who assailed Yale and other top universities for not being generous enough with spending their endowment riches.
“The prudent policy revision we are making will increase spending from the endowment to benefit students and researchers today while continuing to ensure that the endowment’s capacity to support future generations of students is undiminished,” University President Richard Levin said in a statement announcing the change.
Yale will spend about $1.15 billion from the endowment — more than 4.5 percent of its total value — during the next fiscal year, an increase of 37 percent over the $843 million endowment payout this year, the University said in a statement. Under the new spending guidelines, the University will spend an extra $700 million from the endowment over the next six years, Levin told the News after the announcement.
Yale’s endowment spending is governed by a complicated “spending rule” that takes into account inflation as well as the growth of the endowment in recent years. The rule, according to Yale officials, is designed to protect the endowment from the volatility of the investment market.
But as the University’s endowment posted double-digit returns in recent years, the relatively conservative spending rule prevented any commensurate increase in endowment spending. As a result, Yale’s spending from its endowment dwindled from its goal of 5.25 percent to this year’s 3.7 percent, a number that was the lowest among the 10 American universities with the largest endowments and that Levin described as excessively low.
The increase will bring Yale’s endowment spending on par with spending at other universities. Last year, American universities spent an average of 4.5 percent of their endowments, according to a study by the Wilton, Conn.-based Commonfund Institute.
“While the rule [limiting endowment spending] is designed to ensure the purchasing power of the endowment over the long haul, by the same token, it’s supposed to be responsibly trading off the needs of the present with the needs of the future,” Levin said in an interview with the News last week.
But because the endowment had soared in recent years without significant increases in spending, “It became increasingly clear to us … that we might be shortchanging the present generation,” he said.
In addition to targeting financial aid and scientific research, the new money will help pay for expanding access to Yale’s resources through digitization of its library collections and other projects, the University said.
The move to tap into the endowment was not unexpected, especially after Harvard University last month unveiled a sweeping financial-aid initiative aimed at upper-middle-class families. At the time, Yale officials promised their own “major announcement” regarding financial aid, and an analysis of University budget documents conducted by the News indicated that Yale would be able to match Harvard’s financial-aid offering by bumping up its endowment payout slightly.
To match Harvard, the University would need to increase its undergraduate financial-aid budget by about 52 percent, or $32 million, to $94 million. Increasing its endowment spending by that amount would have bumped Yale’s endowment spending from about 3.75 percent to about 3.9 percent, which still would have been tied for the lowest endowment payout among the 10 universities with the largest endowments, according to data compiled by the Chronicle of Higher Education.
Several economists interviewed recently by the News said that, given Yale’s massive wealth, the University could increase its endowment payout without any serious long-term financial risk.
“Could Yale afford it? The answer is yes,” said Roger Kaufman, a professor of economics at Smith College and an expert on higher-education endowments.
Perry Mehrling, a professor of economics at Barnard College, added that Yale still has “plenty of room” to increase its endowment spending.
“It’s pretty clear the money to do this is there,” Mehrling told the News.
In an interview, Levin said the University had been considering modifying its rules regarding endowment spending for several years, and the public debate on the topic in recent months further encouraged Yale to make a change.
In October, Iowa Senator Chuck Grassley, the ranking member of the Senate Finance Committee, publicly criticized Yale and other schools, which he said have continued to raise tuition annually in spite of soaring endowment returns that could easily offset any increase in student costs. In a statement released to the News this fall, he questioned why the University was sitting on billions of dollars in its endowment while still fielding complaints about its financial-aid offerings.
Grassley proposed that colleges with endowments exceeding $500 million be required to spend at least 5 percent of their endowments on an annual basis, the minimum payout required by federal law of not-for-profit foundations. In a statement released by his office, the five-term senator called it “a great day for parents and students” because of Yale’s announcement.
“For the first time in years, we’re hearing good news about tuition and affordability,” Grassley said, citing Yale’s plan and Harvard’s initiative announced last month. “It’s a big deal that the two wealthiest colleges are making tuition more affordable. They set an example for all other well funded schools to do the same.”
The University’s target endowment payout has been 5.25 percent since 2004. But because the endowment has increased so sharply in recent years, this year’s endowment spending is only 3.7 percent, since the spending rule does not allow endowment spending to increase commensurate to investment returns.
Now, the formula will be modified to preclude spending less than 4.5 percent or more than 6 percent of the endowment annually, the University said.
“In managing Yale’s endowment we try to balance the need to support the current generation of scholars with the desire to preserve assets for future generations,” Yale Chief Investments Officer David Swensen said in a news release. “In boosting the distribution of resources for current consumption, we strike a better balance between the present and the future.”
Other universities have already followed suit. After Monday’s announcement, Harvard quietly said it would increase its endowment payout from 4.3 percent to 5 percent, the university told the Wall Street Journal last week. And in a statement last week, Duke University disclosed that it decided last spring to up its endowment payout to more than 5 percent.
In 1992, the year before Levin took office, the University increased its target endowment payout rate from 4.5 percent to 4.75 percent, and it again increased the target rate to 5 percent in 1995 and the current 5.25 percent in 2004.
Over the last decade, the Yale endowment has quadrupled in value, and over that time it has played an increasing role in balancing the University’s budget each year. In 1998, the endowment accounted for one-fifth of the University’s operating expenditures; this year, it will fund 37 percent of the university’s budget. That figure will rise to as much as 45 percent in the next fiscal year, the University said in its statement.
That rate was higher than what University officials once predicted. In 2001, in its annual Endowment Report, the Investments Office projected that by 2009, endowment spending would account for as much as 36 percent of the University budget. That mark was already eclipsed this year.
Over the last 50 years, the University has spent an average of 4.5 percent of its endowment annually, according to a study conducted by the News of historical financial records. In the 1970s, Yale spent as much as 7 percent of its endowment annually. In the last decade, it spent an average of 4 percent each year, although that rate has been decreasing over the last five years and reached a two-decade low this year at 3.7 percent.
Yale’s $22.5 billion endowment is the second-largest of any American university, trailing only Harvard’s, at $34.9 billion. The Yale endowment soared 28 percent last year, the largest increase reported by any major university.