Warner House memo | Yale to curb spending

The boom years are over.

As reports of plunging endowments and vanishing student loans sweep across the world of higher education, Yale is well-positioned to weather the economic crisis, administrators responsible for the University’s budget said. But they, too, are feeling the strain of the recession on the University’s sources of income.

The challenges of the economic crisis are already emerging, and though it is too soon to tell exactly how the University will deal with them, administrators say they are planning for any contingency.

“We’re in a pause mode,” Deputy Provost Charles Long said. “It’s not a good time to be proposing bold new initiatives.”

That is a marked difference from just a year ago, when the University was rolling out major projects. With the endowment returning a nation-leading 28 percent in the fiscal year ending June 30, 2007, the time was right to purchase the 137-acre Bayer HealthCare campus for $109 million, pump another $24 million annually into financial aid and embark on Yale College’s largest expansion in four decades with the construction of two new residential colleges for an estimated cost of $600 million.

Those projects are not in danger of being curbed, but some of the $2.6 billion planned for capital projects in the next four years may have to be delayed, officials have said over the past month.

“Should the economic conditions we are experiencing today persist, we have the flexibility to slow down some of these investments, and we would do so before curtailing ongoing operations,” University President Richard Levin said in a recent letter to the faculty. “Understandably, managers should forgo any unnecessary spending through the balance of this fiscal year and will exercise caution in submitting budget proposals for next year.”

The University is headed for a period of slower growth. And a breakdown of Yale’s sources of revenue reveals exactly why.

First, donations, which provide for about 4 percent of the University’s operating revenue, could be hit hard, Long said.

So far, fundraising has continued to surpass expectations. The University received $28.25 million in donations last month, more than twice the $14 million raised in September 2007, although the total for a given month reflects discussions dating back months and even years. The Yale Tomorrow capital campaign is already 68 percent of the way toward its $3.5 billion goal, even after the Yale Corporation, the University’s highest governing body, upped the target in June.

Still, Long said, Yale has to be prepared for fewer donations at a time when donors, many of whom make their fortunes on Wall Street, have less money to give.

“There’s no question that even if you’re a very rich person, it’s not a good year to be coming up with additional gifts,” he said. “We have to anticipate that it will be much more difficult for our donors to exercise their generosity and, in some cases, they may find it difficult to keep up with the pledges they’ve already made.”

Officials in the University’s Development Office acknowledged that the downturn could affect the timing of pledge payments. But they doubted that the crisis would erase those payments altogether.

“A lot of people have been paying in as little as two years,” said Inge Reichenbach, the University’s Vice President for Development, in an interview with the News last week. “Maybe now they’ll take six years.”

Second, research grants and contracts, which supply about a quarter of the University’s income, are “one of the sources of income we depend on that we’re expecting to be flat or possibly even worse,” Long said. Simply put, there is less federal research funding available, as a result of fiscal tightening.

Third, medical services, which provided about 14 percent of income in the last fiscal year, are directly related to what people can afford to pay. Since most hospital bills are paid through employer-provided insurance, a rise in unemployment or a cutback in benefits could reduce Yale-New Haven Hospital’s revenue.

Fourth, tuition, room and board accounted for about a 16 percent of the University’s revenue in the 2008 fiscal year. But that segment is also shrinking by the University’s choice, administrators said, as Yale bolsters its financial aid program.

To compensate for less income from tuition, the University’s budget has increasingly relied on its largest and most conspicuous source of income: its $22.9 billion endowment.

The portion of the University’s budget that comes from the endowment will swell to 44 percent in the 2009 fiscal year — an increased payout launched last January on the heels of years of double-digit returns. Then in the fiscal year ending in June, the endowment eked out a 4.5 percent gain, beating the market (the S&P 500 fell 13.1 percent) but trailing some competitors (Harvard University’s fund grew 8.6 percent).

So while the endowment is likely to grow at a slower rate — and possibly even post a loss — Yale’s budget is increasingly reliant on its investments.

“It would be imprudent to imagine growth in endowment income in the short run,” Long said. “There isn’t any component of the financial world that’s doing well right now … Even Yale has to look at what would happen if, in one or two or three years, there’s flattening or even shrinking of endowment value.”

Looking at Yale’s income pie chart, it is easy to see how the pie could shrink, said finance professor Jonathan Macey. But what matters more, he said, is how Yale fares relative to other universities: Yale’s pie is bigger to start with and its investments typically perform among the best.

Part of Yale’s advantage is its ability to lean on the endowment in tough times, Long said. Endowment spending is calculated to smooth over short-term market booms and busts, Long said. Yale’s growth strategy focuses on the long term, he said, and in the long term it will be fine.“With an endowment as big as ours and a conservative spending rule, it cushions us significantly,” he said.

Provost Peter Salovey said a lot depends on just how long-term this recession turns out to be. “Are we looking at a difficult 6-month period? A year in which the markets are down? Three years? Five years?” he said in an e-mail message. “We need, of course, to plan for any eventuality.”

Comments

  • Anonymous

    How are the boom years "over"? Who's to say that 2010 or 2015 or 2020 won't see Yale's unprecedented prosperity reach a new level?

  • alum

    A depression could be good for Yale for two reasons:

    1) As other universities enact budget freezes or worse, Yale could hire away their star faculty. The day that Harvard or Yale even consider a spending cut is the day that Cornell, Columbia, UPenn, Michigan, NYU and Berkeley have going out of business sales.

    2) The cost of new construction could significantly decrease if China collapses, enabling Yale to undergo an expansion that makes the current building boom look like nothing.