ENDOWMENT FALLS 25 PERCENT

Yale’s endowment lost roughly a quarter of its value since the start of summer, and several capital projects — possibly including the two new residential colleges — will be delayed as a result, University President Richard Levin announced Tuesday.

Yale will not implement a formal hiring freeze or reduce financial aid even as its endowment has plunged in value to approximately $17 billion today from $22.9 billion on June 30, Levin said. But in a letter to the community and an interview with the News, the president called for budget cuts and postponements of many high-profile construction projects, including the new School of Management campus.

Tracking Yale's endowment
Zhipeng Huang
Tracking Yale's endowment

“In recent years, we have been in the fortunate position of being able to pursue many new ideas and exciting initiatives,” Levin said in the letter. “Now we will have to make harder choices.”

From the start of the fiscal year to Oct. 31, Yale’s marketable securities lost 13.4 percent of their value. But Levin noted in the letter that those losses grew in November and December, adding that it is difficult to know exactly how much the University has lost in investments that “are not traded on a daily basis and are difficult to value with precision.”

Given all this, Levin estimated the endowment’s value at $17 billion, representing a 25 percent decline since June 30.

Harvard University announced earlier this month that its marketable securities had fallen in value by around 22 percent; its endowment likely fell far more, however, because that figure did not include updated valuations in Harvard’s real estate and private equity investments.

“We are less hard hit than some other institutions,” Levin told the News Tuesday afternoon. “That’s because of the excellent management of our endowment by David Swensen.”

Even still, Levin wrote that he anticipates flat endowment returns in the 2009-’10 year and positive growth thereafter. He said the losses would create a budget shortfall that will stand at $100 million in 2009-’10 and is projected to rise to over $300 million in 2013-’14.

For that reason, Levin announced five policy changes — effective immediately — in response to Yale’s dramatic losses.

First, Yale will not freeze hiring, but all new positions will have to be approved by the Provost’s Office. Second, salary growth will be restrained. Third, the University will cut its 2009-’10 budget by an amount equal to 5 percent of the salaries and benefits of all non-faculty staff, primarily via attrition. Fourth, budgets for non-salary and wage expenses will also be cut five percent beginning that year, with another five percent cut anticipated for the 2010-’11 year.

Asked in the interview why he had not implemented a hiring freeze as Harvard and other schools have, Levin said he sees the economic troubles as both a challenge and an opportunity.

“We see the possibility, with so many schools freezing hiring, to do some terrific recruiting,” Levin said. “We didn’t see any advantage in a freeze.”

Certainly the most dramatic announcement in Levin’s letter was his fifth point — that major construction projects would be stalled because of the economic woes. Levin said the renovations of Morse and Ezra Stiles Colleges would not be delayed, and he said no already-approved projects would be canceled.

“Let me be clear,” Levin said in the interview. “Any project that’s already started construction will go forward. Morse and Stiles will go forward, as will a couple essential utilities projects. But everything else, we’re going to have to wait until we can either raise the money to pay for the project in full or wait until we can get access to debt markets without jeopardizing our credit rating.”

Levin said that construction on the already-delayed Yale Biology Building project will be postponed for another year, and that the new campus for the School of Management and the second phase of the renovation of the Yale University Art Gallery will be tabled indefinitely “until funding is secured or market conditions improve,” as Levin put it.

Design work and fundraising for the two new residential colleges will continue, Levin said, but that project may also be delayed. Planning and development at the West Campus will be cut back only minimally because the facilities are already built and do not require major construction.

Levin’s 2,031-word letter — which he himself drafted — was the result of planning that began when the endowment’s losses became clear in October, he told the News. The Yale Corporation discussed and approved the course of action at its meeting last weekend.

In a telephone interview, Len Baker ’64, chair of the Corporation’s finance committee, said the steps outlined in Levin’s letter are appropriate for now, but that adjustments might have to be made.

“The situation is very uncertain right now because of the volatility of the markets,” Baker said. “It may turn out that we need to go further.”

On the other hand, Baker said, Yale’s financial position could be stronger than expected for several reasons. First, he said, investment valuations are deflated currently because some investors are selling securities at discounted rates.

“Prices are determined by the people who have to sell, not by the people holding securities,” Baker said. “So you can have one distressed person who is willing to sell the security for next to nothing, and everyone’s worth gets marked down.”

But, in the long-term, Baker added, the financial crisis could end up benefiting Yale. Swensen and the entire Yale Investments Office are looking for good investment opportunities in the current climate, Baker said.

And if Yale does decided to go ahead with its ambitious construction schedule, it may be able to negotiate discounted rates from contractors looking for business.

“The range of outcomes is very wide,” Baker said. “There’s a possibility that this could end up being a great time for Yale, but it’s also a time when we need to be very careful.”

Click here to read the entirety of Levin’s announcement.

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