The value of the University’s endowment fell an estimated 25 percent, roughly $6 billion, between the end of June and December, University President Richard Levin announced Dec. 16.
The drop prompted the Universityto delay several planned capital projects and cap faculty and staff salary growth. But the endowment’s decline, though seemingly dramatic — the fund shrank to approximately $17 billion from $22.9 billion — will not force the University to adopt a hiring freeze or roll back its financial aid program.
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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 his letter that those losses grew in November and December. Moreover, Levin said 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,” such as private equity and real estate.
The news of Yale’s loss came just a few days after the December meeting of the Yale Corporation, the University’s highest governing body. Len Baker ’64, chair of the Corporation’s finance committee, said his group had “a long set of meetings” to address the economic crisis.
“The situation is very uncertain right now because of the volatility of the markets,” Baker said in a December telephone interview. “And, of course, a lot of our portfolio is in private assets, so there is no market and it’s hard to come by a precise valuation.”
Levin said 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 5 percent beginning that year, with another 5 percent cut anticipated for the 2010-’11 year.
Levin’s fifth point was perhaps his most dramatic: Major construction projects will be stalled because of the economic woes. Construction on the already-delayed Yale Biology Building project will be postponed for another year, Levin said, and the School of Management’s new campus — along with the second phase of the renovation of the Yale University Art Gallery — will be tabled indefinitely “until funding is secured or market conditions improve.”
The renovations of Morse and Ezra Stiles Colleges would not be delayed, Levin said, 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.”
Design work and fundraising for the two new residential colleges will continue, Levin said, but that project may also be delayed if the economy does not rebound by the planned start of construction in early 2011. Planning and development at the West Campus will be cut back only minimally because the facilities there are already built and do not require much costly construction.
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.”
Levin, Baker and others generally pointed to two other upsides of the current economic crisis. First, construction costs may ultimately decline as contractors become willing to cut deals in order to secure business. Second, this may be the best time for Yale’s endowment managers to make new investments at substantial discounts.
“We are going to be working very hard to optimize the portfolio,” Baker said, “and take advantage of some very good opportunities that are out there.”
Bad as Yale’s endowment performance would seem, University officials were quick to point out that its fund had beat most indices. And, for those keeping score at home, Yale may well have beaten Harvard’s endowment performance.
Harvard announced earlier last month that the value of marketable securities in its endowment had fallen 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. “That’s because of the excellent management of our endowment by David Swensen.”
Baker was also quick to praise Swensen, noting that “every market in the world is off somewhere between 40 and 50 percent, except for the ones that are off more. So what David Swensen’s done so far, as disappointing as it is, and as much as we would all like it to be different, is a pretty substantial overperformance.”
While Yale’s marketable securities portfolio outperformed fund managers at Harvard and Stanford, which posted a 24 percent loss, Princeton University announced on Jan. 8 that marketable securities in its own endowment outdid Yale’s, only declining 11 percent.