UP CLOSE | Why budget cuts?

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At a town hall meeting for Yale staff one morning in mid-February, two weeks after administrators announced the latest budget cuts that would help close a $300-million deficit, a human resources representative faced an irate crowd of about 45. Raised hands interrupted him every time he tried to continue with his PowerPoint presentation.

The managerial and professional staff members who nearly filled the Luce Hall auditorium were there to learn more about recent changes in their employee benefits packages. As the presenter, compensation and benefits director Hugh Penney, explained that staff would soon lose some of their sick days, bonus vacation days and other benefits — and, in some cases, their jobs — muttering spread among the assembled staff and hands sprung from the crowd.

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“We had no input into these changes,” said Susan Burhans, a security education coordinator for Yale Police, who sat near the front of the auditorium. “Everyone knows the economy’s bad, but we love Yale, too!” she said to a burst of applause.

Staff are not the only ones suffering from painful cuts at Yale, which has seen a series of budget reductions since the collapse of the financial markets in the fall of 2008. Some observers say that Yale, even with a 24.6 percent tumble in the endowment, still reserves $16.3 billion — plenty of wealth to draw in order to prevent cuts. The advantage of the second-highest University endowment in the country, they say, is that Yale should be able to dip into this significant rainy-day fund, sacrificing some future earnings to protect itself from permanent damage now.

Are Yale’s senior officers protecting the University’s endowment at the expense of its academic mission? Administrators say they are not hoarding wealth, just preserving it for Yale’s future; they have learned from both the restructuring crisis of the early 1990s and the budget crisis of the 1970s, when inflation in the national economy did in fact convince the University to spend more from its endowment than ever before.

Officials also say the budget cuts have given administrators a rare opportunity to trim Yale’s fat and reevaluate what its most important programs are — which means, of course, that even if the budget cuts have hurt everyone, some have lost out more than others.

THE ENDOWMENT ARMS RACE

At a cocktail reception University President Richard Levin hosted five years ago to celebrate Chief Investment Officer David Swensen’s 20th year managing Yale’s endowment, a series of posters and news clippings mounted inside the President’s House traced the endowment’s growth from $1.3 billion to $14 billion under Swensen’s leadership. (It had grown to $22.9 billion by 2008.) One bar chart tracked the gifts of several of Yale’s most generous donors — the Harknesses at $128 million, the Sterlings at $151 million and the Beineckes at $263 million.

The Mellons, at $379 million, were topped only by one name: Swensen. The figure listed under it, $7.8 billion, was the difference between the endowment’s growth under his stewardship and the average return of a university endowment at the time.

Swensen has not only outdistanced all of his competitors at other universities in long-term investment performance, he also developed the model that other schools’ investment managers have eagerly imitated; the so-called Yale Model emphasizes investing in nontraditional assets such as private equity, real estate, timber and gas, said William Jarvis ’77, the managing director of the nonprofit endowment consulting organization the Commonfund Institute. The average educational endowment is 51 percent invested in alternative assets, he said.

Although these assets helped Yale’s endowment grow, they fared particularly poorly in the recent downturn. Some institutional investors are now questioning Swenson’s approach, Jarvis said.

Even with recent difficulties, it is natural for Yale to take pride in the success of its investments, said Perry Mehrling, an economics professor at Barnard College, adding that universities frequently compete on the size of their endowments, which are meant to support teaching, research and other core activities. The more resources a university has, the more it can spend on students and faculty, he said.

But, Mehrling added, some observers question whether endowment managers, including Swensen, have lost sight of the endowment’s purpose in the race to amass more money. Yale and other universities should be careful not to let a desire to boost and preserve its wealth, what Mehrling called “the ‘mine is bigger than yours’ thing,” overtake its academic mission — a case of what Mehrling called the tail wagging the dog.

But Charles Ellis ’59, a fellow of the Yale Corporation until last year who formerly chaired the Corporation’s Investments Committee, said Swensen does not compete for competition’s sake, but to make sure Yale has as much money as possible to spend.

Four economists interviewed said the real question is not whether Swensen has the right goals for building up Yale’s endowment, but whether Yale should dip into that money to avoid damaging the University with this year’s deep budget cuts. After all, even after the major endowment losses of 2008 and 2009, the endowment is still the same size it was just four years ago, Provost Peter Salovey said in an interview last week.

“The point of the endowment is to support the mission, and when you’re sacrificing the mission in order to stabilize the endowment, then the mission is acting as a stabilizer for your bank account, not the other way around,” Mehrling said, “and that’s losing sight of the mission.”

HOW MUCH IS ENOUGH?

Critics — ranging from parents paying around $50,000 in tuition for their children to Republican Sen. Chuck Grassley of Iowa, the ranking member of the Senate Finance Committee — have called on Yale, Harvard and other wealthy universities to spend more from their endowments to increase financial aid and prevent further budget cuts. Grassley, for example, has pushed for legislation that would require universities to spend at a higher rate from their endowments despite repeated defenses from college administrators.

Part of the reason the debate over university endowments has not progressed much is that the two sides have different ideas of what universities need these funds for, said Burton Weisbrod, an economics professor at Northwestern University. While Grassley and his supporters see endowments as pots of money that are sitting idly, Weisbrod said, colleges use their endowments as hedges against times of financial strain and as a way to transfer wealth from the present to future generations.

Weisbrod said he developed the concept of a “rainy day fund” to describe endowments as universities’ savings, which help protect budgets when tuition revenue, donations and government grants drop. Income from the Yale endowment made up about 44 percent of this year’s budget, Levin said.

“We all know that there are going to be good times and there are going to be bad times,” Weisbrod said. “So they would be wise to hold some money as a rainy day fund in case things turn bad.”

The other reason universities hold endowments, he said, is to keep wealth for the university of a century from now and beyond.

Which raises the question: How much is enough?

Even now, Yale has a rainy day fund that would be big enough to cover all of its costs for 69 years if its revenue dropped 10 percent, Weisbrod said. And from an economic standpoint, future generations are almost guaranteed to be richer than those of the present, he added.

“Why should we be saving more now, being relatively poorer people, in order to make things better for relatively wealthier people in the future?” he said. “Just how much of an endowment really makes good sense?”

‘IN PERPETUITY’

For Yale administrators, the answer is clear: Since Yale was built to last and endowed in perpetuity, Levin, Salovey and the others cannot risk spending an endowment that belongs to the Yale of 2110 as much as the Yale of 2010, they say.

“In perpetuity” is a phrase administrators like to use. The premise that Yale will be here forever appeals to donors who entrust their money to Yale knowing their gifts will continue to make an impact for a long time, Ellis said. And Mehrling said the concept of perpetuity has also allowed Swensen to invest for the long run, tying up most of Yale’s money in assets that do not quickly translate to cash.

“If you think of the University as being around forever, then it has a kind of advantage that normal human beings don’t, because it doesn’t have to go for a short-return,” Mehrling said, “so Swensen could invest in timber and other illiquid assets.”

Besides, Deputy Provost Charles Long said, the endowment is not one large savings account that Yale can spend at any time, but a fund mostly composed of some 9,300 restricted funds. Strict donation contracts govern how the University can use those funds, and apart from legal considerations, just a few years of spending more from the endowment can quickly deplete the long-term value of the endowment, he said. (Besides, returns from the 25 percent of Yale’s endowment that is unrestricted would probably not make up for all of Yale’s budgetary shortfall, the Commonfund Institute’s Jarvis said.)

In the 1970s, when stagflation crippled the national economy, Yale spent more from its endowment in an effort to prevent serious budget cuts, Jarvis said. As Yale spent more than it earned in every year of the 1970s, the endowment lost 46 percent of its value by 1979 — and would have lost more were it not for $182 million in new donations during the period, according to the 2000 Yale endowment report. Administrators tried to close the ensuing budget deficit with drastic measures, turning off the heat in student rooms, rationing fruit and nearly freezing faculty hiring.

“You’ve got to gain much more in percentage terms for your recovery than you lost in order to get back to where you were,” Jarvis added. “That directly affects the ability of the university to perform its mission.”

The endowment did not return to pre-1970 levels until 1991, Long said, adding that similarly dipping into the endowment for a sustained period of time today would be a “colossal disaster.”

Yale’s self-imposed spending rule, which dictates how much Yale can spend from its endowment every year and hovers around the target rate of 5 percent, is — like the endowment itself — designed to ward off the short-term volatility of the financial markets, Levin said.

“The spending rule is calculated on the idea of preserving the purchasing power of the endowment over a 50- to 100-year-long period of time,” said Levin, who helped develop Yale’s spending rule along with other Yale economists. The last time the Corporation increased the spending rule was in January 2008, in preparation for Yale’s financial aid overhaul and purchase of West Campus.

Taking the value of the endowment and inflation into account, the rule also “looks backward” to how much was spent the previous year, Salovey said. Because Yale spent a significant amount in recent years when the endowment was still strong, he said, this year’s spending rule dictates a spending rate close to 7 percent — nearly twice what it was when the endowment was growing rapidly, Levin said.

The rule keeps spending from swinging too much and damaging Yale’s mission, Salovey said.

Even though the spending rule is supposed to have a smoothing effect, it could not totally blunt the impact of a drop as large as 24.6 percent.

TRIMMING THE FAT

Administrators and higher education experts say that as painful as the resulting budget cuts are, they give senior administrators a rare chance to reevaluate what Yale should be spending money on. In an August 2009 Newsweek column titled “Sticking with Success: How the crisis will make top schools even stronger,” Levin explained that cuts are not easy to make at institutions with high fixed costs, such as professors who hold lifetime tenure.

“This is not the first time we’ve had to trim expenses, and in the long run, it makes universities even more fertile ground for innovation,” he wrote. “Cutting the least-essential positions and programs allows us to add even more important ones when the economy recovers.”

Added Levin: “If U.S. universities take the long view, they will emerge leaner and stronger.”

In an interview last week, Levin said that though all cuts have been painful, some have trimmed unnecessary fat from Yale’s budgets, fat that never would have been identified were it not for the budget shortfall.

Without the motivation of a budget deficit, said Barnard’s Mehrling, it is nearly impossible to eliminate parts of a university that are no longer strong or relevant to the core mission.

“Crises are sometimes a dean’s best friend,” Mehrling said. “It’s difficult to trim in good times, because all of these pieces have funding sources attached to them — what’s the excuse for trimming a department with no students if it has funding?”

That Darwinian approach has been tried at Yale before, in 1991, when an administrative decision to “restructure” the University left some departments fighting to survive at Yale and provoked an angry backlash from the faculty.

At the time, former provost Frank Turner said, Yale’s buildings were literally crumbling after 30 years of neglect. Although there was a recession at the time and costs were rising faster than income was growing, then-president Benno Schmidt called for deep budget cuts in the Faculty of Arts and Sciences to free up resources for major campus renovations, Turner said.

Long and Turner eventually served on a committee to identify ways to cut the faculty, known as the restructuring committee, which also included future president Levin, future provosts Judith Rodin and Alison Richard, and future dean of Yale College Richard Brodhead. The committee looked at the performance of several departments in deciding which to target, Long said.

Their January 1992 report recommended cutting the faculty by 10 to 12 percent through retirement and attrition, eliminating the departments of linguistics and operations research and the Institution for Social and Policy Studies, combining three engineering departments into one, merging the departments of physics and applied physics, and reducing the sociology department by 40 percent. Only philosophy and statistics, which had also been identified for review, escaped cuts.

Professors received the report with a mixture of shock and anger, recalled eight faculty members who worked at Yale at the time. Suspicious that there was any economic need for budget cuts, convinced that the committee members had judged departments based on their personal preferences and angry that the faculty had not been consulted, professors rose in protest, they said.

“The greatest fault back in the 90s was a lack of transparency,” Yale historian Gaddis Smith ’54 GRD ’61 said. “There was a very serious backlash. I mean, it really contributed to the end of Benno Schmidt’s presidency.”

Laurence Horn, the chair of the Linguistics Department at the time, said he remembers circulating letters and leaflets among other professors to save his department. Some professors even stood on street corners handing out flyers, said Benjamin Foster, the chair of the Near Eastern Languages and Civilizations Department.

“I felt that they’d gone through and kind of made a hit list of departments that were perhaps not performing as well as they should,” said Donald Crothers, a retired chemistry professor who circulated a letter protesting the cuts, “and rather than deciding how to make departments better, they were just going to get rid of them.”

After several raucous faculty meetings, then-dean of Yale College Donald Kagan appointed an ad hoc committee of faculty members to review the decision-making process of the restructuring committee, said the ad hoc committee’s chair, Thomas Carew, who is now a professor of neurobiology at the University of California at Irvine. In the end, most of the proposed cuts were not enacted — thanks to an increase in donations to Yale in the 1990s and the soaring endowment.

A QUIETER RESTRUCTURING

The lessons of restructuring are not lost on the Levin administration, which faculty praised for being open about this round of budget cuts and for distributing the cuts more equitably rather than targeting specific departments.

Department chairs and faculty interviewed over the course of this academic year said that while the budget cuts have been painful, they understood that the global economic downturn demanded sacrifices from everyone at Yale and other universities.

“It’s quite a different thing now, and the principal reason is that there is a credible economic emergency facing even the richest universities that reflects the mess facing the whole country,” said Victor Bers, a classics professor. “Back in the ’90s, the administration’s economic justification for drastic cutbacks was openly mocked by members of the economics department.”

Bers said at one 1990s faculty meeting, a professor held up a report on Yale’s finances and said, “‘If this was by a student in elementary economics, I would give it an F.’”

The series of across-the-board cuts Levin and Salovey have asked for over the past year seems much more equitable, Bers and other professors said.

The past year’s cuts have been based on the premise of driving inefficiency out of Yale’s system by trimming spending on visitors, social events, travel and other inessential expenditures, Long said. And rather than targeting specific academic programs for deeper cuts, he added, administrators have delayed faculty hiring and used departments’ rainy day funds to tide them over until the endowment recovers.

Instead of cutting weaker programs, the Provost’s Office is allowing key faculty hires in stronger programs to move forward — a kind of positive selection, Long said. Since planning for the new colleges began, the faculty has grown by up to 8 percent, Levin said, and it would not have made sense to cut faculty now and grow them again later to accommodate for the increase in the student body.

In fact, although faculty salaries were frozen last year, they are rising again this year. Meanwhile, Yale’s staff has been especially hard hit by the budget cuts, which resulted in 100 layoffs last year.

Salovey said the administrative side of the University has grown significantly over the past two decades to deal with federal compliance regulations and new business systems, and administrators decided to lay off staff, reduce staff benefits and cut YaleNext, the University’s comprehensive overhaul of its business systems, rather than cut into academic programs.

“We have the opportunity to say, let’s restructure the administrative side,” Long said. “With this many dollars going into business support, you ought to be able to cut that.”

That the burden of the budget cuts, which fell on the faculty in 1992 and is now on the staff, shows: While former linguistics chair Horn recalls the faculty meeting on restructuring being moved from Connecticut Hall to Linsley-Chittenden to accommodate all the faculty who wanted to attend, Long said the town hall meetings Levin and Salovey held in November and December for faculty drew a surprisingly low turnout of about 150.

But more than 1,000 staff members crowded Battell Chapel for a similar meeting, Salovey said. And in several meetings and interviews, managerial and professional staff have protested what they say is a lack of transparency in the administration’s decisions to eliminate the bonus vacation day program, reduce paid time off days and cut other benefits.

“I don’t want to pretend it isn’t very difficult for people,” said Salovey, now in his second year as provost. “But as challenging as the current financial climate is, it isn’t the end of the world.”

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