As the economic boom of the past decade fades into the past, Yale administrators are optimistic that the University’s financial situation will continue to prove more stable than that of many of its peer institutions.
Analysts and administrators attributed this situation largely to the performance of Yale’s endowment, which experienced relatively good returns even in the last fiscal year. And despite recent announcements by many other universities — including Stanford and Duke — of budget cuts, hiring freezes and projected deficits, Yale administrators said they are confident Yale will continue to perform well in the current economic climate.
While administrators remain uncertain about how the economy will affect Yale’s next budget, Provost Alison Richard, the University’s chief academic and financial officer, said the University will certainly have to restrain expenses and “the rate of growth of aspirations.”
But, administrators added, Yale is fortunate to have a disciplined budgeting process and is engaged in conversations with faculty and staff members to achieve these goals.
Three down years
During the late 1990s, many universities — including Yale — experienced unprecedented growth.
In the 1999-2000 fiscal year, Yale experienced a 41 percent return on investments, while Duke and the Massachusetts Institute of Technology earned 58 percent. But last year was the first year since 1984 that the average college endowment lost value, with a 3.6 percent average decrease.
In the 2001-02 fiscal year, Yale reported a 0.7 percent investment return, following a 9.2 percent return in 2000-01. This fall, the total value of Yale’s endowment fell from $10.7 billion to $10.5 billion.
But this loss was significantly smaller than that experienced by many universities. The 2001-02 fiscal year was the third year in a row that Yale’s endowment outperformed Harvard’s. And according to the Stanford Management Company, Stanford’s investment returns fell 7.2 percent in the 2000-01 fiscal year.
“We are looking at three down market years,” said Timothy Warner, Stanford vice provost for budget and auxiliaries management. “That has affected the ability of our investments to perform.”
Warner said Stanford is using its recently announced hiring freeze to get employees accustomed to the new market tendencies. Stanford has asked departments to plan for 5, 7.5 or 10 percent budget cuts.
Many have suggested that universities with large endowments — such as Yale — will be most affected by the economic downturn.
“I think that for any university that has a major endowment that’s diversified in the market, that’s going to have an impact,” said Charlotte Johnson, a senior vice provost at Emory University.
While pleased with Yale’s relative success, Richard said the University is aware that all campuses are being affected by the economic slowdown.
“The next several years will be different from the past several years,” Richard said.
John Griswold, senior vice president of Commonfund — a company that manages endowments for universities and nonprofit organizations — said the recent trend in market portfolio diversification has strengthened universities’ ability to withstand market pressures.
“People are diversifying their endowments, and that’s wise,” Griswold said.
In 1985, when Chief Investment Officer David Swensen arrived at Yale, stocks accounted for 65 percent of Yale’s portfolio. Since then, the percentage of stock investments at Yale has decreased to 15.5 percent.
The average American university still invests approximately 43.3 percent of its money in stocks.
According to a recent article in Emory University’s student newspaper, the Emory Wheel, the institution — often referred to as “Coca-Cola University” — invests 44.6 percent of its endowment in Coca-Cola stock. Gary Hauk, vice president and university secretary of Emory, told the Wheel that the percentage of the endowment invested in Coca-Cola used to be nearly twice what it is now.
But Yale’s strategy of portfolio diversification seems to have worked well: Yale has outperformed many peer institutions in endowment growth.
“We have been blessed with Dave Swensen’s leadership in the endowment,” Richard said.
Despite the recent financial troubles at many institutions, Griswold said he does not expect the economic downturn to cripple universities.
“I think that the endowments have done extremely well,” Griswold said. “If they continue to beat the averages, they’ll weather the storm — I think there’s reason for optimism.”
Richard said changes in University planning would not affect Yale’s budget as much other planning matters. Richard said she does not think large projects like the residential college renovations would be affected.
“We have a very clear focus on what we want to do with the facilities project — and I see no reason at this point to think that the core priorities of the institution — would be pulled back on,” Richard said.
But Warner said the economic climate has affected Stanford’s capital planning, particularly in terms of fund raising and borrowing.
“The situation will certainly be tight for the next couple of years,” Warner said.