NEW YORK — Faced with turmoil in the financial markets, the University will consider cutting back its ambitious capital construction project in future years.
In an interview at his office here last week, senior fellow of the Yale Corporation, Roland Betts ’68, warned that the gilded age of economic prosperity for Yale and other universities appears to be over, and that everything from the University’s capital campaign to its endowment could be impacted by the crisis that has shaken Wall Street over the past two-and-a-half weeks.
His comments came even before Congress rejected a $700 billion bailout of the financial industry Monday, sending the Dow spiraling down 777 points, or nearly 7 percent, in the largest single-day loss in two decades. Though Betts promised major projects like the residential college expansion will not be affected by the declining markets, he did not deny that the Wall Street upheaval has nonetheless raised the possibility that Yale’s endowment may plunge into the red for the first time in the Levin administration.
“It’s not unreasonable to think we’re going to have a down year this year,” he said. “But,” he added, “the year’s just begun.”
Betts emphasized that the Corporation performs “doomsday iterations” of market conditions when planning major projects, and in an interview, University President Richard Levin said, barring a catastrophic collapse of the market, the University’s finances should remain strong.
But both men agreed that if the markets continue to decline seriously, the first step to protect Yale’s endowment would be to scale back ambitious investments in the University’s physical plant.
“What you might see going forward is not compromising decisions that have been made, but we may slow down with our construction,” Betts said. “That will be something to keep in mind.”
Meanwhile, the University is in the midst of its most ambitious capital expansion in its history. More than $2.6 billion in construction has been planned for the next four years, according to budget figures obtained by the News. (The projections were included in June 2007 budget documents, the most recent available.)
Included in that total is nearly $600 million to build two new residential colleges and another $200 million to complete the renovations of Calhoun, Morse and Ezra Stiles colleges. Betts said those projects are not in any jeopardy of being delayed.
But other projects down the road could be curtailed. “I’m anticipating [that in] going forward we will do the same type of careful analysis we always do, but the result may be different,” Betts said. “The result may be, let’s not spend $700 million for buildings, $600 million for buildings this year; let’s cut it to $300 or $400 million.”
For one thing, the markets have soured at a rather inconvenient time. The University this year boosted its endowment payout by 40 percent, and spending from its fund — $1.16 billion in total — will account for 44 percent of the University’s operating budget this year. Yale, like its wealthy peers, derives more of its revenue from endowment spending than any other source.
“The risk of any catastrophic return scenario is much greater for that reason,” said John Griswold ’67, executive director of the Commonfund Institute, the educational arm of a group that provides fund management and investment advice to many universities. “That’s why the really sophisticated management of the investment offices is crucial to these institutions.”
Indeed, the pressure is now on the Yale Investments Office more than ever. While Yale managed to squeeze out a positive return in the last fiscal year, the median return among 165 large institutional funds measured by the Trust Universe Comparison Service was negative 4.4 percent. The University of Pennsylvania has already seen its endowment returns plunge into the red.
Such a result would break a 20-year streak of positive returns under Chief Investment Officer David Swensen. In the last 25 years, the Yale endowment has only declined in total value twice: in 1988, when it fell from $2.11 billion to $2.06 billion; and in 2002, when its net total declined from $10.73 billion to $10.53 billion (despite posting a small positive return), according to data collected by the Office of Institutional Research.
Wall Street’s woes are already beginning to affect college campuses. The president of Grinnell College, whose $1.7 billion endowment fell 12 percent this past year, called it an “extraordinarily serious situation”; he told the Chronicle of Higher Education that, if the market slide continues, universities may have to curtail spending or freeze hiring in order to stay on solid financial ground.
Cornell University President David Skorton went as far as sending a letter Friday to faculty and staff, dispelling rumors about the “overall soundness of our university’s financial position,” as he put it. But he warned that a working group he appointed in the summer to assess the impact of state budget cuts has concluded “thoughtful stewardship will require a broader reassessment of all our fiscal strategies.”
One bright spot for Yale is its fundraising, which, so far, has not been impacted by the financial downturn. Yale Tomorrow, the University’s capital campaign, has raised $2.35 billion of its $3.5 billion goal as of Aug. 31, with three years still remaining in the campaign. The fiscal year ending June 30 was a record for the University, both in terms of campaign commitments and cash receipts, said Inge Reichenbach, the vice president for development.
“We also had some very important gifts over the summer, so we got off to a good start in the new year,” she said this week. “We will be monitoring things very carefully, but as of right now, we have not yet seen an impact.”
Still, Betts and Reichenbach expressed concern about how the markets could affect fundraising over the coming years. And it is clear the University is keeping a close eye on the happenings on Wall Street. As the Dow plunged Monday, Levin — an economist by trade — raced through parts of the text of the proposed Congressional bailout, and none other than Swensen himself was spotted later that day outside the president’s Woodbridge Hall office.