While the University reported a $51 million surplus for fiscal 2014, Yale’s true financial status is not as optimistic.
In its annual budget report released last week, the Yale Division of Finance announced that the University operated at a $51 million surplus for the 2014 fiscal year. But the actual net gain in funds was markedly less, and Yale will not now have an additional $51 million at its disposal. According to Provost Benjamin Polak, the exact surplus calculated often depends upon the specific accounting principle used. As a result, administrators and faculty members interviewed expected Yale’s current cost cutting measures — issued after Yale’s $39 million deficit in 2013 — to remain unchanged.
“The fundamental message that should be taken away from [the 2014 Financial Report] is that these were great results — we’re delighted and the surplus is good,” Polak said. “It’s just not ‘$51 million’ good.”
The University last ran a surplus in fiscal 2012.
Polak added that the main discrepancy between the surplus reported in the balance sheet and the actual surplus felt by the University stems from the specific method of accounting used to calculate Yale’s budget. Polak said the University’s financial officers present both the GAAP — Generally Accepted Accounting Principles — and the “Management View” accounting processes in reports.
According to the report, Yale had a $51 million surplus under GAAP but only a $13 million surplus under the Management View. Polak said that the Management View numbers more accurately reflect the financial status of the University.
He added that under GAAP, the University’s reserves invested in the endowment appeared to earn an enormous amount of interest. In fiscal 2014, $27 million of the $51 million surplus was due to these endowment returns on cash balances, Vice president for finance and business operations Shauna King wrote in an email. Accounting rules require the University to record all of this income in the year it was generated. However, it is more appropriately smoothed over multiple years as the University does with other endowment returns, she said.
“We agree that this year’s reported results are somewhat overstated, certainly versus what we can expect to recur,” King said. “Most businesses and institutions have differences between the way they look at financial results internally to manage the institution’s finances, a Management View, versus what is required from a GAAP or an externally reported viewpoint.”
She said that the remaining $24 million surplus is the “net of several moving parts,” citing a strong financial year from the School of Medicine and the growth of its clinical practice.
Still, both Polak and King noted that Central Campus, which excludes the School of Medicine and West Campus, actually operated at a slight deficit this year.
“I don’t want people to get worried since it is only a small deficit, but it is, in fact, a deficit,” Polak said. “We are not quite at balance yet — we are close to it and hope to balance next year, but we are not quite there.”
In her letter accompanying the report, King wrote that the University’s cost cutting measures announced in fall 2013 contributed to the strong financial report. She said the University’s budget benefitted from the five-year plan to reduce administrative costs by 9 percent.
Polak said that the cost saving measures were intended to affect the fiscal 2015 budget, but because Yale departments and units began implementing these plans earlier, it also influenced fiscal 2014.
Still, some individuals questioned the necessity of maintaining these budget cuts — announced by Polak in response to a University deficit — now that the Yale budget is back in the black.
“The administration has overlooked the impact of the cuts on people’s lives and on the quality of services departments are able to provide,” Local 34 president Laurie Kennington said. “With the great news about the surplus, it’s time for the administration to rescind the cuts and reinvest in Yale’s core academic mission.”
Others defended the administration’s financial strategies.
Jessica Labbe, deputy director for finance and administration at the Yale University Art Gallery, said that she still believes the effort to reduce costs is necessary.
“The FY14 surplus is not a direct translation of Yale’s operating income and expense structure,” she said. “While we would of course appreciate additional University support, and the cost-cutting measures have not had a positive effect, thanks to the efforts of staff across the gallery, we are doing our part to bring Yale’s operating budget to a sustainable position.”
Vice President for Human Resources and Administration Michael Peel said that since the $51 million surplus is roughly 1 percent of the Yale budget, departments could not even slightly increase their spending above the fiscal 2015 budget without returning the University to a deficit.
He added that he therefore does not expect the budget surplus to provide additional spending flexibility for human resources or other administrative departments.
“With a budget and revenues of the University’s size — $3.1 billion — this [surplus] is close to a rounding error,” Richard Hesel, a principal at Art and Science Group, LLC — a firm that advises colleges and nonprofits, said. “In the current uncertain higher education economic climate, I applaud the University’s efforts to cut costs provided the savings have not compromised quality and valued programs.”
King responded to potential criticism of maintaining this five-year plan by noting that many units continue to operate at a deficit and the University will continue to find opportunities to improve efficiency in administrative areas.
She added that this shift will allow for more resources to be invested in new University priorities.
“A University as dynamic and creative as Yale always will have more ideas than it has resources,” she said. “It always has and likely always will — the stress created by the financial crisis has certainly made that even more challenging these past several years.”
Still, it remains uncertain whether the University can expect to maintain this surplus. Peel noted that while the surplus was encouraging, it included a number of one time gains that will not reoccur this coming year.
Polak said although cost-saving measures can be reasonably counted upon to help balance the budget, other factors — including endowment returns — are much more difficult to predict.
“Can we expect to get 20 percent endowment [return] every year?” Polak said. “No. Absolutely not.”