Following three years of strong endowment returns, Yale’s rate of spending for fiscal year 2017 may not increase much, even as the University’s expenses continue to rise.
Beginning in the fall of 2017, 200 students will be added to each Yale College class, increasing the University’s yearly operating costs for heat, electricity and facility maintenance. More teaching staff will likely be added to the University’s payroll, and Yale Dining must staff two new residential college dining halls. But in the face of these new expenses, Yale’s effective spending rate — the amount of money, adjusted for inflation, that the University spends each year to cover financial aid, athletics, faculty salaries and facilities — will continue to hover at around 5.25 percent of the total endowment value. Though professors interviewed said they want more budgetary funding to hire faculty in the coming years, Yale’s long-term financial goals may overlook present needs.
William Jarvis ’77, managing director of the Commonfund Institute, an institutional investment firm, said one of the advantages of endowments is that they have an event horizon that is perpetual. Jarvis quoted a 1974 paper on endowment management written by former Yale economics professor James Tobin, which begins, “The trustees of an endowed institution are the guardians of the future against the claims of the present.” Because the University will outlive its current faculty and students, it can make financial choices that build its wealth for future generations, Jarvis said.
But this approach is disappointing to some faculty who want a larger share of the endowment to fund their departments as Yale looks to expand.
Deputy Provost Lloyd Suttle said the 2017 fiscal year budget is currently being planned with the opening of the new colleges in mind, but added that it is too early for him to comment on the specific allocations of money across the University. Suttle said most budget increases will not be needed until the 2018 fiscal year, since the new colleges will not open until the fall of 2017. Fiscal year 2018 begins in July 2017.
“That extra cost will have to be met somehow in the operating budget,” Jarvis said of the costs associated with expanding the student body. The full cost of tuition, room and board is currently $63,250, but Jarvis said Yale spends much more than that on each student, even those who do not receive financial aid.
Professor of molecular, cellular and developmental biology Joel Rosenbaum said that the University’s budget in the next few years should be expanded to provide additional faculty to account for the 15 percent increase in the student body with the opening of the new colleges. Last year, when the Provost’s Office asked Rosenbaum’s department to cut $125,000 from its budget, MCDB faculty voted to cut a popular but expensive electron microscopy lab from its course offerings. Rosenbaum said classes that cost more money should be reinstated and that new scientific equipment should be purchased for the MCDB Department.
But other professors interviewed are less concerned about how the new colleges will impact the University budget. School of Management professor Jim Levinsohn, who currently serves on the University Budget Committee, said he is optimistic that the provost will prioritize research and teaching when drafting the budget. Levinsohn added that the new colleges are not a surprise, and that he thinks the University will be able to handle the financial impact of expanding Yale College.
“I think it’ll all be fine,” Levinsohn said. “Better than fine, actually.”
Concerns over how Yale spends its money are hardly new. The University was publicly criticized by writer Malcom Gladwell in a recent New York Times op-ed, which claimed Yale spends a relatively small amount on its students compared to the amount spent on managing its endowment.
But Jarvis said the budget is often misinterpreted. To the outside observer, Yale’s budget in fiscal year 2017 may not be as large as people would expect, despite recent high endowment returns, he said. Since 2010, the endowment has grown from around $16.6 billion to $25.6 billion in 2015. During that same period, Yale’s operating expenses increased from $2.6 million to $3.1 million in 2014. The spending rate, however, remained at roughly 5.25 percent.
Jarvis said Yale aims to keep its spending rate more or less the same each year, regardless of how markets fare or how operating costs change, because of the smoothing rule — a method of gradually adjusting Yale’s spending in response to market fluctuations. According to Yale’s 2014 Endowment Report, the smoothing rule is meant to ensure that the University is not affected by the ups and downs of the market.
Jarvis said the smoothing rule makes it easy to misinterpret Yale’s yearly spending rate. Growing the student body will increase Yale’s operating costs in fall 2017, but the smoothing rule may prevent the budget from increasing too much during that year. The effective spending rate will appear to be lower during good economic times, and uninformed people will criticize Yale for not spending more, Jarvis said.
With professors like Rosenbaum calling for more funding, Jarvis said deciding how to spend the endowment is not always simple. The endowment, which is made up of many small donations, is restricted by the donor’s intended purpose for the money. For example, if a donation to the endowment was intended to be spent on financial aid or scholarship money, it cannot be used to pay for athletics, Jarvis said.
“The part of the endowment that’s not for scholarships can’t be used for [scholarships],” said Jarvis.
The budget is determined each year by the Provost’s Office, the Faculty of Arts and Sciences Dean’s Office, the Yale College Dean’s Office and the Budget Office.