With soaring endowment growth, where is Yale spending its money?
The University has already announced several new spending commitments for the upcoming fiscal year.
Tim Tai, Staff Photographer
Since the release of the University’s fiscal year 2021 endowment gains – which were the largest in recent years – Yale officials have announced a slew of new spending projects, with some totalling hundreds of millions of dollars. All of this comes as administrators begin to plan the University’s budget for fiscal year 2023.
The budget for fiscal year 2023 — which begins on July 1, 2022, and concludes on June 30, 2023 — will be officially approved during the Yale Corporation’s June meeting. But the process for planning the budget began last fall, when individual schools and administrative units presented “five-year” plans to a group of senior administrators and tenured faculty, according to Chief Financial Officer Stephen Murphy ’87. The budget will be the first that is impacted by the endowment gains of fiscal year 2021, which saw the endowment soar to $42.3 billion — a 40.2 percent return. The University has already announced several spending commitments made possible by last year’s gains, notably the creation of funds totalling $250 million for Yale’s medical, nursing and public health schools, increases in financial aid and the addition of 45 new faculty positions in the School of Engineering and Applied Science and the Faculty of Arts and Sciences.
“The endowment is growing because of the investment return from last year, and the other area that is growing relatively fast is the clinical revenue,” Murphy said. “The other big thing that’s going on this year is COVID, the finances of the University have been impacted. We’re hoping that those revenues will be higher than they have been during this year and last year.”
While data is not yet available for fiscal year 2022, Yale reported an operational surplus of $276 million within an overall $4.275 billion budget for fiscal year 2021.
Budget Approval Process
In the fall, the individual schools’ and units’ “five-year long-range” plans were presented to Yale’s Budget Advisory Group, which includes six tenured faculty members in addition to Murphy, Senior Vice President of Operations Jack Callahan ’80 and other senior administrators. In February 2022, the schools and administrative units then submitted their budget proposals for fiscal year 2023 for consideration by University Provost Scott Strobel and the Budget Advisory Group.
Murphy explained that, for budget purposes, schools and units are assigned to one of two categories: self-supporting schools or units and centrally supported schools or units. Self-supported schools are responsible for generating all of their own revenue and do not depend on the central University — with funds allocated by the President and Provost — for funding. These schools and units have more independence in deciding where money is spent, he said. Centrally supported schools, meanwhile, rely on the President and Provost for some level of funding, and they request this funding as part of the annual budget process.
“The Budget Advisory Group [is] listening to understand what the priorities are of the different schools and units and … opportunities to invest in new areas or areas they might want to strengthen,” Murphy said. “They’re trying to prioritize the requests, because we always get more requests than we can say yes to.”
After the proposals have been reviewed by the Budget Advisory Group, the Provost, Chief Operating Officer and Chief Financial Officer then recommend the budget to University President Peter Salovey, who requests approval from the Board of Trustees, or Yale Corporation. The board will review and approve the budget at the June 2022 meeting.
“The Board of Trustees are all fiduciaries, and as fiduciaries, we have a legal obligation to oversee the operation of the University,” current trustee Bill Kennard LAW ’81 said. “Our job is to work closely with the administration to make sure that the financial resources that the University has are spent in furtherance of the overall long-term mission of the University.”
Although the official budget for fiscal year 2023 has not yet been approved by the board, University officials have recently unveiled a slew of spending commitments.
For one, the University announced in February that the School of Public Health would become independent and that $250 million in endowment funds would be allocated for the School of Medicine, School of Nursing and School of Public Health. During that same week, officials also announced several investments into the University’s science and engineering programs, which include the addition of 45 faculty positions as well as new construction and renovation projects to take place over the next 10 years.
Last fall, Yale also unveiled an expansion of the financial aid program, which included an elimination of the student income contribution. Officials shared that the University would invest $3 million to support this initiative. Around the same time, Yale also announced a $52 million increase in Yale’s voluntary contribution to the City of New Haven. This amounts to an extra $10 million for the next five years and an extra $2 million in the sixth year.
In a typical year, personnel costs make up the largest percentage of the University’s operating expenses. For example, in Fiscal Year 2022, salaries and wages along with employee benefits represented 38 percent and 13 percent of operating expenses, respectively. Together, the two categories contributed $2.94 billion to operating expenses net of internal revenue, which totalled $4.6 billion. Other categories that fall under operating expenses include depreciation, amortization, interest and other expenses such as services, materials and supplies.
In addition to the operating budget, a separate category of Yale’s spending is grouped under the capital budget – which focuses on renovating and maintaining existing facilities along with building new ones, according to Murphy. In Fiscal Year 2022 capital spending totalled $509 million.
Sources of Revenue
During fiscal year 2022, Yale saw total external revenue of $4.76 billion, according to the University’s 2022 budget book. During that year, endowment income was the largest contributor, adding $1.57 billion to the total. Medical services were the second highest, contributing $1.37 billion. Tuition, room and board also provided $453 million in net income. Other categories of income include current use gifts and grant and contract income.
Murphy explained that two areas of growth in revenue are endowment income and clinical revenue from medical services.
Yale’s endowment income is determined by a smoothing rule, which aims to protect Yale from market volatility. The rule applies the targeted spending rate of 5.25 percent to the endowment’s year-end value from two years ago. Twenty percent of that amount is added to 80 percent of the total amount spent in the most recent fiscal year to determine the amount that Yale will spend out of its endowment. The spending amount is then adjusted for inflation and constrained so that the overall rate is at least 4.5 percent, but no more than 6 percent of the Endowment’s inflation-adjusted market value two years prior.
As such, calculations for the 2023 fiscal year’s budget will use Yale’s endowment value from the end of the 2021 fiscal year: $40.2 billion.
“The work of the investment office over the years has been a huge compliment to the school’s efforts to run a modest budget surplus and to the generous support from alumni and friends,” former Dean of the Yale School of Management Ted Snyder wrote to the News.
Murphy added that clinical revenue — revenue from the Yale School of Medicine — is growing because Yale is seeing more patients and expanding into new areas with Yale New Haven Hospital and its affiliated hospitals.
In addition to the endowment income and clinical income, Murphy explained that COVID-19 will continue to play a role in determining future revenue.
“The other big thing that’s going on this year is COVID: the finances of the University have been impacted,” Murphy said. “Some revenue sources have been depressed because of not being able to do things in person. So, for instance, we haven’t been able to have performances and athletic events with full capacity crowds. That’s changing, we certainly hope it’s going to stay that way.”
Last month, Yale also announced a four percent tuition hike, increasing the Yale College term bill from $77,750 to $80,700. It remains unclear how much this will affect overall University revenues.