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"It is important to recognize that $17 billion is still a very large endowment"

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December 16, 2008
To: The Faculty and Staff of Yale University
From: Richard C. Levin
I know that all of you are concerned about the effect of current economic conditions on the University, and I recognize that these are trying and uncertain times for all of us. The precipitous decline in housing prices and stock market values has had consequences for many of us personally, and, naturally, for Yale as an institution. The officers and I have spent the last six weeks analyzing the implications of the downturn for Yale, and last weekend we recommended a course of action to the Yale Corporation. I write now to describe how we have been affected and how we will respond. By acting thoughtfully and strategically, I am confident that we can weather this storm while continuing to advance our most important objectives, albeit at a slower pace.

Despite the downturn in the economy, it is important to keep in
perspective that the University is much stronger than it was a decade
ago. Through your devoted efforts, we have made enormous progress.
We have renewed our facilities, expanded access by offering more
generous financial aid, and built a pre-eminent faculty across the
disciplines and professions. We have also provided expanded
international experiences for our students, advanced important
sustainability projects, and contributed to the renaissance of New
Haven. In all these efforts, we are supported and enabled by the
thousands of alumni and friends who have contributed to the Yale
Tomorrow campaign, and whose contributions have remained steady
through the first months of this economic downturn.
It is not our custom to announce the mid-year status of our endowment
portfolio, but these unusual circumstances call for a departure from
custom. Thanks to the outstanding work of David Swensen and his
colleagues in the Investments Office, our endowment has declined
significantly less than market indices. Taking into account only the
value of marketable securities, our investment return from July 1
through October 31 was a negative 13.4%
. But this does not tell the
whole story
. Our endowment is invested in both marketable securities
(chiefly stocks and bonds) and "illiquid" assets, such as real estate
and private equity investments that are not traded on a daily basis
and are difficult to value with precision. The value of our
marketable securities has declined further since October 31, and, even
earlier, we began to establish reserves in anticipation of substantial
decreases ("write-downs") in the value of our private equity and real
estate investments. As a consequence, our best estimate of the
endowment's value today is $17 billion, a decline of 25% since June
30, 2008
, and this is the value we are using for purposes of budget
planning. We are also assuming that the endowment will remain flat
during the 2009-10 academic year and resume growth after June 30,
2010, at the rate that we have historically used in our budget
It is important to recognize that $17 billion is still a very large
. This was where the endowment stood as recently as January
2006. Still, the 25% decline we have experienced has a very
significant impact on our operations because income from the endowment
supports 44% of the University's annual expense base of $2.7 billion.
Fortunately, our endowment spending policy spreads the effect of
market changes over several years, allowing us to respond gradually.
But the ultimate consequence of the market decline is still
substantial, causing an annual budget shortfall on the order of $100
million next year (2009-10) and growing to over $300 million by
2013-14. The question before us is this: how much of this pattern of
projected future budget deficits should we seek to eliminate by taking
action now?
Of course, we have no crystal ball. We need to balance the benefits
and costs of acting now against the benefits and costs of postponing
action. Markets have been extremely volatile, and the endowment could
do better or worse than we are forecasting. Because of this very high
degree of uncertainty, it is important that we not overreact. Thus,
we deliberately will not reduce our budget immediately to close the
entire gap created by the assumed 25% decline in our endowment.
Instead, in preparing our budget for the 2009-10 academic year, we
will seek to achieve half to two-thirds of the reductions required to
close the gap now forecast for the years ahead. If markets rebound
significantly, we would need to make no further adjustments. If
markets remain flat or decline further, we will need to undertake a
second round of actions next year.
In reflecting these past few weeks on budget scenarios, I have had as
my principal goals supporting the faculty and staff who are here,
ensuring access for the most talented students, and remaining a good
citizen of New Haven. To achieve these goals, certain activities will
be protected as we reduce overall expenditures. Three in particular
deserve mention.
First, we will maintain our commitment to the improvements in
financial aid for students in Yale College announced last year. These
policies, which offer greatly improved support to low and middle
income families, will be especially welcome this year as families
experience economic hardship. They are absolutely necessary to ensure
that access to Yale remains open to the most promising applicants,
regardless of their families' financial circumstances. Our strong
financial aid program in the Graduate School also will be maintained,
and I will encourage the deans of the professional schools to make
every effort to maintain their financial aid budgets in the coming
Second, we will continue to recruit faculty. Authorized searches in
the Faculty of Arts and Sciences will proceed, and the deans in each
of the professional schools will work with the Provost to strengthen
their faculties. We do not want to lose the momentum of recent years,
and we believe that it will be to Yale's long-run advantage to
continue to recruit outstanding and diverse faculty. This said, we
will need to be judicious in authorizing new positions and filling
vacancies, and departments will have to make a strong case for
searches that are not yet authorized.
Third, although we will proceed at a slower pace, we will continue to
develop plans and initiate programs on the West Campus. Because the
facilities are already in place and we face no significant capital
costs, we should not miss the opportunity to strengthen permanently
and substantially Yale's capacity for path-breaking research in the
sciences, engineering, and medicine. Nor should we forego the
opportunity afforded by the West Campus to map out innovative uses of
our library and museum collections that will support Yale's excellence
in the arts and humanities.
Even closing half to two-thirds of the budget gap that we anticipate
over the next few years has consequences that I wish we could avoid.
But if we fail to make significant adjustments now, we would
inevitably need deeper cuts later. In recent years, we have been in
the fortunate position of being able to pursue many new ideas and
exciting initiatives. Now we will have to make harder choices. I am
confident that faculty and staff throughout the University will rally
to the challenge as we make the following adjustments:
1. Effective immediately, all postings of new positions must receive
prior approval. In the case of faculty, approval must be sought from
the Provost or relevant deputy/associate provost. In the case of
staff, positions must be approved by an officer of the university or a
deputy/associate provost. In addition, departments, schools, and
units should review all open positions, including those currently
posted, with their responsible officer or provost. For those staff
positions that are authorized, qualified internal candidates will be
given priority.
2. We will restrain the growth of salaries. For the 2009-10 academic
year, faculty and M&P staff with salaries below $75,000 will be
eligible for merit increases of up to 2%. Merit increases for faculty
and staff who earn over $75,000 will be capped at $1,500. Employees
represented by labor unions will receive the increases scheduled for
the final year of their contracts.
3. We will reduce 2009-10 budgets by an amount equal to 5% of the
salaries and benefits of all non-faculty staff. We believe that we
can accomplish this reduction largely through attrition in all
categories of staff: managerial, professional, clerical, technical,
service, and maintenance. It is clearly of the utmost importance that
this process be handled thoughtfully and carefully. When we undertook
a 5% staff reduction five years ago, we achieved the overwhelming
majority of our goal by retirements, departures, and leaving vacancies
4. We will also need to reduce budgets for all non-salary and wage
expenses by 5% for 2009-10 and by an additional 5% the following year.
I know that this reduction will be difficult for many units, because
we have had no increases in this category for the past several years.
The challenge will be to find less critical expenses that can be
eliminated. For example, we will find ways to reduce expenditures on
outside consultants. Reducing travel, consuming less paper, and
decreasing energy use will also help us achieve our sustainability
goals. We want to continue to provide training opportunities for
staff, but we will save money by conducting more of these programs on
5. All new buildings and renovation projects currently under
construction will continue until completion. But we will not be able
to issue as much debt for construction projects as we had anticipated
in our multi-year capital budget. Consequently, with the exception of
essential utilities projects and the renovation of Morse and Ezra
Stiles Colleges, we will defer the initiation of construction (both
new buildings and renovations) until the conditions in debt markets
permit going forward or additional gift funding can be secured. This
means, concretely, that the Yale Biology Building will be delayed for
one year, while the construction of the new School of Management
campus, the second phase of the renovation of the Yale University Art
Gallery, the renovation of Hendrie Hall, and the move of Dwight Hall
to a renovated 143 Elm Street will not begin until funding is secured
or market conditions improve. Meanwhile, we will move forward with
design work on these and other pending projects. We will also
continue both design and fundraising for the new residential colleges
with the hope that we can keep to the current schedule, but
postponement may become necessary. I know these delays will be
disappointing to those schools and departments that have been awaiting
facility improvements, and it is a great disappointment to me. I want
to underscore that we are not cancelling any projects that have been
approved; we are simply delaying the initiation of construction.
As I mentioned earlier, the actions we are taking at this point,
though challenging, will not fully compensate for the decline in the
value of the endowment that we have experienced to date. With the
exception of the Great Depression, all market downturns of the past
century have been followed by at least a partial rebound within one to
two years. If such a rebound occurs, we may not need to undertake
further budget reductions, but, if such a rebound does not occur, we
will need to take additional action. I hope you agree with our
decision to avoid a possible overreaction at this time.
Yale University today is an institution of which we can all be
justifiably proud. We will manage through this downturn in a way that
will preserve our great strengths and seize the most important
opportunities for the future, so that Yale can continue to serve the
nation and the world by advancing the frontiers of knowledge and
educating the most talented and promising students for leadership and
I ask all of you to help. We need your assistance in identifying
within your own units and elsewhere opportunities for savings that
will not impair our ability to advance our most important missions.
If you have ideas for achieving our budget reduction targets, please
share them with your colleagues and supervisors. The officers would
also welcome any suggestions you would wish to make by e-mailing I know that I can count on you to respond to
the challenges ahead with renewed dedication and commitment.


Don't let the gate hit you on the way out. By John Phelan (Own work) [CC BY 3.0], via Wikimedia Commons

Harvard Endowment Still Sucks

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