Friday, September 11, 2009

Financial Woes at Yale

From: "Richard C. Levin" 
Date: September 10, 2009 12:31:22 PM PDT
To: Yale Alumni 
Subject: Yale President Levin Budget Update

Dear Alumni:

The Provost and I want you to have a copy of the letter we sent earlier this afternoon to faculty and staff providing the latest update on Yale’s response to the economic downturn.  You will see that we remain committed to our strong financial aid programs, as well as other University priorities, but we are seeking larger budget reductions.

With great appreciation for your ongoing support,

Sincerely yours,

Rick Levin
To:      The Faculty and Staff of Yale University

From:  Richard Levin and Peter Salovey

We write to apprise you of the University’s financial condition as we continue to work through the effects of the economic downturn.  We have been greatly impressed with the response of the Yale community.  Rather than wait to reduce expenditures until the current fiscal year began on July 1, many units achieved significant savings in the first half of this calendar year. Budget reductions were achieved with a spirit of cooperation and common purpose.

We explained in our messages to the community last December and February that we did not want to overreact to the downturn in financial markets by making reductions that might later prove unnecessary if markets recovered quickly.  Thus, the budget reductions we undertook eliminated most, but not all, of the deficits previously forecast for the years ahead. These forecasts assumed that the June 30, 2009, value of our endowment would be $17 billion.  Although the publicly traded portion of our endowment declined no further in value between December and June 30, we continued to incur losses in the value of our illiquid investments in private equity and real estate.  The precise final results for the 2008-09 fiscal year are still being compiled and will be announced later this month, but it is clear that we will report a June 30 value of the endowment of approximately $16 billion.  Only a small fraction of our endowment is invested in publicly traded securities, so the recent stock market rebound has not had a substantial effect on that number.  The bulk of our endowment remains invested in illiquid assets, which have not begun to recover their value.

Because we did not make a full adjustment to the initial decline in our endowment and because it has declined further since last December, we are now projecting a general appropriations deficit in the range of $150 million each year from 2010-11 through 2013-14.  Thanks to the work undertaken last year, these deficits are only half as large as the projections we faced last December, but they are still substantial and will require further budget adjustments.

Units of the University heavily dependent on endowment income will be especially affected. Because our spending rule spreads the impact of dramatic changes in the market value over time, the endowment payout for the current academic year declined only 6.7% from last year’s level.  But the payout will decline by approximately an additional 13% in 2010-11 and remain at that level for the next several years.  This estimate reflects our assumption that the endowment will remain flat during the current year and begin to grow after June 30, 2010, at the rate we have historically used in our budget modeling.

We will provide full details of the budget adjustments required for 2010-11 later in the year, but we want to alert you to the fact that another round of reductions will be necessary.  We also want to describe some of the actions we are undertaking now; other measures, still under consideration, will be outlined later.  We will not retreat from our important commitments to financial aid in Yale College and the Graduate School.  But with the exception of financial aid, no area of expenditure will be immune from close scrutiny.

As you know, construction projects that were already underway last December are being carried forward to completion.  Apart from the renovation of Morse and Ezra Stiles Colleges, urgently needed maintenance projects such as Harkness Tower, and essential cost-saving utilities projects, no major construction will proceed until funding is available from donor support or financial markets recover.  We have secured donor support to continue the design of the new residential colleges and to undertake site clearance, the first phase of which will occur this fall.  We also have secured full funding from donors for completing the renovation of the Yale University Art Gallery.  All other projects remain on hold.

Progress toward other important University priorities will be slowed as well. We will continue to recruit faculty to develop exciting new programs on the West Campus, because outstanding laboratory facilities are in place.  But we have set a pace that will trim our originally planned expenditures by more than 25% in the years immediately ahead.  We are also curbing our expenditure on the redesign and implementation of new administrative systems (the YaleNext project), by reducing the use of outside consultants, narrowing the scope, and slowing the pace of implementation.

Faculty recruitment will continue, but at a significantly reduced pace in the Faculty of Arts and Sciences, where more than 50 ladder faculty have been added over the past four years (an 8% increase) and about 100 ladder faculty members have been added over the past decade (a 17% increase).  As we move forward, we believe it would be imprudent to reduce the size of the faculty, only to increase it again to accommodate increased undergraduate enrollment when the new colleges open.  Some authorized searches and all new requests for searches to fill vacancies will be scrutinized carefully, however, and many will be deferred for a year or two.

Last winter we asked units to reduce both their staff and non-salary expenditures by 7.5% for the 2009-10 academic year, and we signaled that a further 5% reduction in non-salary expenditures would be called for in 2010-11.  To accelerate our movement toward budget balance, we are now asking units to achieve this additional 5% reduction in non-salary expenses during the current year.  We are counting on faculty, department managers, and others who control resources to curb nonessential expenditures on travel, entertainment, equipment, and supplies to the extent needed to achieve this target.

We are truly grateful for the support and cooperation that we have received in making these difficult adjustments.  We know that we can count on you in the year ahead to make tough choices among competing priorities, to identify non-essential activities that can be curtailed, and to seek ways to work across departmental lines to lower costs. We are attempting to negotiate these trying times without compromising the University’s commitment to maintaining the extraordinary quality and reputation of our teaching and research. Even as we defer some of our most important long-term investments, we will keep in focus our goals of maintaining the strength of Yale’s superb faculty, student body, and staff, and improving for everyone the experience of working in a community that contributes so much to the well-being of our city, the nation, and the world.


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