Letter from President Levin regarding the budget
We are writing to share the objectives for the budget planning process for the 2011-12 academic year. We are pleased with the progress we have made over the past two years in addressing the operating budget consequences of the loss of $6.5 billion from the endowment during 2008-09. This has not been easy work, and we are grateful for the cooperative and creative ways in which so many of you have helped the University meet this challenge.
Yale remains strong academically and financially. In the last year we have recruited truly distinguished senior faculty and junior faculty with outstanding promise across all schools of the University. We educate the most talented and diverse students from around the world who choose Yale in part because we offer financial aid packages that are competitive with those available anywhere. And, to support our academic mission, we benefit from the tireless efforts of capable and dedicated staff at every level and in every area of the University.
Over the past two years we successfully addressed most of the $350 million budget challenge caused largely by the drop in the value of the endowment in 2008-09. Nonetheless, for 2011-12 we still must close a gap of $68 million, a significant amount but still considerably less than the reductions taken in either of the last two years. This shortfall is the result of two factors. First, part of the $350 million gap was covered last year by the use of $60 million of accumulated reserves and fund balances. This one-time infusion of cash, while extremely helpful in the short term, did not provide a long-term solution for the on-going budget deficits next year and in subsequent years. Second, Yale’s largest source of revenue, i.e., endowment income, is expected to be essentially flat for the next three years while some expense categories — such as the salaries and benefits of ongoing employees, student financial aid, and utilities — will grow. For both reasons, we must identify permanent reductions in expenses and increases in revenue to close the remaining gap this year and achieve a balanced budget that is sustainable over the long term. We are asking again for your cooperation in meeting this challenge.
To explain further, the University’s largest source of revenue is income from the endowment, which this year totals $986 million and covers over 35% of expenses University-wide. In those units that receive general appropriations of central University funds (i.e., units other than self-supporting professional schools and units supported entirely by restricted endowment, such as the Beinecke Library), endowment income covers almost 60% of expenses. Spendable income from the endowment will decline slightly in 2011-12, to $975 million, and it is projected to remain essentially flat for several more years. The slow growth in such a significant source of income is the primary explanation for the budget challenges we will face in the coming years. We were fortunate that the endowment spending “smoothing rule,” with its built-in lag, cushioned the University’s budget these last two years against the full force of the 24.6% endowment decline in 2008-09. But the same principle means that even though the market value of the endowment has begun to grow again (by 8.9% in 2009-10), the funds available for spending over the next three years will grow more slowly than the endowment.
Some members of our community have questioned whether adherence to our spending rule is in the best interest of the University. In weighing this question, we need to keep in mind two facts. First, over the long term the spending rule is designed to protect the University from erosion of the purchasing power of donors’ gifts. It has performed this function admirably. Second, were it not for the “smoothing” function of the spending rule, year-to-year fluctuations in the value of the endowment would make it extremely difficult to provide predictable support for ongoing programs. In 2008-09 we experienced the largest one-year decline in the endowment in the past 80 years. The smoothing rule protected us from making much more drastic reductions in spendable funds on the downside. It will likewise protect us from overspending, and thus violating our donors’ trust, on the upside.
This year’s budget process will continue the progress we have made in recent years to employ an all-funds approach to achieve a balanced budget. We must spend first, within the terms of the applicable donor restrictions, all available income from restricted funds before employing unrestricted endowment income or general appropriations. This approach also will help us practice better stewardship of our restricted funds, which were given to Yale with the understanding that we would spend the income they generate. We believe that a significant share of the $68 million shortfall in central funding can be recouped by conscientious use of restricted funds that have not yet been fully applied to support, on an ongoing basis, objectives that are fully consistent with donor restrictions.
With a more thorough application of all-funds budgeting, we will not be making University-wide across-the-board cuts in staffing or non-salary expenditures in 2011-12. Instead, we will ask non-academic units administered by the officers to meet specific reduction targets averaging about 5% of their total general appropriations of University funds. Academic units also will be asked to reduce the need for general appropriations either by using income from restricted funds or by reducing expenses. We will need cooperation from all parts of the University to create a balanced budget for 2011-12.
We are grateful for the work of all those who have stewardship responsibility for the University’s programs and finances. The budget gap that we have identified must be closed in a sustainable, ongoing way. This requires us to operate programs more efficiently, use all available funds to support core activities, reconsider programs that serve very few students, faculty, or staff, and otherwise find ways to reduce costs in schools and departments as well as in the central administration, which has borne 72% of the reductions made to date. We appreciate the exceptional effort and commitment of our ongoing staff in the face of these reductions.
We look forward to completing the work of establishing the stable financial base that is needed to ensure the vibrancy and excellence of this great University.