2012 - 2013: Yale University Finance Annual Financial Report

Yale University finished the year ending June 30, 2013, with continued excellence and impressive achievement in its core mission of teaching and research. With a strong balance sheet to support its future, Yale continues to adjust its operations to a new fiscal reality and the remaining effects of the endowment’s substantial drop in 2008-09. Highlights from the Year Perhaps the most significant highlight of the year was a transition in the institution’s leadership. Yale wished a hearty farewell to Richard Levin, its president for twenty years, and welcomed Peter Salovey–who had previously served as provost, dean of Yale College, and dean of the graduate school–as Yale’s 23rd president. Shortly thereafter, President Salovey named Benjamin Polak as Yale’s new provost, a central figure in setting the University’s academic and financial direction. In addition, the Yale Corporation, Yale’s governing board, named Margaret Marshall as senior fellow, the first woman to hold this important position. The leadership transition has been a smooth one, and the University has continued to move forward with excellence to advance, disseminate, and preserve knowledge. Among the other highlights for the year were a record nine Yale College students named as Rhodes Scholars and three faculty members named to the National Academy of Sciences. Yale opened its new Energy Sciences Institute, initiated renovations of the Sterling Chemistry Laboratory and the nave of the Sterling Memorial Library, and completed the breathtaking renovation of the Yale University Art Gallery. The campus was filled with other exciting accomplishments in teaching, research, and practice in the Faculty of Arts and Sciences, and the schools of Medicine, Law, Management, Forestry and Environmental Sciences, Divinity, Nursing, Drama, Music, Architecture, and Art. These accomplishments and many more were the result of our exceptional faculty, students, and staff as well as incredibly generous alumni and other benefactors. This generosity has continued into the 2013-14 fiscal year with President Salovey’s announcement of the largest gift in Yale University history, $250 million from Charles B. Johnson ’54, to build two new residential colleges and increase undergraduate enrollment by 15%–the first expansion of Yale College since 1969. For more information on this and other exciting news please visit news.yale.edu. Strong Balance Sheet Yale remains financially strong, blessed with a robust balance sheet thanks to the $20.8 billion Yale Endowment managed by the Investments Office led by David Swensen. In 2013, Yale’s balance sheet strengthened further, with net assets growing by $2.0 billion or 10% for the year, driven by a strong 12.5% endowment return as well as the repayment of $900 million in debt. From a balance sheet perspective, this was a terrific year. In addition to the obvious strength of the Yale Endowment, Yale’s balance sheet remained strong in two areas that might be less apparent. Universities spend the overwhelming majority of their financial resources on buildings and people. Overall, the condition of Yale’s buildings–including the signature residential colleges, its magnificent museums and libraries, and the many other academic and administrative buildings on campus–are in excellent shape, thanks to Yale’s established discipline of setting aside enough capital replacement funds each year in our operating budget for building renovations. This has allowed Yale, after a concerted two decade-long effort, to reach the point where its building stock is roughly in equilibrium. This is no small accomplishment. Deferred maintenance on buildings was a serious issue at Yale several decades ago, and, if unattended, it would have represented a hidden liability amounting to billions of dollars, albeit unrecorded on a public balance sheet. The fact that Yale no longer faces the type of deferred maintenance liability so common in higher education is now a hidden asset, but a real one. Regarding the cost of people working at Yale, our outstanding faculty and staff, most outlays, like salaries, wages and benefits, are funded as they are incurred. Cash is expended throughout the year as people are paid for their services to the University. However, like many other universities, we also have significant obligations for retirement plans with defined future pension benefits and support for retiree health care. The payments for these benefits will be made over long time frames (decades), so securing the funds to meet these future obligations requires ongoing and responsible stewardship. These types of liabilities have received a lot of press recently, particularly related to the challenges facing federal, state, and municipal governments. Yale has roughly $2 billion of liabilities associated with its retirement plans. We have been and remain committed to funding these plans at responsible levels. As with many organizations, Yale’s level of funding for its defined benefit plans for retirees (assets set aside as a percent of the outstanding liabilities) dropped considerably with the twin events of the stock market decline in 2008-09 and record-low interest rates. We have continued on a responsible path of contributing additional funds each year. This year, thanks to continued funding, strong investment returns, and rising interest rates, Yale’s overall funding levels improved by over $200 million. In short, Yale remains a place with ample resources to support its varied and important mission. Continued Repositioning of Operations With a balance sheet that remains strong and grew even stronger this year we are continuing the work to improve Yale’s operating results which were significantly impacted by the endowment’s decline in 2008-09. For the year ending June 30, 2013, Yale is reporting a small deficit ($39 million or about 1% of revenue). We are continuing to take actions to reposition Yale’s operations, adjusting expenses to match the drop in expected revenue resulting from the endowment’s decline in 2008-09. Yale has already made substantial adjustments in this regard. Five years ago we were projecting annual deficits for this point in time, absent any action, of $350 million. We have traveled much of the way, and the work to close the remaining gap is underway. Yale’s ongoing goal, challenge, and great opportunity is to align our resources to support an exciting and positive vision for the future of this wonderful place. With a new president at the helm, this is an opportune time to define what Yale’s vision will be. President Salovey has already begun to describe what he envisions as a “more unified, accessible, innovative, and altogether excellent Yale.” A balanced budget is an essential means to this vital end, including providing resources to invest in new areas of exploration and innovation that are the lifeblood of a major research university. Yale’s decision in the wake of the endowment decline was to neither over- nor under-react to what was an unprecedented and sudden fall. Yale, excluding its medical school, is more reliant on endowment income than nearly any other major research university, and thus the impacts felt at Yale were significant. Our approach was to adjust to the decline over a multi-year period in order to shield the core activities of teaching and research as much as possible from the downturn. We delayed many new programs imagined but did not eliminate existing ones, and we continued to expand research and invest in clinical activities because of great opportunities for Yale’s exceptional scientists and clinicians. Five years after the endowment’s decline, Yale has ample resources to carry out its mission with excellence for years to come, and we are identifying ways to reposition the costs of operating Yale in line with expected revenue growth. We are well along the way and are heartened by the outstanding character, intellect, and collaboration present on campus among faculty and staff that will be essential to making this happen. This is an important challenge to address, but one that with a handful of choices–in support of a positive and exciting vision–is readily achievable at Yale. I look forward to reporting our progress in future years, and I remain confident Yale will emerge an even stronger place that continues to educate exceptionally talented men and women from across the nation and around the world for leadership in scholarship and society.

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