Surviving a Pandemic at Yale Endowment

University President Peter Salovey wrote about the endowment in a letter to the Yale community that was published this week.

We are fortunate to have a large, well-managed endowment, which mostly is restricted to support various aspects of the university’s core mission — from financial aid, to faculty salaries, to research and scholarship, to student activities. This year, the endowment supplies more than $1.4 billion of the university’s $4.3 billion budget. Because the endowment’s value will likely decrease, the amount available from the endowment to spend on the activities of the university will be lower than originally anticipated. This gap will affect nearly every school and program.

In recent days, and as in the previous financial crisis, I have been asked why Yale cannot simply spend more from its endowment. After all, isn’t this a time of true emergency? The simple answer is that the endowment is neither a savings account nor a “rainy-day fund,” but rather a collection of gifts made to the university over its lifetime, usually with restrictions on how the earnings from those invested gifts can be spent and with requirements that they support programs both today and in perpetuity.

Yale’s policy for spending from the endowment does mitigate the immediate effects of a financial disruption. When the value of the endowment drops, we spend a greater percentage of the endowment’s value than when the endowment’s value is rising. This “smoothing” component of the policy has proven over time to be a very effective way to blunt the immediate shock of a drop in the endowment on our budget. Nonetheless, when endowment investment returns are smaller than originally anticipated, our spending over time must decrease.

Our spending policy seeks to balance two objectives: to provide a steady flow of funding for current operations, and to preserve purchasing power for future generations. Over the course of every five years, we spend about one-quarter of the value of the endowment. This is as much as we can responsibly spend without unfairly taking from those who will come after us. The strength we enjoy today derives from the generosity and care of those who came before us, and we have similar obligations to the future students, faculty, and staff of this university.

Yale in the months ahead

Yale may have the resources to survive this pandemic but other schools are not so lucky.

In mid-March, Moody’s Investors Service downgraded the outlook for higher education from stable to negative, predicting that institutions with strong endowments and cash flow, like Harvard or Stanford, would weather the virus, while smaller ones would not.

But even wealthy universities have begun announcing austerity measures. Robert Zimmer, president of the University of Chicago, said in an April 7 email to the staff that to buffer its losses, the university would freeze salaries, slow academic hiring, suspend discretionary spending and look for other budget cuts. The University of Pennsylvania announced similar measures, including a hiring freeze and a pause in new capital projects, on Monday.

“I think it’s a greater systemic shock” than either the financial crisis of 2008 or the terrorist attacks of 2001, said Susan Fitzgerald, a Moody’s analyst. “We don’t know how long it’s going to go on or the multiple impacts.”

After Coronavirus, Colleges Worry: Will Students Come Back?, The New York Times

Public clock on the High Street bridge at Yale.
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Post by Marcelino Pantoja