Financial Update

We are writing to update you on the University’s financial situation and the context in which schools and departments will be developing their budget proposals for the academic year 2012-13 (Fiscal Year 2013). As you all know, the world economy, and Yale’s endowment along with it, experienced a tremendous shock three years ago. The U.S. economy continues to suffer from high unemployment, sluggish growth, and considerable uncertainty, and Europe is facing another potential financial crisis.

Thanks to the determined effort and creativity demonstrated by all of you, we substantially reduced the $350 million gap between our revenue and expenses caused by the drop in the endowment’s value.  Despite our very considerable progress, as we look forward to Fiscal Year 2013 we project a continuing gap between our revenues and expenses. The reason for this deficit is straightforward and due to a small number of factors.  

First, certain categories of expenses – notably utilities and the health care benefits provided to employees – have grown and are projected to grow at rates well in excess of inflation.  Without remedial action to curb the growth of our spending, total expenses would grow by 6% next year.  Second, on the revenue side, just as our spending rule cushioned the impact of the 2008-09 drop in the value of our endowment, the same rule will spread over several years the positive impact of last year’s 21.9% endowment return, a rate of return far in excess of what we are likely to achieve in this year’s much more turbulent financial markets.  Thus, even with last year’s outstanding endowment performance, our total unrestricted revenues, prior to budget actions, are projected to grow next year by only 2.6%.  Finally, the current-year budget is balanced in part through the use of reserve balances, the equivalent of spending from a savings account to meet current-year needs. 

For these reasons, Fiscal Year 2013 will be challenging. We are confident, however, that we can put together a balanced budget that includes salary and wage increases and avoids the deep across-the-board cost reductions we have seen in prior years.  We will, however, ask some units to make targeted reductions based on the normal evolution of programs, the availability of alternate funding sources, and the ongoing need to identify administrative efficiencies.

A balanced budget is a necessary target for the near term, but it is not enough to secure a vibrant future for Yale.  In order to make room for academic initiatives and to advance some of the construction projects frozen in the crash of 2008-09, we will need to free up or find new resources. This year’s budget process will close the Fiscal Year 2013 gap, and give us time to reflect on the future priorities for the University and the best approach for funding them. Over the coming months, and extending into next fall, we will be working with deans, directors, faculty, and staff to identify the most important priorities for the future and how we might find the resources to advance them. As always, we would welcome your thoughts about key priorities and opportunities to achieve our objectives at lower cost.  We encourage you to e-mail us your suggestions at provost@yale.edu.

In closing we extend our heartfelt gratitude for all you do to make Yale a great institution.