Yale Bulletin and Calendar

January 11, 2008|Volume 36, Number 14

University is increasing
payout from endowment

Yale will increase its endowment payout by more than one-third in the upcoming fiscal year, President Richard C. Levin announced.

The estimated payout from the University’s endowment will total $1.15 billion in 2008-2009, an increase of 37% above the $843 million in funding from the endowment in Yale’s current fiscal year.

“Exceptionally strong investment returns in recent years have led to a lower than anticipated payout rate from the endowment under our current policy,” Levin said. “The prudent policy revision we are making will increase spending from the endowment to benefit students and researchers today while continuing to ensure that the endowment’s capacity to support future generations of students is undiminished.”

Yale’s top priorities for the additional revenue generated by the endowment policy change include increasing student financial aid, expanding access to Yale’s resources and strengthening scientific research that leads to benefits for all humanity, Levin said.

Access to Yale will be increased through a number of initiatives. First, there will be additional financial aid for students, support for efforts to recruit students of modest means for college and, possibly, an expansion of the size of Yale’s undergraduate student body. Levin noted that the University is scheduled later this month to announce a plan to increase dramatically financial aid for Yale College students.

In addition, Yale will make more of its intellectual treasury available without charge to the public. For example, Yale is embarking on efforts to digitize its collections in formats that make them readily available to the public. Yale recently launched Open Yale Courses, which placed the full content of a group of popular undergraduate courses online for free, and will be expanding ways that individuals around the country and the world can use the Internet to take advantage of Yale lectures and resources.

Yale is actively considering expansion of the size of its undergraduate student body from 5,300 to about 6,000 by building two new residential colleges. A decision on whether to expand is expected by the summer.

As part of Yale’s contribution to the advancement of knowledge, the University is planning a major expansion of its capabilities in the biomedical sciences and the establishment of several research institutes as a consequence of its recent acquisition of the 136-acre campus that it purchased in October from the Bayer Pharmaceutical Company, located in West Haven, seven miles from Yale’s main campus. By providing additional money to support research, Yale faculty will be better equipped to pursue the innovations necessary for groundbreaking research that will lead to new treatments and cures for disease, said Levin. The increased funding made available by the new payout policy will be invested to strengthen Yale’s contribution to the advancement of science on its central campus, as well as its new campus.

The endowment, which totaled $22.5 billion on June 30, 2007, provided $843 million of support to the University for the 2007-2008 fiscal year. Funds in the endowment pool currently receive payouts of 3.8% of their market values. Yale’s endowment aggregates gifts to the University that are invested to produce regular income to support a variety of purposes, including financial aid for students, support for professorships and funding for scholarly research. A portion of the investment earnings is paid out each year, while the remaining earnings are reinvested to ensure that a gift’s principal grows with inflation and that a donor’s purpose can be carried out in perpetuity.

The history of Yale’s endowment spending policy includes an increase in the targeted payout rate from 4.5% to 4.75% in 1992, an increase to 5% in 1995 and an increase to the current rate of 5.25% in 2004. The difference between the targeted endowment payout rate and the actual payout rate is due to a “smoothing rule,” first suggested by the late Nobel Prize-winning economist and Yale Sterling Professor James Tobin, which prevents wide fluctuations in annual endowment spending based on changing investment returns. The smoothing rule allows the University to budget relatively stable funding levels for educational and research programs from one year to the next and to engage in long-term budgetary planning.

In the future, Yale’s endowment formula will be modified to place a floor of 4.5% on the expected payout rate and a ceiling of 6%.

“In managing Yale’s endowment we try to balance the need to support the current generation of scholars with the desire to preserve assets for future generations,” said David Swensen, Yale’s chief investment officer. “In boosting the distribution of resources for current consumption, we strike a better balance between the present and the future.”

The endowment is the single largest source of support for Yale’s budget. Its annual contribution to the operating budget has increased nearly fourfold in the past 10 years. It currently funds 37% of the University’s expenses and is projected to support more than 45% of the budget for the 2008-2009 fiscal year.

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