We write today to provide the customary annual update on the university’s finances. In the fiscal year ending June 30, 2016, Yale’s budget was “in the black” for the third year in a row. This is an achievement that reflects incredibly hard work and a spirit of cooperation by colleagues across the university. And so, we begin with two heartfelt words: thank you.
Many of you will already be familiar with the numbers that have brought us to our current state of financial equilibrium. The outstanding work of the Investments Office, under “endowment guru” David Swensen, led to a 3.4 percent growth in Yale’s endowment in a year when many of our peers reported negative returns. We had one of the strongest fundraising years on record—the second-highest totals outside of a capital campaign. And our ongoing efforts to reduce administrative costs have yielded innovation and savings across the university.
Our annual operating results for the university show a surplus of $37 million for last year, which is slightly ahead of the previous fiscal year. Most of this surplus comes from the School of Medicine and some of the professional schools, while the central campus budget is almost exactly balanced. On a total budget of $3.5 billion in revenue these results are an indication that our budget is in good shape but tight—meaning that to invest in new areas we will need to find new sources of funding. We have come a long way since the economic downturn of 2008-09, but we still have work to do if we are to move forward on the academic priorities and other initiatives that will create an ever more excellent Yale.
What are the key budgetary issues for us to focus on now? First, our target endowment spending rate of 5.25 percent depletes roughly one-quarter of the value of the endowment every five years. This means that just to prevent our available resources from shrinking, we must replace this one-quarter of the total value and make up for inflation over any five-year period. Because of the great work of our Investments Office, we have been managing to do so, but we cannot depend on this always being possible. The past year’s endowment return, a remarkable achievement in relative terms, was nevertheless almost 5 percent below what would be needed simply to keep up with spending and inflation. It will become increasingly difficult, if the economy continues to grow slowly or tightens further, to achieve the kind of investment results necessary to keep our costs from cutting into the endowment’s overall value.
We also continue to face substantial challenges in funding retiree health care and pensions for our employees. This is an enormously important obligation, and we must plan carefully in order to provide as we have promised for colleagues who have devoted their lives to working for the university. These retirement benefits amount to $75 million in the current year’s budget, and we still face significant deficits and the resulting escalation in fringe benefit rates charged to schools, units, programs, and projects around the university. These expenditures are a vital part of our commitment to a strong university community. But the costs do pose challenges for Yale—as they do for many institutions—in our current economy.
A budget without deficits is a fine position from which to start, but we also need room to grow. There are many important new things we want to do—goals we share for making our university the best possible version of itself. We have ambitious plans to invest in world-class science at Yale, to make our outstanding arts programs even stronger, to create new connections among our iconic humanities departments, and to bring Yale’s social science expertise to bear on the great issues of our era. We are unflagging in our commitment to make a Yale education even more accessible—not just in the college but across all of our schools.
Finally, we know that the costs of education are rising everywhere. This will remain true for the foreseeable future. Therefore, we must always be attentive to stewarding our resources not only for the benefit of those currently on our campus but also for the generations who follow. For all of these reasons, we must continue to make space in our budget through thoughtful decision-making, prioritization, and innovative cost-saving measures.
The university’s strengthening fiscal state is a testament to all that we, working together, can achieve. As always, we welcome your ideas for economizing, innovating, and making this great institution even better. Thank you for your partnership and your enduring dedication to Yale.