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STANDARD 9: FINANCIAL RESOURCES
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Description Process Operating Expenses Capital Spending Gifts & Bequests Appraisal/Projection Attachments
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DescriptionThe Yale Corporation retains ultimate fiduciary control of the University. Financial matters are addressed by several Corporation Committees, including the Finance Committee, which is responsible for monitoring financial performance and for planning and budgeting; the Audit Committee, which provides oversight of fiscal and accounting practice; and the Investment Committee, which supervises the management of the endowment and other investments. Broad assignment of responsibility can be found in the Yale Corporation Charter* and By-Laws*. The principal internal financial committee is the Budget Committee, which is chaired by the Provost, and on which serve a number of distinguished faculty plus key individuals in the Administration. The Budget Committee reviews the University’s long range plans and budgets, investigates matters of topical financial interest, and reviews key decisions such as increases in term bill and faculty and managerial salaries. The University's overall strategy is to coordinate its financial, physical, and human resources to meet its goal of sustained academic excellence. An organization chart depicting financial functions and relationships is shown as Attachment 1. Each of the four broad areas of financial activity shown in Attachment 1 is discussed below.
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Description Process Operating Expenses Capital Spending Gifts & Bequests Appraisal/Projection Attachments
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Process
The University’s financial statements? are audited annually by an external public accounting firm (presently PriceWaterhouseCoopers, LLP), which is retained annually by the Corporation Audit Committee. As an integral part of the audit, the external auditor issues a summary of the major internal control weaknesses and financial business risks identified during the course of the audit. This report is reviewed annually by the Corporation Audit Committee. The auditor also issues a separate letter, containing less significant observations of internal control weaknesses, which is reviewed by the University Audit Committee. The University also maintains an internal audit department that reports to the Vice President for Finance and Administration. That unit conducts audits of the University’s schools and departments to ensure compliance with University policies and the maintenance of an effective internal control environment. For internal control purposes, financial statements are prepared monthly and are distributed to central and departmental administrators throughout the University.
The University requires minimum funding levels to establish endowed funds. The Yale Corporation sets these funding minimums upon recommendation of the vice President for Development. Development officers work with donors to ensure that the gift’s purpose meets the donor’s wishes while also providing the necessary flexibility to allow successful fund management. A substantial number of gifts the University receives are in the form of charitable gift annuities, charitable remainder trusts or pooled income funds. The Vice President for Finance and Administration established guidelines for the acceptance of these gifts upon recommendation from the Offices of Planned Giving and Investments. These guidelines assure that such gifts have substantial value for the University and do not place other University assets at risk. Three standing committees review potential and existing restricted gifts. The Gift Implementation and Stewardship Committee, implemented in 1996 and chaired by the Provost and the Vice President for Development, now reviews existing gifts in terms of unexpended balances, unassigned named positions, or unclear or outdated purposes. The Provost’s Committee on Gift Review meets regularly to review issues that arise from the Stewardship Committee, discuss project allocation, recommend University priorities, and establish policies and procedures as necessary. The Corporation Committee on Development and Alumni Affairs established and monitors the practices and procedures of the Office of Development, reviews proposals from the other committees, and receives periodic reports showing donor, amount, and purpose for all new gifts that equal or exceed $5,000. Final authority to accept or reject gifts rests with the Corporation. Established University procedures ensure that faculty and administrators expend restricted gifts in accordance with the donor’s designation as to use, and provide recognition of and regular communication with donors. Development Office Staff assign designation codes and distribute a gift memo for each restricted gift. For endowed funds, the Office of Funds Management assigns an endowed fund number, establishes the fund and distributes to relevant faculty and staff an indenture documenting how the University is to spend the income from the fund. The University Recording Secretary reports to donors on the use of endowed funds. For example, in the case of endowed scholarship funds, donors receive a letter each year describing the student assigned to such fund. Donors of expendable gifts may receive recognition through membership in various associates programs and the University frequently includes the names of donors who support facilities renovation on commemorative plaques.
See Attachment 3 for a tabular summary of the following discussion.
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Description Process Operating Expenses Capital Spending Gifts & Bequests Appraisal/Projection Attachments
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Operating Expenses For the ten-year period ended June 30, 1998, Yale’s operating expenses grew at an average annual rate of 5.85 percent, reaching $1.07 billion in 1998. Expenses for salaries, wages, and fringe benefits (totaling $650.5 in 1998) represents the largest component of Yale’s operating expense base. During the past decade, salaries and wages increased at an average annual rate of 6.1 percent, as a result of normal contractual and merit pay increases, as well as the recruitment of new employees, particularly in the information technology area. The 1998 distribution of salaries by type of employee is shown in the following table:
Employee benefits contributed an additional $128.7 million of expenses in 1998, increasing only 2.3 percent during the year, a rate substantially lower than annual increases reported in the immediate preceding years. This declining growth rate reflects Yale’s cost containment measures with respect to its medical benefit plans and strong performance by assets invested on behalf of the Yale Staff Retirement Plan and Postretirement Benefit Plans. The University employs approximately 2,700 faculty, 2,900 managerial and professional staff, and 3,700 unionized clerical and technical and service and maintenance personnel. Staffing and benefit policies for unionized employee groups are governed by the terms of their respective collective bargaining agreements which expire in January, 2002. Expenses other than compensation and student aid include books, goods and services, utilities, interest expense, amortization of capital projects, and other expenses. Most of these have increased at reasonably modest rates over the last decade. The exception is interest and amortization, which has risen from $13.0 million in 1989 to $50.5 million in 1998, reflecting the increased investment in Yale’s capital program and the corresponding growth in borrowing.
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Description Process Operating Expenses Capital Spending Gifts & Bequests Appraisal/Projection Attachments
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Capital spending By the time of the last full accreditation in 1989, the University had already begun a major effort to renovate its facilities. The University expects to continue to expend more than $200 million per year for at least the next decade, continuing work in the residential colleges, the science facilities, the arts area, and the Medical School. The University has recently or nearly completed work on first phases of Payne Whitney Gymnasium and Sterling Memorial Library. More detail on this effort will be found in Standard Eight. The major sources of funding and/or financing for these projects are gifts and debt. The University has set gift targets for a number of projects as a hurdle to achieve before the project is undertaken. For example, $20 million in gifts is sought for each of the residential colleges (and has been raised for the first two). The University’s facility debt outstanding ($751 million as of 6/30/98; approximately 1.0 billion as of April 15, 1999) is roughly equivalent to that of its peer institutions and has received the highest rating from the rating agencies. Yale’s capacity to manage its debt compares favorably with the median for other large Aaa institutions (See Attachment 6). Total debt service for the University is expected to be about $57 million in the fiscal year ending 1999; and is projected to increase to about $70 million in the year 2000. It is expected to remain under 10 percent of the total University budget for the next decade, although it will reach 16 percent of the discretionary general appropriations budget. Debt service has been incorporated in the University’s long term projection, which is in balance. For internal budgeting and monitoring purposes the University uses interest and amortization costs distributed in a manner similar to that of a mortgage; for financial statement purposes, the University uses actual external interest paid and depreciation. In fiscal 1998, depreciation expense was $65 million and external interest expense $30 million.
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Description Process Operating Expenses Capital Spending Gifts & Bequests Appraisal/Projection Attachments
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Gifts and Bequests: Capital Campaign The University’s success in restoring its physical plant and increasing the value of its Endowment, as described in the preceding sections, was made possible in part through the capital campaign that commenced in 1992. The campaign concluded on 7/1/97, surpassing its target of $1.5 billion by raising $1.702 billion, of which $641.8 million was for programs and current use; $424.0 million was for facilities; and $636.8 was for endowment. The amount raised for facilities was a particularly strong achievement and raising funds for renovations remains one of the highest priorities. In addition, the Campaign sought to raise sustainable levels of yearly support by increasing annual cash gift revenues from $120 million to $200 million. Cash gift receipts for 1998 were $223 million.
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Description Process Operating Expenses Capital Spending Gifts & Bequests Appraisal/Projection Attachments
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Appraisal/ProjectionThe University enters the twenty-first century, and its own fourth century, in a strong financial position. As stated, the endowment on June 31, 1998 was worth more than twice its real value a decade earlier, and its contribution to the operating budget has grown significantly. Student demand for the class entering in the Fall of 1999 is at an all- time high. The University has just finished a successful development campaign. Yale has been able to minimize increases in term bill charges to students, increase financial aid benefits for both undergraduates and graduates, and maintain its dedication to a policy of need-blind admissions for undergraduates. The University is well into a facilities renovation campaign which has already completed major improvements to many of its most important buildings. The University’s financial prognosis is considered excellent by the financial and investment communities, and Yale continues to receive the highest (AAA/Aaa) ratings from the two major rating agencies. The University’s administration is stable, and its compensation to faculty remains competitive. All of this is encouraging. Over the next decade most of the University’s financial fundamentals should remain strong: student demand is expected to continue; the research program should remain competitive; alumni/alumnae should maintain their generosity; and many of our key buildings have been renovated and should provide decades of use. The University’s ten-year capital and operating budget is revised annually and serves as a template for the analysis of alternative futures. The operating budget model is differentiated by University segment, which allows the use of separate growth parameters for different elements of income, expense and sector of the University. The model in its base form projects a growing surplus over the ten-year period. At present the University sees these surpluses as protection against unforeseen events, such as a market downturn, rather than as an opportunity for expansion. For example, a 10 percent reduction in endowment market value would eliminate most of the surplus. There are several areas of risk which the University carefully scrutinizes. The University tracks and manages its growing debt burden and annual debt service costs, which remain below the point of concern usually considered to be 10 percent. Nevertheless, the level of debt raises two potential dangers: one is that it commits funds to a fixed stream of payments which cannot be changed even if the University should for some reason encounter fiscal difficulty. The other is that, to the extent interest payments are in variable form, the University is exposed to market fluctuations. With regard to the former, the University is and must continue simply to be aware of the fixed commitment of funds. With regard to the latter, the University is carefully monitoring its net interest rate exposure, and is fixing the cost of debt through swap transactions in the taxable bond market, the most cost-effective mechanism given the current shapes of the taxable and tax-exempt yield curves. A second area for risk management is the changing medical care environment. Reimbursement to medical providers is shrinking as insurers move toward an increasingly competitive service structure. The University has already responded to this change in environment in working to create a joint venture with Yale-New Haven Hospital. At present, medical services income continues to be robust and growing, although the 13 percent increase between 1997 and 1998 is unlikely to persist. The University has recently installed a new medical billing system to enhance its collection efficiency. With regard to the endowment, the current value of over $6 billion is of course subject to market fluctuations, and the University, like all investors, is not immune from market declines, although it has constructed its portfolio in a manner which it believes provides prudent diversification. In the short run, the University is protected by the spending rule, which limits the impact of market decline. In the longer term, the University believes that it has appropriately positioned itself. Finally, there are uncertainties associated with levels of federal grant activity. Although the federal research budget has been under increased pressure, the University continues to perform well in attracting its share of research dollars, and it believes that it will continue to do so. The largest component of such funding flows into the Medical School, which is soon to construct a major new research facility with the idea of adding technically sophisticated laboratory space both to support federal research and to continue to attract the best faculty. On the Central Campus, grant income has been declining, but it is a significantly smaller component of revenue, and although the University is seeking to reverse the trend, failure to do so should not pose a threat to economic stability. Consequently, Yale believes it is positioned to respond to most foreseeable negative financial events. Although it would prefer not to do so, the University could address operating problems through the reduction of certain budget lines such as the operating allocation to capital, or through the consumption of reserves such as unrestricted University funds functioning as endowment. The University strongly reiterates its goal of achieving and maintaining general equilibrium, defined as a state of balance within and among the University’s financial, physical, and academic resources, which it pursues, not as a goal in itself, but as a means of maintaining certain other principles of operation which include continuing indefinitely the policy of admission of undergraduates without regard to financial condition; maintaining the excellence of the University’s faculty and students in both the Professional Schools and the Faculty of Arts and Sciences; safeguarding the University’s collections; and continuing to strengthen ties with the City.
* Copies of items marked with an asterisk are included in the Appendices. As measured for internal budgeting purposes. These data will not appear in the University’s financial statements.
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Description Process Operating Expenses Capital Spending Gifts & Bequests Appraisal/Projection Attachments
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