Budget Plans for the Coming Year
Date: December 21, 2006
To: Members of the Yale Community
From: Andrew D. Hamilton, Provost
Shauna King, Vice President, Finance & Administration
Re: Budget Plans for the Coming Year
Dear Colleagues,
As the fall semester winds down and the holidays approach, the thoughts of some of you lean toward family gatherings, others to trips to snow or sunshine, while ours inevitably turn to the budget. This fall, we embarked on the process of developing the University’s 2007-08 budget with a new Vice President for Finance and Administration and a renewed sense of partnership between the Offices of the Provost and Vice President. Working together with the University Budget Committee and with faculty and staff from across campus, we have sought ways to achieve a balanced budget while delivering improved services in a cost-efficient way. We take this opportunity before the holiday break to update you about the general status of the University’s finances, and about some of our important goals and priorities as we plan next year’s budget.
On the whole, the University’s financial situation is very healthy. In the year ended June 30, 2006, we achieved our revenue targets in almost every category. Our endowment finished strong, at more than $18 billion in value. Our expenses during 2005-06 were mostly in line with the budget, with the exception of utilities costs, which were even higher than the increases we planned, and health care costs, which are trending higher than anticipated. The University therefore finished the year with a balanced General Appropriations budget and added $40 million to balances in restricted endowment income and current use gift accounts, many of which are managed within departments.
As we plan for the 2007-08 budget, we must again look toward all funding sources, including balances in reserves and restricted fund accounts. As the following chart shows, endowment has become the single largest source of revenue for the University, and next year will constitute approximately one-third of total revenue, compared to 18% a decade earlier. Furthermore, the gap between the growth rate of endowment spending and the growth rates of our other revenue sources has widened.
The growth of endowment income relative to other revenue sources has two important implications for our budget planning. On the one hand, the growth of endowment-funded programs can place increasing demands on administrative support staff, non-salary expenses, and especially space, all of which have historically been funded from General Appropriations. Second, the growing imbalance between restricted and unrestricted resources creates the risk of a corresponding imbalance in the University’s programs, in ways that challenge our academic needs and priorities. These are difficult issues, and will require that we work closely with individual departments to achieve the broad programmatic goals that we all share. As we did in the 2006-07 budget process, we need to determine the total needs of a department’s programs and the full range of funding sources to support those programs. We will first look at the amount of support that might be available from restricted and unrestricted funds managed by departments, and insure that they are effectively used to further the departments’ goals, while remaining consistent with donor intent. The amount of General Appropriations funds allocated to departments will be based largely on this “all funds” approach to budgeting.
Looking forward to the fiscal year that begins in July 2007, we must focus not just on supporting current programs but also on funding important institutional priorities. We continue to increase our investment in undergraduate financial aid through support for two programs -- increased aid for students from low-income families and International Summer Awards. We also continue the investments begun in 2006 to increase the diversity of our faculty and staff and improve childcare. We plan to introduce several important initiatives in our information technology infrastructure and support, particularly in academic media and technology. We must make major investments in our financial and administrative systems and processes, to bring them into alignment with our objective of world class support of our teaching and research programs. These improvements will focus particularly on the area of grants management and financial compliance, where we seek to upgrade our support for these critical activities. Finally, through the capital replacement charge, we are increasing our operating budget contribution to the ongoing capital replacement of our campus as we fund the cost of current consumption of our buildings.
In addition to the investments in institutional initiatives, we must respond to factors in our external environment that influence our costs and revenue. The three largest are utilities costs, health care costs, and the interest rates we pay on our debt. Utility rates remain a concern; however, we have recently adopted a hedging strategy for fuel costs that should result in little unplanned growth. The growth in health care costs continues to exceed our earlier assumptions, and we have increased our budget projections accordingly. On the other hand, interest rate increases have moderated and we don’t expect large movements in these costs.
On the revenue side, the fastest growing component continues to be endowment income, as discussed above. Another major source of revenue, and our primary source of unrestricted funds, is tuition. The University has increased tuition rates for Yale College
by more than inflation for the last few years, which has helped to fund investments that have been made in Yale College programs, financial aid, and the residential colleges. We need to consider carefully the impact of higher education costs on families as we set tuition rates in the future.
The third major source of revenue is indirect costs on sponsored research that help to fund the administrative and facilities costs associated with the research mission. Tight federal budgets are likely to result in slower growth in the indirect cost recoveries, so we must plan accordingly.
On the expense side, we must continue to pay competitive salaries to faculty and staff in order to be able to recruit and retain excellence. As in recent years, we are planning a flat non-salary budget. We have found that most units have been able to absorb the moderate inflationary increases in their non-salary costs by offsetting them against savings from other items, or funding them from sources other than General Appropriations. By capturing these savings, we have been able to allocate incremental funding for our priorities.
We look forward to continuing our work with the University community to strengthen our services, to improve our infrastructure, to exploit effectively all of our resources, and most importantly, to maintain Yale as a preeminent institution of higher education and scholarship. We can take collective pride in what we have accomplished and look forward with optimism toward 2007-08 and beyond.
With best wishes for the holidays,
Andrew D. Hamilton
Provost
Shauna King
Vice President, Finance & Administration
