yale university financial report

Transcription

1 yale university financial report

2 Highlights Fiscal Years Five-Year Financial Overview ($ in millions) Operating Budget Bottom Line (see page 17) $ 14.5 ($14.5) $ --- $ --- $ --- Financial Position Highlights (see page 24): Total assets $27,711.6 $22,505.7 $19,772.4 $17,556.2 $16,741.3 Total liabilities 8, , , , ,006.6 Total net assets $19,498.3 $16,501.2 $13,975.3 $12,228.1 $11,734.7 Endowment: Net investments, at fair value $17,949.1 $15,091.0 $12,740.9 $11,048.9 $10,522.6 Total return on investments 22.9% 22.3% 19.4% 8.8% 0.7% Spending from Endowment 4.1% 4.5% 4.5% 4.5% 3.8% Facilities: Land, buildings and equipment, net of accumulated depreciation $2,486.9 $2,263.2 $2,095.2 $1,986.1 $1,853.2 Disbursements for building projects Debt: For facilities improvements $1,954.3 $1,576.9 $1,572.7 $1,543.9 $1,193.8 For student loans and other Statement of Activity Highlights (see page 25): Operating revenue $1,971.0 $1,835.6 $1,677.9 $1,553.7 $1,466.6 Operating expenses 1, , , , ,427.0 Increase in net assets from operating activities $7.4 $48.7 $2.0 $10.6 $39.6 Fiscal Years Five-Year Enrollment Statistics Student Fees: Yale College term bill $41,000 $38,850 $37,000 $35,370 $34,030 Freshmen Enrollment: Class of: '09 '08 '07 '06 '05 Freshmen applications 19,451 19,682 17,735 15,466 14,809 Freshmen admitted 1,880 1,958 2,014 2,009 2,038 Admissions rate 9.7% 9.9% 11.4% 13.0% 13.8% Freshmen enrollment 1,321 1,308 1,353 1,300 1,296 Yield 71.3% 68.1% 67.9% 65.6% 64.7% Total Enrollment: Yale College 5,380 5,281 5,308 5,307 5,270 Graduate and professional schools 6,000 5,971 5,933 5,853 5,762

3 Message from the Vice President for Finance and Administration This September, the University launched its $3 billion Yale Tomorrow capital campaign. Building upon the strong foundation made possible by current and past donors, the funds raised in this new campaign will literally create the future! This year s financial report focuses on the new capital campaign and how the University uses donations to improve academic programs, student learning experiences, infrastructure, and Endowment support to allow Yale to remain competitive and fulfill its mission of creating, disseminating, and preserving knowledge in an increasingly global environment. While we are excited by the potential of the campaign, it is also important for us to continuously look for ways to enhance, streamline and make more productive the operations of the University. In fiscal 2006, the University was able to keep expenses within the limits of available revenue, and closed the year with a net increase of $7 million in operating funds. The University continues to improve the accuracy and e ciency of all of its processes. In addition to the continued rollout of expense management systems, e-procurement, and online travel applications, the University completed the implementation of Yale s ebillepay system. This internet-based system allows students to receive, manage and pay their tuition and other bills electronically 24 hours a day, every day of the year. In other areas, Yale strengthened its oversight of workers compensation by implementing new controls and a new system to ensure better claims management and tracking. The University has engaged the leading supplier of electronic staffing solutions to enhance our staffing capabilities. New business processes and a new system to support this initiative will be fully implemented in fiscal The University also completed a plan to upgrade and simplify its core Oracle Financial applications. Endowment growth was very strong, with a 22.9% return on investments that resulted in increased net assets of $3.3 billion. The continued generosity of donors, combined with prudent management and strong investment returns, has allowed the University to continue to meet its ambitious current and long-term goals. One of the strategies to help maintain the University s competitiveness includes continued investment in the physical infrastructure, which helps attract faculty, support ground-breaking research, and provide students an environment to foster excellence and creativity. The University spent $265 million on facilities renovations and plans to spend more than $300 million a year over the next ten years to bring facilities up to modern standards and complete planned new state-of-the-art buildings supporting key initiatives across campus. The University was notified in June of 2006 that the federal government was initiating an investigation into our grant and contract financial practices. The University is cooperating with the investigation fully. In addition, we launched a comprehensive 100 day plan to identify and correct any potential issues with University practices in this important area. While we will be working on this for a while, already controls have been tightened, new and revised policies put in place, and a significant investment made to train business office personnel, lab personnel, and principal investigators to improve all aspects of financial accounting and controls for grants and contracts. Rules and regulations for grant activity continue to grow in complexity, but we are determined to be fully compliant and to become a model for best practices in this area. A new position has been created Associate Vice President for Research Administration and this unified leadership and organizational structure has already strengthened our capacity to meet federal requirements. I will continue to work personally in this critical area to ensure we have the appropriate infrastructure in place to administer this important activity in the most efficient and transparent manner. John Pepper retired from his position as Vice President for Finance and Administration this past January and I was appointed in June While John led Finance and Administration for only two years, he had a significant impact on the University, especially in the development of staff. We appreciate all of the good work John did for the University and we will continue the initiatives that he started, including the development of an improved relationship with the unions and the creation of a culture that promotes trust and open communications and the personal development of all Yale s employees. We also want to thank Yale s donors and friends for their continued support in making Yale the premier institution of teaching and research that it has become, and we take pride in our stewardship of Yale s financial and administrative operations. Shauna Ryan King Vice President for Finance and Administration

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5 yale university financial report Why Yale Tomorrow? Yale Tomorrow is a five-year, $3 billion campaign to build a Yale of permanently greater capacity for education and discovery. As President Levin said at the September launch, the campaign will complete the transformation of the Yale that was once a tiny college for the Connecticut colony into a truly global institution, serving not only America but the world. The fundraising efforts touch every aspect of life at Yale, with particular focus in four priority areas. At Yale College, curriculum innovations will ensure that Yale continues to be a true laboratory for leadership. In the sciences, Yale is investing in emerging areas such as nanotechnology and genomics that will have a profound effect on medicine and society. In the arts, where Yale is an acknowledged leader, new facilities and programs will nurture the next generation of cultural innovators. And in the global arena, Yale will educate students to enter a world that recognizes few boundaries or limitations. University-wide, the campaign will invest in financial aid, endowed professorships, state-of-theart laboratories, performance venues, the preservation and digitization of library collections, and other initiatives that are so vital to Yale s educational mission. With an $18 billion Endowment, why does Yale need to raise more money? Even Yale s most loyal supporters may ask why Yale is embarking on such an ambitious fundraising effort. Over the past twenty years, the University has realized superb returns on its investments, and the Endowment has been able to play an increasingly important role in funding vital operations. In fiscal 2007 it will contribute $676 million, about one-third of operating revenues. There is no question that the Endowment has enabled Yale to become one of the world s great research universities. It has helped fuel growth, been a major source of support for Yale College students, and allowed Yale to attract worldrenowned researchers and scholars to the faculty. The Increasing Role of the Endowment 100% 90% 80% 70% 60% 50% 40% 30% Chart for position only 20% 10% 0% Medical Services and Other Gifts, Grants, and Contracts Tuition, Room, and Board Endowment Income Because almost 75% of the Endowment is restricted, innovation requires new funding. Perhaps the most critical factor in the complex mosaic of University funding is that almost three-quarters of the separate funds that make up the Endowment are restricted by the binding designation of the original donors. No matter how well the existing Endowment performs, it is not sufficient to expand Yale beyond its current scale and scope. 3

6 Named professorships, which make up a large segment of the Endowment, are weighted toward areas where Yale has been traditionally strong, including English, history, and economics. In the laboratory sciences, a smaller percentage of professors hold endowed chairs. In the important work of funding new undertakings, the revenue from unrestricted endowments is limited. Every year, exciting opportunities and promising projects far outstrip the funds available to pursue them. Restricted vs. Unrestricted Endowment Funds Fiscal Year 2006 Miscellaneous Specific Purposes 25% Books 3% Scholarships 18% Maintenance 4% Unrestricted 27% Professorships 23% This is particularly true in science, engineering, and medicine. Today, Yale is a leader in areas that couldn t have been imagined a century ago, including biomedical engineering, computational biology, biospheric studies, genomics and proteomics, as well as the translational and interdisciplinary research that stems from these fields. From developing medical devices only a few molecules wide to finding new methods of solar energy conversion, Yale researchers are engaged in path-breaking research that has the power to change our lives in the 21st century. The newly formed Yale Center for Clinical Investigation, the Yale Center for Genomics and Proteomics, and the Yale Institute for Nanoscale Research are among the core funding priorities. In every discipline and department, breakthrough ideas need support from new gifts. From pioneering curriculums at the Yale School of Management and Yale College to expanding international initiatives, to programs that demonstrate leadership in the arts and social sciences, Yale is striking out into often unendowed territory. Why doesn t Yale just spend more of the Endowment? Spectacular returns are not a given. Markets can be uncertain, so Endowment growth can never be taken for granted. The Endowment returned an annualized 17.2% over the past ten years, but between 1966 and 1985 the Endowment lost half its purchasing power. To insulate the University against income fluctuations related to Endowment spending, Yale combines a spending target of 5.25% with a smoothing rule designed to mitigate the short-term impact of market changes. What s more, although Endowment returns may fluctuate, the expense of running one of the world s leading universities tends to increase. This is true even though Yale, like most major universities, is making a substantial effort to reduce its cost base. The intense competition for the best faculty, the need to provide more generous financial aid packages at both the undergraduate and graduate levels, and the significant investment needed to build stateof-the-art research facilities are just a few of the escalating costs that Yale faces in a highly competitive environment. The past cannot fund the future. We will. The generosity of donors can provide critical startup funding for promising ideas or help successful initiatives expand into full-fledged programs. Several specific examples illustrate 4

7 yale university financial report Thousands $ just how important new gifts are to the academic mission. When programs begin, they are often funded by current-use gifts. Then, as they succeed, we work to find long-term funding in either the general appropriation budget or through the Endowment, explained Julie Grant, University Budget Director. The ISA (International Student Awards) program was started in 2005 with seed money from current-use gifts. Today, this program is funded by a combination of current-use gifts, Endowment, and other operating funds. Yale College is committed to ensuring that every student can have an international experience, regardless of financial circumstances. Over the next decade the goal is to increase the endowments for this critical program, explained Lloyd Suttle, Deputy Provost for Undergraduate and Graduate Programs. International Student Awards Funding Goals FY05 FY07 FY09 FY11 FY13 FY15 FY17 Expendable Gifts Endowment Income General Appropriations momentum is continuing to build. Recently a generous gift from Maurice (Hank) Greenberg and The Starr Foundation has provided additional support for the program s annual operating budget. Yale is also looking to support individual participants through the establishment of permanently endowed World Fellow positions. The Yale Scholars Program is a new endowed fund at the Yale School of Medicine designed to help researchers early in their careers. When Yale hires new science or medical faculty, the University can spend as much as $1 to $2 million for laboratory supplies and equipment. Initial laboratory funding is critical in that it helps to attract the most promising young faculty to Yale and ensures their success. Young scientists need funds to get their careers started before they can compete for NIH and other grants, said Robert J. Alpern, M.D., Dean and Ensign Professor of Medicine. A gift of $2.5 million will fund a Yale Scholar endowment, with each dollar of private funds matched by the University. This collaborative effort will offset the University s investment by giving every Yale Scholar startup funding, distributed over four critical years. The World Fellows Program began in 2000 with a grant of $2 million from the Goldsmith Foundation. This early vote of confidence supported the program from its planning period through the arrival of the first class of fellows in It also served as a catalyst to attract other grants and gifts, including ongoing support from The Starr Foundation. Today the 5

8 New gifts support vital operations. Many departments and services critical to Yale s educational mission are not self-supporting. Both new endowments and current-use gifts are vital to their operations. The Yale Library, for instance, encompasses a tremendous number of collections, services, and school and departmental libraries, some of which are generously endowed while others are very much dependent on new gifts. In many cases, the Endowment can be used for the purchase of materials but does not cover cataloging or digital conversion. Preservation of invaluable physical collections and digitization are among campaign priorities for the Library. In the early 1990s, for example, Yale purchased a rare collection of Cambodian newspapers that provide irreplaceable documentation of the period just after the fall of the Khmer Rouge. But newsprint is fragile. Today, new funding is critically needed to convert the collection so that it will be available to scholars for generations to come. At the undergraduate level federal support has seen a steady decline. In 1978 the federal government contributed twenty-five cents of every dollar of grant aid awarded by Yale College. Today that figure is less than five cents of every dollar, with the shortfall covered by Yale s own resources. The cost of financial aid increases every year, with the most promising candidates often selecting a school on the basis of the support they are offered. Currently 42.5% of Yale College students receive need-based aid, averaging $26,000. And since 2005, parents with incomes below $45,000 have been exempted from contributing to the cost of their child s education. The tremendous cost of financial aid is supported not only by endowed gifts but by the collective power of gifts made to the Annual Fund. Student Effort 13% Grants from Other Sources 4% Paying for a Yale College Education Parent Contribution 27% State and Federal Grants 4% Grants from Yale 52% Debt reduction programs have allowed students in the Schools of Law and Management to pursue lower-paying careers in the public and nonprofit sectors without being faced with large loan payments. An anonymous gift of $100 million ensures complete tuition reduction for all students at the Yale School of Music. The generosity of all donors helps Yale attract the very best students. Expanding financial aid is one of Yale s most important and costly undertakings, requiring current-use gifts as well as endowment. At the Yale School of Management, the generosity of alumni has created a Loan Forgiveness Program that has awarded over $1 million to 140 graduates. The program was recently revised to cover 100% of need-based loans for participants with incomes up to $70,000. 6

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10 Alexander Hovani, SOM 06, is typical of those who have taken advantage of this important opportunity. After graduating from a joint program at the School of Management and the School of Forestry & Environmental Studies, he is working at The Nature Conservancy, launching a new effort to allow developing nations to get carbon-reduction credits for slowing deforestation. I m really making the most of my education, but I would not have been able to take the job if I were facing years of large loan payments. Smart planning and careful budgeting support innovation. Every summer, a complex planning process looks ten years out at Yale s long-range goals, carefully integrating University and departmental priorities with the strategic and financial plans. Since the Provost of the University is also chair of the University Budget Committee, this system ensures complete integration between the budgeting process and the academic mission of the University. After we decide how to allocate resources at a high level, the budget process serves to align our resources with our priorities. We ask departments to review their costs every year to make sure that what they re doing is still a high priority. If they can eliminate things that are no longer needed, it helps us fund new initiatives and innovations, explained Julie Grant. Through the budget process we provide incentives for departments to evaluate what they need for their programs by challenging them to do more with what they have. Through this process they identify efficiencies and reallocations to high-priority programs. If they need incremental resources, they make a request during budget development that is evaluated by the Budget Committee. While the process is not zero-based budgeting, it does achieve much of the same objective, Grant continued. Model Work Flow Endowment GA and Endowment Restricted General Appropriations Total Funds Professional Schools & Other Areas Self Support Schools MAIN MODEL Fringe Salary law f&es divinity medicine nursing management Building Services Planning Parameters University General Utilities ITS Interest & Capital Replacement Charge Endowment YC Tuition/Aid Health Plan 8

11 yale university financial report Yale takes on important financial issues in bold ways. Like the Endowment Spending Rule Yale instituted in the 1980s, the new Capital Replacement Cost program ensures that Yale s resources won t be depleted for future generations. Being good stewards of the Yale campus is both critical and expensive. In the past, the cost of caring for buildings was not built into the operating budget, resulting in the maintenance problems of the 1970s. Under a new and innovative plan, Yale now puts away 2.7% of the replacement value of its buildings every year for renovation of buildings. Because of this approach, Yale will never get to the point where it can t afford renovations. The Capital Replacement Cost program is expensive about $150 million a year is set aside from the operating budget. But it is an investment in Yale s future. It has created a maintenance/renovation/replacement program that is a model for other universities, explained John Bollier, Associate Vice President for Facilities Operations. Working smarter contributes to the academic mission. Over the past several years, Yale has taken a sweeping look at how the University does business and serves the needs of the academic community. This has included transforming the way Yale buys, moving from a transactionbased to a strategic sourcing system. In just the past three years, Yale has gone from a less than $4 million to a projected $8.1 million savings through this effort. In addition to the monetary benefits, the system furthers the academic mission by helping departments purchase with greater flexibility and efficiency. As Linda Mayes, the Arnold Gesell Professor of Child Development, explained, Our research into the link between behavior and brain activity in young children requires sophisticated headgear made by only one company. Yale Procurement has helped us buy up front to get what we need more quickly and at a significant savings. We ve been able to afford additional equipment which, in turn, is helping us advance our learning. Procurement Annual Savings Millions $ FY04 FY05 FY06 9

12 The opportunities ahead As President Levin has said, the work of building and sustaining a great institution is never done. Yale, like other world-class universities, must constantly nurture new ideas and support all those who develop them. The Yale Tomorrow campaign is our collective promise to the next generation. It is an ambitious and focused plan to build on the efforts of all those who came before us. And to create a Yale that will contribute even more to society through both its scholarship and its graduates. 10

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14 Financial Results Overview Yale University has a very strong financial position after experiencing positive results for the year. At June 30, 2006, the University reported total consolidated assets of $27.7 billion, consolidated liabilities of $8.2 billion, and net assets of $19.5 billion. Net assets increased by $3.0 billion during the year, primarily because of the 22.9% return investment on the Endowment. The University maintains a diverse operating revenue base, which allows protection from a downturn in any one source of revenue. Total operating revenue increased by 7.4% to $1.97 billion. The largest contributors to this growth were the increase in the allocation of Endowment spending to operations, other investment income, and medical services income. Total operating expenses increased by 9.9% to $1.96 billion. The results from operations show an increase of $7.4 million in operating net assets for the year. Net Assets Ten-year trend ($ in billions) FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 Operating Revenue Other investment income 3% Endowment income 31% Publications income 2% Contributions 5% Other income 5% Student income, net 12% Medical services income 15% Grant and contract income 27% Operating Revenue As shown in the chart at left, the University derives its operating revenue from five main sources: student income (net of certain scholarships and fellowships), grants and contracts, medical services, contributions, and endowment income. Additional revenues are received from a variety of programs. Student Income, Net Student income, which includes revenue from tuition, fees, and room and board, net of certain scholarships and fellowships increased 5.5% during 2006 and amounted to $235.9 million, or 12% of operating revenues. Of the total amount, tuition and fees accounted for $318.9 million, a 6.0% increase over Revenue from room and board increased 6.5% to $52.7 million. In accordance with generally accepted accounting principles, student income is presented net of certain scholarships and fellowships, which totaled $135.6 million and $126.7 million for 2006 and 2005, respectively. 12

15 Grant and Contract Income Ten-year trend analysis ($ in millions) $600 $500 $400 $300 $200 $100 $0 During the academic year, 11,380 students were enrolled at the University; 5,380 were undergraduate students attending programs at Yale College, and 6,000 were pursuing their studies at the Graduate School of Arts and Sciences and ten professional schools. (Figures are based on full-time equivalents.) Students enrolled in Yale College paid $31,460 for tuition and $9,540 for room and board, bringing the total term bill to $41,000 for the academic year. The increase in the Yale College term bill was 5.5% over the academic year. Students enrolled in the Graduate School of Arts and Sciences paid $28,000 for tuition, a 4.5% increase over the academic year. The University maintains a policy of offering Yale College admission to qualified applicants without regard to family financial circumstances. This need-blind admission FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 Federal-NIH Federal-Other Non-Federal policy is supported with a commitment to meet in full the demonstrated financial need of all students throughout their undergraduate years. During the academic year, 2,267 Yale College students, representing 42.5% of eligible Yale College enrollment, received financial aid. In the Graduate School of Arts and Sciences, 2,444 students, or 99.3% of those eligible, received financial aid. In the professional schools, 2,833 students, or 82.7% of those eligible, received financial aid. In all, 7,544 University students, or 67.2% of total University eligible enrollment, received some form of University-administered student aid in the form of loans, gifts, or a combination of both loans and gifts. Grant and Contract Income Grant and contract income experienced a 3.6% growth from $507.2 million in 2005 to $525.7 million in The Yale School of Medicine, which receives 78% of the University s grant and contract income, reported an increase of 4.4% for 2006, while the remaining University sectors had an increase of 1.1%. The federal government funded $430 million, or 82% of 2006 grant and contract income, in support of Yale s research and training programs. The largest federal sponsor was the National Institutes of Health (nih), which provided revenues of $337 million during 2006, an increase of 3.4% over the prior year. This increase is in line with the recent slow growth of the nih budget. Currently, the President, the House of Representatives, and the Senate have nih budget proposals with less than 1% growth for the next fiscal year, so the slower growth is expected to continue. The University also receives significant research support from the National Science Foundation, the Department of Energy, the Department of Defense, and student aid awards from the Department of Education. Nonfederal sources, which include foundations, voluntary health agencies, corporations, and the State of Connecticut, provided an additional $96 million in research, training, and other purposes during

16 Operating Revenue In addition to funding the direct cost of sponsored programs, grant and contract awards generally include reimbursement for a portion of the costs related to research laboratories and other facilities, as well as administrative and support costs incurred for research and other sponsored activities. These reimbursements for facility and administrative costs amounted to $125.4 million in 2006, which is an increase of 4.5% over the prior year. Recovery of facility and administrative costs allocable to federally sponsored programs is recorded at rates negotiated with the University s cognizant agency, the Department of Health and Human Services. Yale s current rate agreement is effective from July 1, 2006 through June 30, The primary regulations governing federal grants and contracts are encompassed in Office of Management and Budget Circular A-21, Cost Principles for Educational Institutions, and Circular A-110, Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations. The A-21 principles were modified during the 1990s to impose limits on the types and amounts of facility and administrative costs eligible for reimbursement and mandate more stringent Federal Cost Accounting Standards for both grants and contracts. Medical Services Income Medical services income totaled $302.9 million in fiscal 2006, an increase of 9.3% from 2005, and represented 15% of the University s operating revenue. The largest portion of this revenue stream is derived from patient care services provided by the School of Medicine s Yale Medical Group. Other components include income from diagnostic laboratory services and contracts with affiliated hospitals, including Yale-New Haven Hospital, Inc. (ynhh). The increase of 8.0% in patient care income during the year was a result of an overall increase in volume across the departments. Increased laboratory volume in Pathology, Dermatopathology, and Genetics resulted in a 21.9% increase over the prior year in these departments. School of Medicine Clinical Income by Department Orthopaedics and Rehabilitation 3% Ophthalmology and Visual Science 2% Obstetrics and Gynecology 7% Pathology 9% Pediatrics 8% Psychiatry 3% Surgery 14% Therapeutic Radiology 3% YSM Central 3% Allocation of Endowment Spending Each year a portion of accumulated Endowment investment returns is allocated to support operational activity. This important source of revenue represents 31% of total operating income this year and is the largest source of operating revenue for the University. The level of spending is computed in accordance with an Endowment spending Neurosurgery 2% Neurology 1% Laboratory Medicine 1% Anesthesiology 10% Comprehensive Cancer Center 2% Child Study Center 1% Internal Medicine 15% Genetics 1% Diagnostic Radiology 8% Dermatology 7% 14

17 policy that has the effect of smoothing yearto-year market swings. Endowment investment returns allocated to operating activities increased by 8.6% to $615.7 million. Additional information on the Endowment spending policy is provided in the Endowment section of this report and in the footnotes to the financial statements. Other Investment Income Other investment income of $65.0 million represents interest, dividends, and gains on non-endowment investments. The increase over the prior year is due to higher interest rates and to the allocation of available cash to higher-yielding investments. In addition, the University earns interest on the unexpended funds from the $300 million chefa debt offering. Contributions Contributions from operating, physical, and financial activities totaled $316.8 million for This represents a 21% decrease from the 2005 contributions of $398.6 million. This decrease was not unexpected, as 2005 had unusually high contributions revenue, due in large part to a $100 million pledge to the Endowment supporting the School of Music and a significant pledge supporting physical capital. Publications and Other Income Publications income is generated through Yale University Press (Press), a separately endowed department of the University. The Press published approximately 300 titles in 2006 and has approximately 3,700 titles in print. Many of these books are winners of prizes, including four Pulitzer Prizes. Its authors are academic and professional people from around the world. Revenue for the Press was $30.5 million in 2006 and $28.9 million in Other income includes such items as royalty income, ticket sales, admission revenue, parking revenue, and application and enrollment fees. Allocation of Endowment Spending As a percentage of total revenues, ten-year trend analysis $700 35% $600 30% $500 25% $400 20% $300 15% $200 10% $100 5% 0 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 0% Allocation of Endowment ($ in millions) % of total revenues 15

18 Student aid and services 15% Libraries and other academic support 9% Public service 6% Patient care and other related services 15% Operating Expenses Operating expenses totaled $1.96 billion, representing a 9.9% increase in expenses for the year. The largest component of expenses salaries and wages and employee benefits rose 9.9%. This category of expense represents 61% of total University operating costs. This increase was in line with the University s overall plans to maintain moderate growth and a competitive position with peer institutions. Faculty salaries, which make up 44.3% Operating Expenses by Functional Classification Administration and other institutional support 7% Instruction and departmental research 29% Organized research 19% Operating Expenses by Natural Classification Utilities 3% Interest on indebtedness 3% Depreciation and amortization 7% of total compensation, rose 6.4% in Compensation packages must be competitive in order to recruit and retain faculty of the highest caliber. The University has also made it a priority to ensure that the salary and benefit programs for staff are equitable and competitive with the marketplace. The cost of providing employee benefits, including various pension, postretirement health, and insurance plans in addition to social security and other statutory benefits, amounted to $288.3 million, an increase of approximately 21% from The increase was primarily due to increases in defined benefit pension and postretirement health care plan expenses, as well as health care costs for active employees. Other operating expenditures include services, materials and supplies, and other expenses. These expenditures increased by approximately 12%. Increases include travel, library collections, professional service fees, and building operations and maintenance. In accordance with generally accepted accounting principles, Yale reports its operating expenses by functional classification in the Statement of Activities. Expenses in each classification increased primarily as a result of the salary, wage, and employee benefit increases mentioned above, as well as the cost to maintain the University buildings. The University spends 53% of its operating resources on academic activities including libraries as well as student aid and services. Organized research represents 19% and patient care 15% of spending. Organized research and patient care activities also support the academic and learning experiences at the University. Other operating expenditures 23% Student aid 3% Employee benefits 15% Salaries and wages 46% Faculty and Staff Compensation The University employs approximately 2,900 faculty and 700 postdoctoral associates and other trainees. Additionally, there are approximately 3,700 managerial and professional staff, and 4,100 unionized clerical, technical, service, and maintenance personnel. The employment amounts are based on full-time equivalents. Total salaries and wages and related employee benefits were $1.2 billion in

19 Operating Budget The University manages its operations to achieve long-term financial equilibrium. It is committed to sustaining both the programs and the capital assets (Endowment and facilities) supporting those programs over multiple generations. Endowment income is allocated to the Operating Budget based on a spending policy that preserves the Endowment asset values for future generations, while providing a robust revenue stream for current programs. Similarly, the Operating Budget increasingly includes the funds needed to replenish the capital base necessary to ensure that buildings are maintained to support current programs. The Statement of Activities in the audited financial statements is presented in accordance with generally accepted accounting principles (gaap). gaap recognizes revenue when earned and expenses when incurred. The Operating Budget is focused more on resources available and used in the fiscal period presented. The Budget does not include certain expenses that are paid out over the long term, such as unused vacation time, and certain revenue that will not be received within the next fiscal year, such as pledged contribution revenue. Another significant difference is that the Operating Budget treats the Capital Replacement Charge or crc (replacement Yale University Operating Budget Revenue and Expense for the year ended June 30, 2006 ($ in thousands) Actual Budget General Other June 30, June 30, Appropriations Revenue: Tuition, room and board $364,408 $7,147 $371,555 $368,854 Funded Scholarships (110,221) (25,403) (135,624) (123,154) Net tuition, room and board 254,187 (18,256) 235, ,700 Sponsored agreement income 124, , , ,848 Medical services income 30, , , ,949 Contributions 25,573 67,518 93,091 74,564 Allocation of Endowment spending 43, , , ,611 Unrestricted and recovery income 394,154 (394,154) - - Other investment income 28,237 36,715 64,952 34,974 Other income 46,613 57, ,062 89,761 Transfers 11,418 (21,371) (9,953) (2,660) Total revenue 958, ,778 1,932,409 1,859,747 Expenses: Faculty salaries 151, , , ,678 Staff salaries and wages 305, , , ,120 Total salaries and wages 456, , , ,798 Employee benefits 114, , , ,213 Student stipends 18,098 41,642 59,740 62,618 Other expenses 315, , , ,824 Interest and capital replacement 168,383 7, , ,310 Utilities 51, ,823 44,999 Internally provided services (175,279) (30,786) (206,065) (194,198) Total expenses 949, ,577 1,877,845 1,902,564 Operating results - budgeted activity: 9,363 45,201 54,564 (42,817) Use of / (Add to) Fund Balances 5,137 (45,201) (40,064) 57,317 Operating Budget Bottom Line $ 14,500 $ - $ 14,500 $ 14,500 17

20 Operating Budget depreciation) as an expense rather than the historical cost depreciation expensed in the Statement of Activities. The University has been increasing the funding of the crc since In fiscal 2006, Yale funded $98 million of the crc from the Operating Budget and departmental funds, $32 million from capital gifts, and borrowed the remaining $34 million. The University expects to fund the full crc level in its Operating Budget by Another difference is that the gaap financial statements do not present fund balance transfers between the operating, physical, and financial categories, as the Operating Budget does. Also, the operations of Yale Press are consolidated in the Statement of Activities, but are not part of the Operating Budget. A summary of the differences between the Operating Budget presentation and the Statement of Activities is as follows: Operating Budget Bottom Line $ 14,500 $(14,500) Operating Budget Add to/ (Use of ) fund balances 40,064 59,262 Revenue from pledge activity (1,884) 26,474 Expenditures related to long-term liabilities (47,940) (27,252) Depreciation in excess of capital funding (16,342) (8,244) Yale Press operating results 2, Interest expense on interest rate swaps 6,938 - Funding transfers 9,953 12,541 Increase in net assets from operations per the Statement of Activities $ 7,447 $ 48,657 The Budget presents operating activity by funding source. The category General Appropriations includes the cost of education for the University. The category Other includes Endowments and gifts, sponsored research, patient care, and other activity. Endowment and gift activities are separated to facilitate and monitor the University s fiduciary responsibility for compliance with donor intentions for restricted activity. Sponsored research includes the funding from federal, state, and non-governmental entities and the direct costs of the related research. Other activity includes, among other things, health services provided by the Yale Medical Group as part of Yale s role in the Academic Health Center of Yale-New Haven Health Systems. FY06 Operating Budget Results The University ended the year with a surplus of $14.5 million as planned in order to repay the budget deficit incurred in fy05. Positive operating results of $54.6 million allowed the University to increase fund balances rather than draw $42.8 million from fund balances as anticipated in the budget. This positive variance resulted from higher revenues of $73 million and lower expenses of $25 million. Revenues were higher in grants and contracts, medical services, contributions, investment income and other income. Grants and contracts revenue was favorable to budget as the Medical School continued to experience growth in its research funding. Medical services income was favorable to budget because of continued efficiencies and growth in the Yale Medical Group. Contributions to the University s Operating Budget were higher than expected as donors responded to the quiet phase of the University s pending capital campaign. Investment income was favorable to budget because of higher interest income earned on University cash balances. Operating expenses were about 1.2% below budgeted levels. Salary expenses were on budget while employee benefits were below budget because of lower effective fringe rates than budgeted by departments. Financial aid costs (funded scholarships and student stipends) were over budget because of more financial aid funds available in grants and restricted funds. Interest and capital replacement costs were under budget because of increased capital gifts received during the fiscal year which were applied to the funding of the capital replacement cost. Record high oil and gas prices caused the unfavorable variance in utilities costs. 18

21 Physical Capital In 2006 the University continued its ambitious program of renovating existing facilities while adding strategic new facilities to meet teaching, research, and residential needs. Capital spending on facilities in 2006 totaled $265.1 million. This is the ninth straight year that capital spending has exceeded $200 million since it was significantly increased in the 1990s to address years of deferred maintenance. Capital Spending by Campus Area Humanities and Social Sciences 3% Self-support schools 9% Residential 30% Utilities 5% All other 3% Capital Spending by Year ($ in millions; in 2006 dollars) $400 $350 $300 $250 $200 $150 $100 $50 0 Museums and galleries 4% Acquisitions and new construction Administration and other 9% Athletics 6% Biological and Physical Sciences 8% Engineering and Applied Sciences 4% Medicine 19% FY 81 FY 86 FY 91 FY 96 FY 01 FY06 Renovations Almost one-third of the University s capital spending in 2006 was devoted to achieving the University s goal of fully refurbishing its undergraduate residential facilities. With the completion of Davenport College in time for the start of the academic year, six of the twelve residential colleges have been renovated: Berkeley, Branford, Davenport, Timothy Dwight, Pierson, and Saybrook. Another four colleges were in various stages of renovation at the end of 2006: the renovation of Trumbull College was nearly complete; construction was underway on Silliman College; the renovation of Jonathan Edwards College was being designed; and the Calhoun College renovation was in the planning phase. Planning for the two remaining residential colleges Morse and Stiles will begin in The School of Medicine accounted for almost one-fifth of the University s 2006 capital expenditures. The largest expenditure of funds was for the construction of the new Amistad Street Building. When completed next year, this building will significantly increase the Medical School s research laboratory space. Funds were also spent to construct a new Magnetic Resonance Center, which will include a Positron Emission Tomography Center. Finally, funds were spent on modernizing laboratory space in a number of medical buildings, most notably the Sterling Hall of Medicine and the Hunter Radiation Therapy Center. About 12% of the University s capital spending was for science buildings. Most of the spending in this area was to construct the new Class of 1954 Chemistry Research Building and the new Daniel L. Malone Engineering Center. Both of these buildings were completed in time for the start of the academic year. Consistent with the University s strategy of modernizing all areas of the campus, significant capital projects were underway in other areas of the University in The new Rose Center, home of the Yale Police, and the comprehensive renovation of the School of Music s Leigh Hall were both completed. The largest expenditures outside of the residential colleges, Medicine and science 19

22 Physical Capital were for the comprehensive renovation of the Yale University Art Gallery s Kahn Building and the partial renovation of the Yale Bowl, both of which were well underway in Construction of the new Sculpture Buildings and garage and the renovation of the Cross Campus Library were just starting at the end of Finally, by the end of 2006, design was underway for Forestry & Environmental Studies new Kroon Building, and design was nearly complete for the renovation of the Art & Architecture Building as well as the construction of a new History of Art addition. The University s ambitious renovation and building plans were funded by a combination of gifts, debt, and, increasingly, funds from the operating budget. The University continues to rely heavily on the extraordinary generosity of its alumni/ae and friends. Gifts for facilities in 2006 totaled $57 million. The University has been the beneficiary of an outstanding response from donors. The Daniel L. Malone Engineering Center, the Class of 1954 Chemistry Research Building, the residential college renovations, the Yale University Art Gallery s Kahn Building, the School of Music s Leigh Hall, the Rose Center, the Yale Bowl, Forestry & Environmental Studies Kroon Building, the Cross Campus Library, the Art & Architecture Building with its new History of Art addition, and indeed nearly all of the University s recent major capital projects have been funded at least partially through gifts. Another major source of funding for University capital projects is debt. The University issued $300 million in tax-exempt debt in October 2005 through the Connecticut Health and Educational Facilities Authority. The debt, plus a related $11 million premium, brings total outstanding facility debt to $1.95 billion, including capital lease obligations. The University again received the highest bond ratings available: AAA from Standard and Poor s and Aaa from Moody s. The University continues to benefit from its diverse sources of variable-rate debt, but hedges a significant portion through taxable interest rate swaps. As of June 30, 2006, Yale had outstanding swaps totaling $540 million resulting in a debt portfolio with a 56% fixed and 44% variable mix. Although the University relies on its own liquidity to support the remarketing of its variable-rate demand notes, it has also entered into a $200 million revolving credit arrangement to serve as a backup liquidity facility. With the exception of its taxable commercial paper, which can be retired at will, the University s debt is almost entirely in the form of bonds and notes with bullet maturities between 2027 and 2042 and a Century Bond maturing in Continuing a multi-year plan toward funding all capital maintenance and renovation from the Operating Budget and capital gifts by 2010, the operating budget contributed $98 million, or 60%, of the estimated $164 million required annually to maintain the University s buildings. Capital gifts provided another $32 million, or 20%, to meet this target. 20

23 $5,000 $4,000 $3,000 $2,000 $1, Endowment Endowment Growth of $1,000 Invested in the Yale Endowment The Endowment supports both current and future academic programs of the University. To balance current and future needs, Yale employs investment and spending policies designed to preserve Endowment asset values while providing a substantial flow of income to the Operating Budget. At June 30, 2006, the Endowment was more than $17.9 billion, after the allocation of Endowment spending of $616 million to the Operating Budget during the year. Mean of broad universe of colleges and universities Endowment Fund Allocation, Fiscal Year 2006 Miscellaneous specific purposes 25% Books 3% Sholarships 18% Maintenance 4% Unrestricted 27% Professorships 23% Inflation Investment Performance For the year ended June 30, 2006, the Endowment achieved a 22.9% investment return. During the past decade, the Endowment earned an annualized 17.2% return, placing the University at the top of the universe of institutional funds. Yale s disciplined and diversified asset allocation policies combined with strong active management added substantial value to the Endowment. Over the ten years ended June 30, 2006, Yale s superior investment returns added $8.5 billion relative to a composite passive benchmark and $9.1 billion relative to the mean return of a broad universe of colleges and universities. Endowment Spending The Endowment spending policy, the means by which Endowment earnings are allocated to operations, balances the competing objectives of providing a stable flow of income to the Operating Budget and protecting the real value of the Endowment over time. The spending policy manages the trade-off between these two objectives by using a longterm spending rate target combined with a smoothing rule, which adjusts spending in any given year gradually in response to changes in Endowment market value. The target spending rate approved by the Yale Corporation currently stands at 5.25%. The smoothing rule limits Endowment spending in a given year to the sum of 80% of the previous year s spending and 20% of the targeted long-term spending rate applied to the market value two years prior. The spending amount determined by the formula is adjusted for inflation. The smoothing rule and the diversified nature of the Endowment mitigate the impact of short-term market volatility on the flow of funds to support Yale s operations. The Endowment provided income of $616 million to current operations in 2006, representing 31% of the University s operating revenues. Ten years ago, Endowment distributions contributed approximately $170 million, or 17% of the budget. Over the past decade, Endowment distributions have increased at an annualized rate of nearly 14%. 21

24 Endowment 40% Asset Allocation Asset allocation proves critical to successful Endowment performance. Yale s asset allocation policy combines tested theory and informed market judgment to balance investment risks with the need for high returns. The need to provide resources for current operations as well as preserve the purchasing power of assets dictates investing for high returns, causing the Endowment to be weighted toward equity. In addition, the Endowment s vulnerability to inflation directs the University away from fixed income and toward equity instruments. Hence, over 90% of the Endowment is invested in some form of equity, through domestic and international securities, real assets, and private equity. Over the past twenty years, Yale significantly reduced the Endowment s exposure to traditional domestic marketable securities, reallocating assets to nontraditional asset classes. In 1986, over 80% of the Endowment was committed to U.S. stocks, bonds, and Yale Endowment Asset classes versus benchmarks: annualized returns net of fees for ten years ended June 30, 2006 cash. Today, this percentage is approximately 18%. Foreign equity, private equity, absolute return strategies, and real assets now represent more than four-fifths of the Endowment. The heavy allocation to nontraditional asset classes stems from the diversifying power they provide to the portfolio as a whole. Alternative assets, by their nature, tend to be less efficiently priced than traditional marketable securities, providing an opportunity to exploit market inefficiencies through active management. Today s actual and target portfolios have significantly higher expected returns and lower volatility than the 1986 portfolios. June Current Asset Class 2006 Target Domestic Equity 11.6% 12.0% Fixed Income 3.8% 4.0% Foreign Equity 14.6% 15.0% Absolute Return 23.3% 25.0% Private Equity 16.4% 17.0% Real Assets 27.8% 27.0% Cash 2.5% 0.0% Total 100.0% 100.0% 35% 30% 25% 20% 15% 10% 5% 0 22 Domestic equity Fixed income Foreign equity Absolute return Private equity Real assets Yale return Active benchmark Passive benchmark Active Benchmarks Domestic Equity: Frank Russell Median Manager, U.S. Equity Fixed Income: Frank Russell Median Manager, Fixed Income Foreign Equity: Frank Russell Median Manager Composite, Foreign Equity Absolute Return: CSFB Composite Private Equity: Cambridge Associates Composite Real Assets: NCREIF and Cambridge Associates Composite Passive Benchmarks Domestic Equity: Wilshire 5000 Fixed Income: Lehman Brothers Treasury Index Foreign Equity: 50% MSCI EAFE Index, 50% MSCI EMF Index Absolute Return: 1-year Constant Maturity Treasury + 6% Private Equity: University Inflation + 10% Real Assets: University Inflation + 6%

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