Yale to Increase Endowment Payout; Grassley Praises Decision

Yale to Increase Endowment Payout; Grassley Praises Decision

News story posted in Investing on 9 January 2008| comments
audience: National Publication | last updated: 18 May 2011
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Summary

In a January 7 news release, Yale University has announced its decision to increase the payout from its $22.5 billion endowment fund during the upcoming fiscal year by 37% to an estimated $1.15 billion. The distributions will be used to expand student financial aid, recruit students of modest means, and, possibly, expand the size of Yale's undergraduate student body. Sen. Grassley, in a separate statement, praised the decision pointing out that Americans subsidize endowments by tax-exemption and, therefore, deserve a public benefit in return.
Yale News Release:

Yale To Increase Endowment Payout to Expand Access and Advance Science


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

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 it purchased in October from the Bayer Pharmaceutical Company, located in West Haven, Conn., 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. 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 2007-08 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, that 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 2008-09 fiscal year.

January 7, 2008

PRESS CONTACT
Helaine Klasky
203-432-1345



Grassley Release:


MEMORANDUM

To: Reporters and editors

Fr: Jill Gerber for Sen. Grassley, 202/224-6522

Re: Yale announcement on endowment pay-out

Da: Monday, Jan. 7, 2008

Sen. Chuck Grassley, ranking member of the Finance Committee, with jurisdiction over tax policy, has a long-standing interest in tax-exempt policy. Last September, the committee held a hearing that focused in part on the size of college endowments, at Grassley's urging. In December, Harvard University announced reduced tuition costs for families below certain income levels. Today, Yale announced an increased pay-out of its endowment to increase student financial aid and for other purposes. Grassley made the following comment on today's announcement.

"This is a great day for parents and students. The Yale bulldog might take a bite out of tuition costs for middle and low-income families. For the first time in years, we're hearing good news about tuition and affordability. Harvard has the largest endowment, and Yale has the second-largest. It's a big deal that the two wealthiest colleges are making tuition more affordable. They set an example for all other well-funded schools to do the same. More student access is the goal. Yale is looking at expanding the size of its undergraduate student body. More slots combined with lower tuition could help improve access to a top university. I also hope to see certain, reliable tuition costs from Yale and others so families can crunch numbers and see what they can really afford. I look forward to the details to come from Yale in the days ahead.

"This isn't just an issue of college access. It's also an issue of tax fairness. Universities hold at least $340 billion in endowments. The donations to those endowments and the endowments themselves are all tax-exempt. American taxpayers are subsidizing that tax-exemption, and they deserve public benefit in return. Meanwhile, I hope Congress is motivated by Harvard and Yale's action to continue a discussion of whether to impose a mandatory endowment pay-out requirement on well-funded colleges. Colleges are tax-exempt, and other tax-exempt entities, such as most private foundations, have a mandatory pay-out requirement of 5 percent a year. It's reasonable to consider a mandatory endowment pay-out requirement for colleges."

For the Finance Committee hearing testimony on college endowment size, please see:

http://finance.senate.gov/sitepages/hearing092607.htm.

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