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The Yale Alumni Magazine regularly holds a conversation with Yale president Rick Levin ’74PhD to provide a forum in which alumni can learn his views. In this issue, Levin talks about Yale’s endowment.
Y: Last September the Wall Street Journal questioned whether wealthy universities are spending enough from their endowments. Yale has spent 4.5 percent a year for the past three years, but critics said universities should spend 5 percent—that any less is hoarding.
L: We’re not hoarding. What we are trying to do is to spend at the long-run rate of return, net of inflation—so that our endowment principal grows over time at the rate of inflation. If you give money to Yale for a particular purpose, there should be enough money 100 years from now, 200 years from now, to sustain that same purpose. We have established a spending rule that determines how much we spend from year to year, based on rigorous study of the expected returns and volatility of the asset classes over long periods. Our rule has a slight conservative bias. Rather than adopt a rule that implies a 50-50 probability that the endowment would diminish or grow in purchasing power, we bias our assumptions slightly in favor of growth.
Y: Why was that?
L: If you look back over the last hundred years, or just the last 40 years, you see a balance—20 years of famine and 20 years of fat. At Yale we have had superb management of the endowment by Dave Swensen and his team, better than any of the other top institutions. But all of them have done well in the 20 years from 1985 to 2005. The opposite was true from 1966 to 1985. We lost half of the endowment’s purchasing power during that period. That could happen again. We have a conservative spending rule because not every 20-year period will be as fortunate as the one we just had.
Y: Smith economist Roger Kaufman asked, “Is there a point where you are so rich you don’t need to have all these capital fund drives?”
L: Well, first, all of these universities have grown. That’s a good thing for society. We have more students, more faculty, more library resources than we did 100 years ago. That growth has been supported much more by new endowment than by the old endowment. Second, to take on new activities, you need a source of funds. You can get them by increasing tuition, by securing current use gifts, or by getting new endowment gifts. We’ve made a commitment, for example, to make the School of Music tuition-free. We’ve raised a very substantial endowment gift so that we won’t have to turn our back on that commitment. We can sustain it.
But the demands for new activities far, far exceed our ability to support them. Universities are places of great creativity. We have faculties who are constantly generating ideas for new educational programs and new research directions. Right now at Yale we have some fantastic investment opportunities in the sciences. We have people who are doing remarkable breakthrough work in genetics. We have people working in quantum computing, which has the capacity to revolutionize the computer in the next 30 years or so. You could invest ten times what we’re going to be able to invest, and still get a strong and positive social return, so that society benefits. There are just a lot more ideas than money. If at any time we should have more money than ideas, I’d say, “Fine, stop giving money to us.”
Y: About four-fifths of the endowment is restricted by the donors to certain purposes. Given Yale’s focus on humanities in previous centuries, is there a bias toward the humanities built into the endowment?
L: Yes. Take endowed professorships, which make up a significant portion of the endowment. We have a great many in English, in history, in economics, because those are subjects that for a long, long time have been among the most popular majors in Yale College, and donors tend to give money to support the things that meant something to them when they were students. We also have quite a number of endowed chairs in engineering, because there was a long period when the Sheffield School of Engineering at Yale was very prominent. But in the laboratory sciences, only a small fraction of our professors have endowed chairs.
Y: When the endowment is growing, some funds return more money than is needed. What happens then?
L: Let’s say a fund for a professorship starts generating more income than is needed to pay the salary and fringe benefits of that professor. The first increment of excess funding would be used to fund other supporting services—staff support services or travel or research support. But we have had a few cases, with older endowments, in which we find we’ve got enough to support two professors. So we have actually gone back to the donor’s family and said, “Would you object if we created a second professorship with the same title?” Without exception, people are delighted. It’s like getting a dividend.
Y: Do funds ever become obsolete?
L: Yes, but today there is always a sentence in our letter of agreement with the donor that says, if this particular activity ceases to be practical for the university, the donor agrees that the Corporation can redirect the funds to another program as close as possible to the donor’s intended purpose.
In the past, we have had a handful of endowments that became problematic. In a couple of instances we have asked the attorney general of Connecticut to allow us to redirect the funds. We also had an interesting case of a chair originally endowed for a professor of railway engineering. For 30 years or more, no one occupied that chair. But then it turned out that one of our engineering professors was starting to work on, among other things, magnetic levitation—which is a technology that is now used in Shanghai, for example, for railroad transportation. So, after many dormant years, we were able to once again award this chair.
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