Is Yale pound wise, penny foolish?

As nearby colleagues mill about in moon suits amidst anonymous gray machines, Richard Barker, TC '50, GRD '55, guides his visitor through a tour of Becton Center, home of the engineering departments. Barker, the graduate dean of engineering, explains the workings of the growth chambers and the fearsomely named MicroZoom Probe Station. He lingers over the argon-ion laser, a $10,000 piece of equipment that the department was able to snag from a private company for a cool $1,500. Quite a deal, but there's one problem: "It's not hooked up yet because the University decided not to give us the money for it," Barker explains. "This is one of the things we struggle with."

Barker mentions this small frustration matter-of-factly. He's not taking a wry stab at a penny-pinching university; he's presenting a problem that, one presumes, has a corresponding solution. Yale's decade-long solution to its budget deficits has been to tighten its purse strings across the board, most notably by reducing the size of the faculty by 5.5 percent over the last six years. The hiring freeze has begun to thaw recently with the addition of six new slots to the illustrious-but-small political science department, and many departments are gearing up to make cases for similar reinforcements of their own.

Yet many professors remain curious as to why, with a $35 million budget surplus predicted for the next 10 years and a $6.6 billion endowment, the third-largest in the nation, Yale should have any reason to let engineering equipment sit idle. Or why Mathematics Department Chair Peter Jones is still scrambling to offer popular spring courses due to what he termed "staffing problems." Or why Astronomy Department Chair Sabatino Sofia, DC '63, GRD '66, can't hire two additional faculty members to help the University of Chile set up an astronomy program in exchange for access to their state-of-the-art telescopes.

Yale has maintained a conservative financial approach that seems incongruous in light of unprecedented donor largesse and (mostly) booming markets. But the Administration does not share professors' views that expansion is badly needed; as Deputy Provost Charles Long said, "The one thing that faculty always universally want is more faculty." And Yale is not the only major university exhibiting such caution about its long-term financial plans. Competitors such as Harvard and Brown have also refused to dip deeply into their endowments, despite overflowing coffers. For Economics Professor Ray Fair, these trends are "a complete puzzle to me, especially in times like this."

The gift that keeps on giving

The amount of money the University spends each year out of its endowment is calculated by Yale's "spending rule," which has two main components. Seventy percent of endowment spending is determined by the prior year's spending, adjusted for inflation. The remaining 30 percent is based on the endowment's real value, which in turn is predicated on how well investments have performed. "In periods of rising markets with relatively low levels of inflation, the 70 percent portion is not going to grow as fast as the 30 percent. But if markets drop, you've got that 70 percent still protected," Joseph Mullinix, vice president for finance and administration, explained.

Mullinix points out that endowment spending is the second-fastest growing area of expenditure in Yale's portfolio, and that per-year spending of this vast reservoir has crept up from 4.5 percent to five percent over the last half-decade. "Five percent is neither an outrageously conservative nor aggressive number. In light of five years of this stock market, it looks unbelievably conservative, sure," Mullinix said. "But if the market started down like it did in the late '70s and early '80s, if there were no real market growth, then we'd see the endowment start wilting away." According to Long, Yale is hardly hoarding its money; the University is simply preserving the original purchasing power of each donation that it receives, "so that we can maintain a gift forever." Simply put, if the endowment grows by five percent and inflation rises by three percent, then Yale has two percent to put toward the budget and still edge out inflation.

Despite an endowment that, at $12.8 billion, is nearly twice the size of Yale's, Harvard has maintained a mere 3.65 percent payout rate. "We take a biblical view of these things," half-jokes Alex Huppe, Harvard's director of public affairs. "We have to be in business forever. If you have seven fat years, that doesn't mean you're not going to have seven lean years."

That lesson was on display just last month. Ironically, just as Yale students and many faculty members learned that the University's hiring cap had been loosened for political science's benefit, the stock market took an alarming free fall. "Every other department was calling up and saying, `Where does the line start?' and just as they're starting to line up, the market tanked," Long said with a chuckle.

The view from Mars

Despite September's events, Huppe's statement, when applied to Yale, seems in some ways counterintuitive. In the past, Yale has struggled through some truly "lean years," such as those following the OPEC crash in the '70s or the budget crisis during the tenure of President Benno Schmidt, TC '63, LAW '66, in the early '90s. Schmidt responded to the crisis by slashing department rolls and pushing the sociology department within inches of extinction. During these eras, however, the endowment was never employed as a cushion to soften financial tumbles; instead, budgets were pruned and staff sizes were frozen.

In an interview with The New York Times this past summer, law professor Henry Hansmann, LAW '74, GRD '78, questioned why "when times are tough they cut educational expenditures so they can get over the hard times and maintain the endowment's value." He added that "a stranger from Mars" observing a large university like Yale or Harvard would see "institutions whose business is to manage large pools of investment assets and that they run educational institutions on the side that can expand and contract to act as buffers for the investment pools."

"I love that statement. I think it's right on," Fair said of Hansmann's "stranger from Mars" scenario. "There's been a loss of focus on education. It's become a game--let's see who can get the biggest endowment." Fair cited a recent financial blow to Harvard: though it enjoyed a one-year increase of $2 billion to their endowment, the school lost $1.7 billion when a Connecticut hedge fund collapsed. "If Harvard has enough money to invest in hedge funds--with the attendant large risks involved--why not spend it on education?" he asked.

Fair added, "Yale has done a great job with physical capital and doing a lot with the buildings and the physical plant. What gets short shrift is the human capital. Why does it always seem that academics gets put last when all the other areas are expanding? The heart, the essence of the University is academic." Barker, whose department withstood the loss of one junior and two senior faculty slots following Schmidt's budget crunch, added, "Having the lowest possible number of professors to maintain the undergraduate course of study is, in fact, the most expensive way to operate, because it means that productivity among the faculty is at a minimum. You are in a position of operating at an inefficient level."

Incremental increases in "selective excellence" departments (read: small and narrowly focused) like engineering are especially rare. But although "selective excellence" was one of University President Richard Levin's, GRD '74, buzzwords just a year ago, it's not a phrase often heard anymore--Yale College Dean Richard Brodhead, BR '68, GRD '72, said this week, "I myself have never used the phrase `selective excellence.' "

Scraping by on $6.6 billion

Long takes issue with many of the assumptions made by Hansmann and those who support his views. "We did dip into the endowment much more casually in the '60s, and the result was that it took until the early '90s for the endowment's value to catch up with inflation again," Long explained.

"I think many people see the endowment as a savings account you don't need," Long added. "A family puts a million dollars in the bank, they don't have to worry about putting in any more for a rainy day. But Yale's endowment isn't for a rainy day; it's for every day."

Mullinix sees the philosophical question of the endowment's purpose a bit differently: "Libraries take risks--they keep a book and no one reads it, but it's there in case someone wants to. Is that a waste? I don't think so. You could argue that it is, but we can't know exactly what the future is going to bring."

Sheer prudence, however, is not the only factor in how the endowment is (or isn't) spent. Most gifts are earmarked for some particular purpose. Furthermore, "another reason we pinch pennies is because we do so very many things," Long said. He pointed out the drama, art, architecture, and music schools: "They don't make any money, but they make the entire place much richer. Harvard wouldn't do that. Princeton doesn't have these schools. We choose to have more small good things than fewer good big things. And the fact is, we're spread thin."

Long has a point. Between 1701 and 1994, Yale had zero dollars in its operating budget allocated for capital improvements. In the early '80s, the University spent four to five million a year on piecemeal improvements; now that figure has skyrocketed to $250 million with the renovations to Berkeley College and the construction of the swing space. Yale's "rainy day" has arrived, and a robust endowment has allowed sorely needed maintenance to go deferred no longer. Yet why not go further? As Fair insisted, "The [Administration] is much too concerned with the size of the endowment and not what's actually done with it."

The view from Burns Manor

For the political science department, as professor Rogers Smith explained, six additional positions "will still leave us considerably smaller than major competitors like Harvard, Princeton, Berkeley, and Michigan, but it's probably as much as we can use constructively right now." Whether political science's sudden windfall is a bellwether for other departments, however, is anyone's guess; in any case, faculty shouldn't expect the opportunity for a Montgomery Burnsian "Money Fight" any time soon. Provost Alison Richard flatly stated in February 1997 that faculty growth would not be considered during her tenure, but Levin backed off from that mandate at least as early as October 1997, during a faculty meeting. "He made it clear that no faculty growth was not a hard and fast rule," Fair recalled. "On the other hand he didn't follow through with much expansion, either."

Levin maintained, "I don't think the quality of education was ever endangered. There never was a hiring freeze." Over the past four years--since Richard tooks the helm as provost--104 senior faculty positions have been proferred due to departures or retirements; three-fourths of these offers were accepted. "Our proven efforts have been very successful," Levin said.

Still, Fair is not the only faculty member who senses that the University has been sending conflicting signals. "People don't understand yet what the playing field is. I'm not sure the Administration does either," Jones said. Sofia concurred, "I have heard about a cessation in the hiring freeze, but I haven't seen it articulated in writing. You can make out of the political science situation as much as I can."

Sofia's use of the phrase "hiring freeze" is instructive. Levin and Brodhead have both disavowed the term in interviews, calling it inaccurate. But "freeze" seems to be an apt characterization to many professors when they consider the current hiring situation. "It's correct in a certain sense to say there was never a freeze in that people were hired, but after all, the number of people leaving was not equal to people being hired," Jones reasoned.

As chair of "probably the smallest of the major math departments" in the United States, Jones sees "staffing problems cropping up quite often. We're worried much more about these things than before the cuts." But Jones had unqualified praise for Yale in one area: "In bad times, even in Benno Schmidt times, Yale was always very aggressive in making offers to superstars." Since the 1992 implementation of the hiring cap, Jones's department has welcomed two Fields Medalists--mathematics' equivalent to the Nobel Prize--as well as Benoit Mandelbrot, the father of fractals. "Now that Yale is in a more positive financial situation, I can only hope that they will continue to use those resources," Jones concluded diplomatically.

The view from Mount Sinai

The courtly, reticent Barker would much rather muse on the physics of the four million memory cells housed on a silicon wafer than discuss crass financial matters. He also offers probably the closest thing to a "biblical view" of Yale that can be found amidst administrators and faculty alike: he has been here--first as an undergraduate, then as a graduate student, and finally as a teacher--since 1946. Ask him what changes he has seen in the University's financial outlook during the last half-century and his reply may surprise.

"President Levin has spoken of `selective excellence,' and you would have to ask him what he meant by that," Barker says. "But it doesn't matter what university you're at, you can't do everything. Your goal is to make the whole greater than the sum of its parts."

Photo collage by Julia Tiernan.

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