New endowment tax strains YDS budget but School to maintain key advances and priorities

Yale Divinity School’s budget will absorb a hit of roughly $4.5 million per annum as a result of the dramatically higher federal tax on elite universities’ endowments. 

Taking effect on July 1, the increased endowment tax is tiered and exacts its heaviest toll on academic institutions with the largest endowments as measured on a per-student basis. As part of Yale University, YDS finds itself in the tier facing the highest tax rate: 8 percent. The current endowment tax, enacted in 2017, is 1.4 percent. There is, however, a twist: the new tax is on the gains of the endowment, not the distribution from the endowment as with the 2017 tax. Yale is using 8.25 percent as a forecasted gain with a 5.25 percent distribution from the endowment. This means that YDS will pay an 8 percent tax on an 8.25 percent forecasted gain but will have only a 5.25 percent distribution to pay it, which results in a net or effective tax of 12.5 percent.

The effect of the increased tax is particularly acute for schools like YDS whose budgets rely heavily on earnings from their endowments. Fully 88 percent of the Divinity School’s revenue comes from the endowment. The impact of the tax is acute enough that the University has given schools permission to run deficits for the next two years, provided they have the reserves to cover their shortages. 

In a series of campus meetings over recent weeks, YDS Dean Greg Sterling has laid out for students, faculty, and staff how the School will manage the budget strain without backtracking on high-priority advancements of recent years. The Divinity School will not scale back full-tuition scholarships and cost-of-living stipends for the 95 percent of students with demonstrated need. Nor will YDS abandon plans to develop a Ph.D. program as outlined in its strategic plan—although it will delay its implementation—or the pursuit of more student housing and a Black Church Studies institute.

 “We will not pause,” Sterling said, “and we will not go into reverse.”

Reaching equilibrium

The School is, however, forced to undertake a series of spending reductions to align the budget with the difficult new financial reality. The first step is a series of cuts in the current-year budget, which anticipated the endowment tax. They include a slight reduction in the student population, a smaller pool for faculty and staff salary increases, elimination of a YDS-funded matching-gift program, restrictions on sponsorships, fewer events, and putting the School’s many named lectureships on slower rotations.

As Sterling has explained in the campus meetings, the size of the faculty and staff will also have to be reduced in the coming years. This will mainly be achieved through people leaving YDS, whether they are retiring or moving to different jobs at Yale or elsewhere.

More cuts are planned for the next two fiscal years. After that, the Divinity School administration expects to reach equilibrium.

The new endowment tax is one of at least eight ways the administration in Washington is affecting operations and finances at Yale and other top universities, Sterling explains. One of the biggest worries is a threatened reduction in federal research support, which would potentially cost Yale hundreds of millions of dollars. (While some research grants have been cancelled, there has not yet been an across-the-board cut. Such a cut would not affect YDS directly, as the Divinity School does not receive federal research grants; it would, however, hurt YDS indirectly since the School of Medicine would be heavily affected and is half of the University’s budget, thus affecting all parts of Yale.)

Also looming are restrictions on international students and reductions in federal student loans, among other measures. Both of these have already had a negative impact on YDS.

To Sterling, the new strains on YDS finances are daunting but not defeating. “The School has faced many challenges over our 200-plus years—some greater than this—and each time we have not only survived but come out stronger,” Sterling said. “We will do so again.”