yale university financial report 2005-2006 · Markets can be uncertain, so Endowment growth can ....

yale university

financial report

2005-2006

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Fiscal Years

Five-Year Financial Overview ($ in millions) 2006 2005 2004 2003 2002

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 8,213.3 6,004.5 5,797.1 5,328.1 5,006.6

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 265.1 259.3 202.1 207.6 328.2

Debt:

For facilities improvements $1,954.3 $1,576.9 $1,572.7 $1,543.9 $1,193.8

For student loans and other - 6.0 - 29.0 29.5

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 1,963.6 1,786.9 1,675.9 1,543.1 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 2006 2005 2004 2003 2002

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

Highlights

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Message from the Vice President for Finance and Administration

This September, the University launched its $3 billion“Yale Tomorrow” capital campaign. Building upon thestrong foundation made possible by current and pastdonors, the funds raised in this new campaign will literal-ly create the future! This year’s financial report focuses onthe new capital campaign and how the University usesdonations to improve academic programs, student learn-ing experiences, infrastructure, and Endowment supportto allow Yale to remain competitive and fulfill its missionof creating, disseminating, and preserving knowledge inan increasingly global environment.

While we are excited by the potential of the campaign, itis also important for us to continuously look for ways toenhance, streamline and make more productive the opera-tions of the University. In fiscal 2006, the University wasable to keep expenses within the limits of available rev-enue, and closed the year with a net increase of $7 millionin operating funds. The University continues to improvethe accuracy and e∞ciency of all of its processes. In addi-tion to the continued rollout of expense management sys-tems, e-procurement, and online travel applications, theUniversity completed the implementation of Yale’s “eBill-ePay” system. This internet-based system allows studentsto receive, manage and pay their tuition and other billselectronically 24 hours a day, every day of the year. Inother areas, Yale strengthened its oversight of workers’compensation by implementing new controls and a newsystem to ensure better claims management and tracking.The University has engaged the leading supplier of elec-tronic staffing solutions to enhance our staffing capabili-ties. New business processes and a new system to supportthis initiative will be fully implemented in fiscal 2007. TheUniversity also completed a plan to upgrade and simplifyits core Oracle Financial applications.

Endowment growth was very strong, with a 22.9% returnon investments that resulted in increased net assets of$3.3 billion. The continued generosity of donors, com-bined with prudent management and strong investmentreturns, has allowed the University to continue to meet itsambitious current and long-term goals. One of the strate-gies to help maintain the University’s competitivenessincludes continued investment in the physical infrastruc-ture, which helps attract faculty, support ground-breakingresearch, and provide students an environment to fosterexcellence and creativity. The University spent $265 mil-lion on facilities renovations and plans to spend morethan $300 million a year over the next ten years to bring

facilities up to modern standards and complete plannednew state-of-the-art buildings supporting key initiativesacross campus.

The University was notified in June of 2006 that the fed-eral government was initiating an investigation into ourgrant and contract financial practices. The University iscooperating with the investigation fully. In addition, welaunched a comprehensive “100 day plan” to identify andcorrect any potential issues with University practices inthis important area. While we will be working on this fora while, already controls have been tightened, new andrevised policies put in place, and a significant investmentmade to train business office personnel, lab personnel,and principal investigators to improve all aspects of finan-cial accounting and controls for grants and contracts.Rules and regulations for grant activity continue to growin complexity, but we are determined to be fully compli-ant and to become a model for best practices in this area.A new position has been created–Associate Vice Presidentfor Research Administration–and this unified leadershipand organizational structure has already strengthened ourcapacity to meet federal requirements. I will continue towork personally in this critical area to ensure we have theappropriate infrastructure in place to administer thisimportant activity in the most efficient and transparentmanner.

John Pepper retired from his position as Vice Presidentfor Finance and Administration this past January and Iwas appointed in June 2006. While John led Finance andAdministration for only two years, he had a significantimpact on the University, especially in the development ofstaff. We appreciate all of the good work John did for theUniversity and we will continue the initiatives that hestarted, including the development of an improved rela-tionship with the unions and the creation of a culture thatpromotes trust and open communications and the per-sonal development of all Yale’s employees. We also wantto thank Yale’s donors and friends for their continuedsupport in making Yale the premier institution of teach-ing and research that it has become, and we take pride inour stewardship of Yale’s financial and administrativeoperations.

Shauna Ryan KingVice President for Finance and Administration

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In fi scal 2007 it will contribute $676 million,

about one-third of operating revenues. There

is no question that the Endowment has ena-

bled 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 world-

renowned researchers and scholars to the faculty.

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 suffi cient to expand Yale beyond its

current scale and scope.

With an $18 billion Endowment, why

does Yale need to raise more money?

Yale Tomorrow is a fi ve-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 leader-ship. 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 fi nancial aid, endowed professorships, state-of-the-art laboratories, performance venues, the preservation and digitization of library collections, and other initiatives that are so vital to Yale’s educational mission.

Why Yale Tomorrow?

yale university financial report 2005–2006

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.

The Increasing Role of the Endowment

Chart for position only

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%1985 1990 1995 2000 2005

Medical Services and Other

Gifts, Grants,and Contracts

Tuition, Room,and Board

EndowmentIncome

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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 eco-

nomics. 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.

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, computa-

tional biology, biospheric studies, genomics

and proteomics, as well as the translational and

interdisciplinary research that stems from these

fi elds. From developing medical devices only

a few molecules wide to fi nding 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, break-

through ideas need support from new gifts.

From pioneering curriculums at the Yale

School of Management and Yale College to

expanding international initiatives, to pro-

grams 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

fl uctuations 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 fl uctuate, the expense of running one of

the world’s leading universities tends to in-

crease. This is true even though Yale, like most

major universities, is making a substantial effort

to reduce its cost base. The intense competi-

tion for the best faculty, the need to provide

more generous fi nancial aid packages at both

the undergraduate and graduate levels, and the

signifi cant investment needed to build state-

of-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-fl edged

programs. Several specifi c examples illustrate

Unrestricted27%

Miscellaneous Specifi c Purposes25%

Restricted vs. Unrestricted Endowment FundsFiscal Year 2006

Books3%

Scholarships18%

Professorships23%

Maintenance4%


5

just how important new gifts are to the aca-

demic mission. “When programs begin, they

are often funded by current-use gifts. Then,

as they succeed, we work to fi nd 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 experi-

ence, regardless of fi nancial 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.

The World Fellows Program began in 2000

with a grant of $2 million from the Goldsmith

Foundation. This early vote of confi dence sup-

ported the program from its planning period

through the arrival of the fi rst class of fellows

in 2002. It also served as a catalyst to attract

other grants and gifts, including ongoing

support from The Starr Foundation. Today the

momentum is continuing to build. Recently

a generous gift from Maurice (Hank) Green-

berg 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 mil-

lion 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 off-

set the University’s investment by giving every

Yale Scholar startup funding, distributed over

four critical years.


International Student AwardsFunding Goals 2005 – 2017

$450

400

350

300

250

200

150

100

50

0FY05 FY07 FY09 FY11 FY13 FY15 FY17

Thou

sand

s

Expendable Gifts Endowment Income General Appropriations


6

New gifts support vital operations.

Many departments and services critical to

Yale’s educational mission are not self-support-

ing. Both new endowments and current-use

gifts are vital to their operations. The Yale

Library, for instance, encompasses a tremen-

dous 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 priori-

ties for the Library. In the early 1990s, for

example, Yale purchased a rare collection of

Cambodian newspapers that provide irreplace-

able 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 avail-

able to scholars for generations to come.

The generosity of all donors helps Yale attract the very best students.

Expanding fi nancial aid is one of Yale’s most

important and costly undertakings, requiring

current-use gifts as well as endowment.

At the undergraduate level federal support has

seen a steady decline. In 1978 the federal govern-

ment contributed twenty-fi ve cents of every

dollar of grant aid awarded by Yale College.

Today that fi gure is less than fi ve cents of every

dollar, with the shortfall covered by Yale’s own

resources. The cost of fi nancial aid increases

every year, with the most promising candidates

often selecting a school on the basis of the sup-

port they are offered. Currently 42.5% of Yale

College students receive need-based aid, aver-

aging $26,000. And since 2005, parents with in-

comes below $45,000 have been exempted from

contributing to the cost of their child’s education.

The tremendous cost of fi nancial aid is supported

not only by endowed gifts but by the collective

power of gifts made to the Annual Fund.

Debt reduction programs have allowed stu-

dents in the Schools of Law and Management

to pursue lower-paying careers in the public

and nonprofi t 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.

At the Yale School of Management, the gener-

osity 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.

Parent Contribution27%

Student Effort13%

Paying for a Yale College Education

Grants from Other Sources4%

State and Federal Grants4%

Grants from Yale52%


7


8

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 depart-

mental priorities with the strategic and fi nancial

plans. Since the Provost of the University is

also chair of the University Budget Committee,

this system ensures complete integration be-

tween 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 challeng-

ing them to do more with what they have.

Through this process they identify effi ciencies

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.

ProfessionalSchools &

Other AreasSelf Support

Schools

MAIN MODEL

General Appropriations

EndowmentGA and

Endowment Restricted

Total Funds

Planning Parameters

Endowment

UniversityGeneral

ITS

YC Tuition/Aid

Health Plan

Fringe

Salary

Building Services

Utilities

Interest & CapitalReplacement

Charge

l a w | f & e s | d i v i n i t y | m e d i c i n e | n u r s i n g | m a n a g e m e n t

Model Work Flow


9

Yale takes on important fi nancial issues in bold ways.

Like the Endowment Spending Rule Yale insti-

tuted 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 mainte-

nance 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 pro-

gram 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 transaction-

based 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 benefi ts, the system furthers the

academic mission by helping departments

purchase with greater fl exibility and effi ciency.

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 signifi cant savings. We’ve been able

to afford additional equipment which, in

turn, is helping us advance our learning.”


Procurement Annual Savings

$10

8

6

4

2

0 FY04 FY05 FY06

Mill

ions


10

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.

The opportunities ahead


11


12

Operating Revenue

Yale University has a very strong financialposition after experiencing positive results forthe year. At June 30, 2006, the Universityreported total consolidated assets of $27.7 bil-lion, consolidated liabilities of $8.2 billion,and net assets of $19.5 billion. Net assetsincreased by $3.0 billion during the year, pri-marily because of the 22.9% return invest-ment on the Endowment.

The University maintains a diverseoperating revenue base, which allows protec-tion from a downturn in any one source ofrevenue. Total operating revenue increased by7.4% to $1.97 billion. The largest contributorsto this growth were the increase in the alloca-tion of Endowment spending to operations,other investment income, and medical ser-vices income. Total operating expensesincreased by 9.9% to $1.96 billion. Theresults from operations show an increase of $7.4 million in operating net assets for the year.

Financial Results

0

2

4

6

8

10

12

14

16

18

20

FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06

Grant and contract income

27%

Medical services income 15%

Contributions5%

Endowment income 31%

Student income, net 12%

Other investment income 3%

Publications income 2%

Other income

5%

Net AssetsTen-year trend ($ in billions)

Operating Revenue

As shown in the chart at left, the Universityderives its operating revenue from five mainsources: student income (net of certain schol-arships and fellowships), grants and con-tracts, medical services, contributions, andendowment income. Additional revenues arereceived from a variety of programs.

Student Income, NetStudent income, which includes revenue fromtuition, fees, and room and board, net of cer-tain scholarships and fellowships increased5.5% during 2006 and amounted to $235.9million, or 12% of operating revenues. Of thetotal amount, tuition and fees accounted for$318.9 million, a 6.0% increase over 2005.Revenue from room and board increased6.5% to $52.7 million. In accordance withgenerally accepted accounting principles, stu-dent income is presented net of certain schol-arships and fellowships, which totaled $135.6million and $126.7 million for 2006 and 2005,respectively.

Overview

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During the 2005-2006 academic year,11,380 students were enrolled at the Univer-sity; 5,380 were undergraduate studentsattending programs at Yale College, and6,000 were pursuing their studies at theGraduate School of Arts and Sciences and tenprofessional schools. (Figures are based onfull-time equivalents.)

Students enrolled in Yale College paid$31,460 for tuition and $9,540 for room andboard, bringing the total term bill to $41,000for the 2005-2006 academic year. The in-crease in the Yale College term bill was 5.5%over the 2004-2005 academic year. Studentsenrolled in the Graduate School of Arts andSciences paid $28,000 for tuition, a 4.5%increase over the 2004-2005 academic year.

The University maintains a policy ofoffering Yale College admission to qualifiedapplicants without regard to family financialcircumstances. This “need-blind” admission

policy is supported with a commitment tomeet in full the demonstrated financial needof all students throughout their undergradu-ate years.

During the 2005-2006 academic year,2,267 Yale College students, representing42.5% of eligible Yale College enrollment,received financial aid. In the Graduate Schoolof Arts and Sciences, 2,444 students, or99.3% of those eligible, received financial aid.In the professional schools, 2,833 students, or82.7% of those eligible, received financial aid.In all, 7,544 University students, or 67.2% oftotal University eligible enrollment, receivedsome form of University-administered stu-dent aid in the form of loans, gifts, or a com-bination of both loans and gifts.

Grant and Contract Income Grant and contract income experienced a3.6% growth from $507.2 million in 2005 to$525.7 million in 2006. The Yale School ofMedicine, which receives 78% of theUniversity’s grant and contract income,reported an increase of 4.4% for 2006, whilethe remaining University sectors had anincrease of 1.1%.

The federal government funded $430million, or 82% of 2006 grant and contractincome, in support of Yale’s research andtraining programs. The largest federal spon-sor was the National Institutes of Health(nih), which provided revenues of $337 mil-lion during 2006, an increase of 3.4% overthe prior year. This increase is in line with therecent slow growth of the nih budget.Currently, the President, the House ofRepresentatives, and the Senate have nih

budget proposals with less than 1% growthfor the next fiscal year, so the slower growthis expected to continue. The University alsoreceives significant research support from theNational Science Foundation, the Departmentof Energy, the Department of Defense, andstudent aid awards from the Department ofEducation. Nonfederal sources, which includefoundations, voluntary health agencies, cor-porations, and the State of Connecticut, pro-vided an additional $96 million in research,training, and other purposes during 2006.

$0

$100

$200

$300

$400

$500

$600

FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06

Federal-NIH Federal-Other Non-Federal

Grant and Contract IncomeTen-year trend analysis ($ in millions)

ris247152_13 2/7/07 10:17 AM Page 13

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In addition to funding the direct cost ofsponsored programs, grant and contractawards generally include reimbursement for aportion of the costs related to research labora-tories and other facilities, as well as adminis-trative and support costs incurred for researchand other sponsored activities. These reim-bursements for facility and administrativecosts amounted to $125.4 million in 2006,which is an increase of 4.5% over the prioryear. Recovery of facility and administrativecosts allocable to federally sponsored pro-grams is recorded at rates negotiated with theUniversity’s cognizant agency, the Depart-ment of Health and Human Services. Yale’scurrent rate agreement is effective from July1, 2006 through June 30, 2009.

The primary regulations governing feder-al grants and contracts are encompassed inOffice of Management and Budget CircularA-21, Cost Principles for EducationalInstitutions, and Circular A-110, UniformAdministrative Requirements for Grants andAgreements with Institutions of HigherEducation, Hospitals, and Other Non-ProfitOrganizations. The A-21 principles were mod-

ified during the 1990s to impose limits on thetypes and amounts of facility and administra-tive costs eligible for reimbursement andmandate more stringent Federal CostAccounting Standards for both grants andcontracts.

Medical Services Income Medical services income totaled $302.9 mil-lion in fiscal 2006, an increase of 9.3% from2005, and represented 15% of the University’soperating revenue.

The largest portion of this revenuestream is derived from patient care servicesprovided by the School of Medicine’s YaleMedical Group. Other components includeincome from diagnostic laboratory servicesand contracts with affiliated hospitals, includ-ing Yale-New Haven Hospital, Inc. (ynhh).The increase of 8.0% in patient care incomeduring the year was a result of an overallincrease in volume across the departments.Increased laboratory volume in Pathology,Dermatopathology, and Genetics resulted in a21.9% increase over the prior year in thesedepartments.

Allocation of Endowment Spending Each year a portion of accumulatedEndowment investment returns is allocatedto support operational activity. This impor-tant source of revenue represents 31% of totaloperating income this year and is the largestsource of operating revenue for the Univers-ity. The level of spending is computed inaccordance with an Endowment spending

Operating Revenue

Pediatrics8%

Psychiatry3%

Surgery 14%

Anesthesiology 10%

Therapeutic Radiology 3%

YSM Central 3%

Comprehensive Cancer Center 2%

Child Study Center 1%

Dermatology 7%Diagnostic

Radiology 8%Genetics

1%

Internal Medicine 15%

Laboratory Medicine 1%

Neurology 1%

Neurosurgery 2%

Obstetrics and Gynecology 7%

Ophthalmology and Visual Science 2%

Orthopaedics and Rehabilitation 3%

Pathology9%

School of Medicine Clinical Income by Department

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15

policy that has the effect of smoothing year-to-year market swings. Endowment invest-ment returns allocated to operating activitiesincreased by 8.6% to $615.7 million. Addi-tional information on the Endowment spend-ing policy is provided in the Endowment section of this report and in the footnotes tothe financial statements.

Other Investment Income Other investment income of $65.0 millionrepresents interest, dividends, and gains onnon-Endowment investments. The increaseover the prior year is due to higher interestrates and to the allocation of available cash tohigher-yielding investments. In addition, theUniversity earns interest on the unexpendedfunds from the $300 million chefa debtoffering.

ContributionsContributions from operating, physical, andfinancial activities totaled $316.8 million for2006. This represents a 21% decrease from the

2005 contributions of $398.6 million. Thisdecrease was not unexpected, as 2005 hadunusually high contributions revenue, due inlarge part to a $100 million pledge to theEndowment supporting the School of Musicand a significant pledge supporting physicalcapital.

Publications and Other Income Publications income is generated throughYale University Press (Press), a separatelyendowed department of the University. ThePress published approximately 300 titles in2006 and has approximately 3,700 titles inprint. Many of these books are winners ofprizes, including four Pulitzer Prizes. Itsauthors are academic and professional peoplefrom around the world. Revenue for the Presswas $30.5 million in 2006 and $28.9 millionin 2005.

Other income includes such items as royalty income, ticket sales, admission rev-enue, parking revenue, and application andenrollment fees.

0

$100

$200

$300

$400

$500

$600

$700

FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY060%

5%

10%

15%

20%

25%

30%

35%

Allocation of Endowment ($ in millions) % of total revenues

Allocation of Endowment Spending As a percentage of total revenues, ten-year trend analysis

ris247152_15 2/7/07 10:00 AM Page 15

Instruction and departmental research 29%

Organized research 19%

Patient care and other related services 15%

Libraries and other academic

support 9%

Student aid and services 15%

Public service 6%

Administration and other institutional

support 7%

16

Operating expenses totaled $1.96 billion, rep-resenting a 9.9% increase in expenses for theyear. The largest component of expenses—salaries and wages and employee benefits—rose 9.9%. This category of expense repre-sents 61% of total University operating costs.This increase was in line with the University’soverall plans to maintain moderate growthand a competitive position with peer institu-tions. Faculty salaries, which make up 44.3%

Operating Expensesof total compensation, rose 6.4% in 2006.Compensation packages must be competitivein order to recruit and retain faculty of thehighest caliber. The University has also madeit a priority to ensure that the salary and ben-efit programs for staff are equitable and com-petitive with the marketplace.

The cost of providing employee benefits,including various pension, postretirementhealth, and insurance plans in addition tosocial security and other statutory benefits,amounted to $288.3 million, an increase ofapproximately 21% from 2005. The increasewas primarily due to increases in definedbenefit pension and postretirement healthcare plan expenses, as well as health care costsfor active employees.

Other operating expenditures include ser-vices, materials and supplies, and otherexpenses. These expenditures increased byapproximately 12%. Increases include travel,library collections, professional service fees,and building operations and maintenance.

In accordance with generally acceptedaccounting principles, Yale reports its operat-ing expenses by functional classification inthe Statement of Activities. Expenses in eachclassification increased primarily as a result ofthe salary, wage, and employee benefitincreases mentioned above, as well as the costto maintain the University buildings.

The University spends 53% of its operat-ing resources on academic activities includinglibraries as well as student aid and services.Organized research represents 19% andpatient care 15% of spending. Organizedresearch and patient care activities also sup-port the academic and learning experiences atthe University.

Faculty and Staff CompensationThe University employs approximately 2,900faculty and 700 postdoctoral associates andother trainees. Additionally, there are approx-imately 3,700 managerial and professionalstaff, and 4,100 unionized clerical, technical,service, and maintenance personnel. Theemployment amounts are based on full-timeequivalents. Total salaries and wages andrelated employee benefits were $1.2 billion in 2006.

Salaries and wages 46%

Employee benefits 15%

Student aid 3%

Other operating expenditures 23%

Depreciation and amortization 7%

Utilities 3%

Interest on indebtedness 3%

Operating Expenses by Natural Classification

Operating Expenses by Functional Classification

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17

The University manages its operations toachieve long-term financial equilibrium. It iscommitted to sustaining both the programsand the capital assets (Endowment and facili-ties) supporting those programs over multi-ple generations. Endowment income is allo-cated to the Operating Budget based on aspending policy that preserves theEndowment asset values for future genera-tions, while providing a robust revenuestream for current programs. Similarly, theOperating Budget increasingly includes thefunds needed to replenish the capital basenecessary to ensure that buildings are main-tained to support current programs.

Operating BudgetThe Statement of Activities in the audited

financial statements is presented in accor-dance with generally accepted accountingprinciples (gaap). gaap recognizes revenuewhen earned and expenses when incurred.The Operating Budget is focused more onresources available and used in the fiscal peri-od presented. The Budget does not includecertain expenses that are paid out over thelong term, such as unused vacation time, andcertain revenue that will not be received with-in the next fiscal year, such as pledged contri-bution revenue. Another significant differenceis that the Operating Budget treats the CapitalReplacement 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 2006 2006

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) 235,931 245,700

Sponsored agreement income 124,079 401,591 525,670 515,848

Medical services income 30,877 272,034 302,911 288,949

Contributions 25,573 67,518 93,091 74,564

Allocation of Endowment spending 43,493 572,252 615,745 612,611

Unrestricted and recovery income 394,154 (394,154) - -

Other investment income 28,237 36,715 64,952 34,974

Other income 46,613 57,449 104,062 89,761

Transfers 11,418 (21,371) (9,953) (2,660)

Total revenue 958,631 973,778 1,932,409 1,859,747

Expenses:

Faculty salaries 151,155 249,891 401,046 406,678

Staff salaries and wages 305,749 184,989 490,738 487,120

Total salaries and wages 456,904 434,880 891,784 893,798

Employee benefits 114,367 130,057 244,424 253,213

Student stipends 18,098 41,642 59,740 62,618

Other expenses 315,037 345,105 660,142 656,824

Interest and capital replacement 168,383 7,614 175,997 185,310

Utilities 51,758 65 51,823 44,999

Internally provided services (175,279) (30,786) (206,065) (194,198)

Total expenses 949,268 928,577 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

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depreciation) as an expense rather than thehistorical cost depreciation expensed in theStatement of Activities. The University hasbeen increasing the funding of the crc since1996. In fiscal 2006, Yale funded $98 millionof the crc from the Operating Budget anddepartmental funds, $32 million from capitalgifts, and borrowed the remaining $34 mil-lion. The University expects to fund the fullcrc level in its Operating Budget by 2010.Another difference is that the gaap financialstatements do not present fund balance trans-fers between the operating, physical, andfinancial categories, as the Operating Budgetdoes. Also, the operations of Yale Press areconsolidated in the Statement of Activities,but are not part of the Operating Budget.

A summary of the differences between theOperating Budget presentation and theStatement of Activities is as follows:

2006 2005

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 2,158 376

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 byfunding source. The category “GeneralAppropriations” includes the cost of educa-tion for the University. The category “Other”includes Endowments and gifts, sponsoredresearch, patient care, and other activity.Endowment and gift activities are separatedto facilitate and monitor the University’s fidu-ciary responsibility for compliance withdonor intentions for restricted activity.Sponsored research includes the fundingfrom federal, state, and non-governmentalentities and the direct costs of the related

research. Other activity includes, amongother things, health services provided by theYale Medical Group as part of Yale’s role inthe Academic Health Center of Yale-NewHaven Health Systems.

FY06 Operating Budget ResultsThe University ended the year with a surplusof $14.5 million as planned in order to repaythe budget deficit incurred in fy05. Positiveoperating results of $54.6 million allowed theUniversity to increase fund balances ratherthan draw $42.8 million from fund balancesas anticipated in the budget. This positivevariance resulted from higher revenues of $73million and lower expenses of $25 million.Revenues were higher in grants and con-tracts, medical services, contributions, invest-ment income and other income. Grants andcontracts revenue was favorable to budget asthe Medical School continued to experiencegrowth in its research funding. Medical ser-vices income was favorable to budget becauseof continued efficiencies and growth in theYale Medical Group. Contributions to theUniversity’s Operating Budget were higherthan expected as donors responded to thequiet phase of the University’s pending capi-tal campaign. Investment income was favor-able to budget because of higher interestincome earned on University cash balances.

Operating expenses were about 1.2%below budgeted levels. Salary expenses wereon budget while employee benefits werebelow budget because of lower effectivefringe rates than budgeted by departments.Financial aid costs (funded scholarships andstudent stipends) were over budget becauseof more financial aid funds available in grantsand restricted funds. Interest and capitalreplacement costs were under budget becauseof increased capital gifts received during thefiscal year which were applied to the fundingof the capital replacement cost. Record highoil and gas prices caused the unfavorable vari-ance in utilities costs.

18

Operating Budget

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19

Physical CapitalIn 2006 the University continued its ambi-tious program of renovating existing facilitieswhile adding strategic new facilities to meetteaching, research, and residential needs.Capital spending on facilities in 2006 totaled$265.1 million. This is the ninth straight yearthat capital spending has exceeded $200 mil-lion since it was significantly increased in the1990s to address years of deferred mainte-nance.

Almost one-third of the University’s capi-tal spending in 2006 was devoted to achievingthe University’s goal of fully refurbishing itsundergraduate residential facilities. With thecompletion of Davenport College in time forthe start of the 2005-2006 academic year, sixof the twelve residential colleges have beenrenovated: Berkeley, Branford, Davenport,Timothy Dwight, Pierson, and Saybrook.Another four colleges were in various stagesof renovation at the end of 2006: the renova-tion of Trumbull College was nearly com-plete; construction was underway on SillimanCollege; the renovation of Jonathan EdwardsCollege was being designed; and the CalhounCollege renovation was in the planning phase.Planning for the two remaining residentialcolleges—Morse and Stiles—will begin in2007.

The School of Medicine accounted foralmost one-fifth of the University’s 2006 capi-tal expenditures. The largest expenditure offunds was for the construction of the newAmistad Street Building. When completednext year, this building will significantlyincrease the Medical School’s research labora-tory space. Funds were also spent to constructa new Magnetic Resonance Center, which willinclude a Positron Emission TomographyCenter. Finally, funds were spent on modern-izing laboratory space in a number of medicalbuildings, most notably the Sterling Hall ofMedicine and the Hunter Radiation TherapyCenter.

About 12% of the University’s capitalspending was for science buildings. Most ofthe spending in this area was to construct thenew Class of 1954 Chemistry ResearchBuilding and the new Daniel L. MaloneEngineering Center. Both of these buildingswere completed in time for the start of the2006-2007 academic year.

Consistent with the University’s strategyof modernizing all areas of the campus, sig-nificant capital projects were underway inother areas of the University in 2006. Thenew Rose Center, home of the Yale Police,and the comprehensive renovation of theSchool of Music’s Leigh Hall were both com-pleted. The largest expenditures outside ofthe residential colleges, Medicine and science

Utilities 5%

Residential 30%

Self-support schools 9%

Museums and galleries 4%

Medicine 19%

Engineering and Applied Sciences 4%

Biological and Physical Sciences 8%

Administration and other 9%

Humanities and Social Sciences 3%

Athletics 6%

All other3%

Capital Spending by Campus Area

RenovationsAcquisitions and new construction

0

$50

$100

$150

$200

$250

$300

$350

$400

FY 81 FY 86 FY 91 FY 96 FY 01 FY06

Capital Spending by Year($ in millions; in 2006 dollars)

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Another major source of funding forUniversity capital projects is debt. TheUniversity issued $300 million in tax-exemptdebt in October 2005 through the Connect-icut Health and Educational FacilitiesAuthority. The debt, plus a related $11 millionpremium, brings total outstanding facilitydebt to $1.95 billion, including capital leaseobligations. The University again received thehighest bond ratings available: AAA fromStandard and Poor’s and Aaa from Moody’s.

The University continues to benefit fromits diverse sources of variable-rate debt, buthedges a significant portion through taxableinterest rate swaps. As of June 30, 2006, Yalehad outstanding swaps totaling $540 millionresulting in a debt portfolio with a 56% fixedand 44% variable mix.

Although the University relies on its ownliquidity to support the remarketing of itsvariable-rate demand notes, it has alsoentered into a $200 million revolving creditarrangement to serve as a backup liquidityfacility. With the exception of its taxablecommercial paper, which can be retired atwill, the University’s debt is almost entirely inthe form of bonds and notes with bulletmaturities between 2027 and 2042 and a“Century Bond” maturing in 2096.

Continuing a multi-year plan towardfunding all capital maintenance and renova-tion from the Operating Budget and capitalgifts by 2010, the operating budget con-tributed $98 million, or 60%, of the estimat-ed $164 million required annually to maintainthe University’s buildings. Capital gifts pro-vided another $32 million, or 20%, to meetthis target.

were for the comprehensive renovation of theYale University Art Gallery’s Kahn Buildingand the partial renovation of the Yale Bowl,both of which were well underway in 2006.Construction of the new Sculpture Buildingsand garage and the renovation of the CrossCampus Library were just starting at the endof 2006. Finally, by the end of 2006, designwas underway for Forestry & EnvironmentalStudies’ new Kroon Building, and design wasnearly complete for the renovation of the Art& Architecture Building as well as the con-struction of a new History of Art addition.

The University’s ambitious renovationand building plans were funded by a combi-nation of gifts, debt, and, increasingly, fundsfrom the operating budget. The Universitycontinues to rely heavily on the extraordinarygenerosity of its alumni/ae and friends. Giftsfor facilities in 2006 totaled $57 million. TheUniversity has been the beneficiary of an out-standing response from donors. The DanielL. Malone Engineering Center, the Class of1954 Chemistry Research Building, the resi-dential college renovations, the YaleUniversity Art Gallery’s Kahn Building, theSchool of Music’s Leigh Hall, the RoseCenter, the Yale Bowl, Forestry & Environ-mental Studies’ Kroon Building, the CrossCampus Library, the Art & ArchitectureBuilding with its new History of Art addi-tion, and indeed nearly all of the University’srecent major capital projects have been fund-ed at least partially through gifts.

Physical Capital

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0

$1,000

$2,000

$3,000

$4,000

$5,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Endowment InflationMean of broad universe of colleges and universities

Growth of $1,000 Invested in the Yale Endowment 1996-2006

EndowmentThe Endowment supports both current andfuture academic programs of the University.To balance current and future needs, Yaleemploys investment and spending policiesdesigned to preserve Endowment asset valueswhile providing a substantial flow of incometo the Operating Budget. At June 30, 2006,the Endowment was more than $17.9 billion,after the allocation of Endowment spendingof $616 million to the Operating Budget dur-ing the year.

Unrestricted 27%

Sholarships 18%

Maintenance 4%

Miscellaneous specific purposes

25%

Professorships 23%

Books 3%

Endowment Fund Allocation, Fiscal Year 2006

Investment PerformanceFor the year ended June 30, 2006, theEndowment achieved a 22.9% investmentreturn. During the past decade, theEndowment earned an annualized 17.2%return, placing the University at the top of theuniverse of institutional funds. Yale’s disci-plined and diversified asset allocation policiescombined with strong active managementadded substantial value to the Endowment.

Over the ten years ended June 30, 2006,Yale’s superior investment returns added $8.5billion relative to a composite passive bench-mark and $9.1 billion relative to the meanreturn of a broad universe of colleges and uni-versities.

Endowment SpendingThe Endowment spending policy, the meansby which Endowment earnings are allocatedto operations, balances the competing objec-tives of providing a stable flow of income tothe Operating Budget and protecting the realvalue of the Endowment over time. Thespending policy manages the trade-offbetween these two objectives by using a long-term spending rate target combined with asmoothing rule, which adjusts spending inany given year gradually in response tochanges in Endowment market value.

The target spending rate approved by theYale Corporation currently stands at 5.25%.The smoothing rule limits Endowmentspending in a given year to the sum of 80% ofthe previous year’s spending and 20% of thetargeted long-term spending rate applied tothe market value two years prior. The spend-ing amount determined by the formula isadjusted for inflation. The smoothing ruleand the diversified nature of the Endowmentmitigate the impact of short-term marketvolatility on the flow of funds to supportYale’s operations.

The Endowment provided income of$616 million to current operations in 2006,representing 31% of the University’s operatingrevenues. Ten years ago, Endowment distrib-utions contributed approximately $170 mil-lion, or 17% of the budget. Over the pastdecade, Endowment distributions haveincreased at an annualized rate of nearly 14%.

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cash. Today, this percentage is approximately18%. Foreign equity, private equity, absolutereturn strategies, and real assets now repre-sent more than four-fifths of theEndowment.

The heavy allocation to nontraditionalasset classes stems from the diversifyingpower they provide to the portfolio as awhole. Alternative assets, by their nature,tend to be less efficiently priced than tradi-tional marketable securities, providing anopportunity to exploit market inefficienciesthrough active management. Today’s actualand target portfolios have significantly higherexpected returns and lower volatility than the1986 portfolios.

June CurrentAsset 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%

0

5%

10%

15%

20%

25%

30%

35%

Domestic equity Fixed income Foreign equity Absolute return Private equity Real assets

Yale return Active benchmark Passive benchmark

40%

Yale EndowmentAsset classes versus benchmarks: annualized returnsnet of fees for ten years ended June 30, 2006

Active BenchmarksDomestic Equity: Frank Russell Median Manager, U.S. EquityFixed Income: Frank Russell Median Manager, Fixed IncomeForeign Equity: Frank Russell Median Manager Composite, Foreign EquityAbsolute Return: CSFB CompositePrivate Equity: Cambridge Associates CompositeReal Assets: NCREIF and Cambridge Associates Composite

Passive BenchmarksDomestic Equity: Wilshire 5000Fixed Income: Lehman Brothers Treasury IndexForeign Equity: 50% MSCI EAFE Index, 50% MSCI EMF IndexAbsolute Return: 1-year Constant Maturity Treasury + 6%Private Equity: University Inflation + 10%Real Assets: University Inflation + 6%

Asset AllocationAsset allocation proves critical to successfulEndowment performance. Yale’s asset alloca-tion policy combines tested theory andinformed market judgment to balance invest-ment risks with the need for high returns.

The need to provide resources for currentoperations as well as preserve the purchasingpower of assets dictates investing for highreturns, causing the Endowment to beweighted toward equity. In addition, theEndowment’s vulnerability to inflation directsthe University away from fixed income andtoward equity instruments. Hence, over 90%of the Endowment is invested in some formof equity, through domestic and internationalsecurities, real assets, and private equity.

Over the past twenty years, Yale signifi-cantly reduced the Endowment’s exposure totraditional domestic marketable securities,reallocating assets to nontraditional assetclasses. In 1986, over 80% of the Endowmentwas committed to U.S. stocks, bonds, and

Endowment

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23

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24

Yale University Statements of Financial PositionJune 30, 2006 and 2005 ($ in thousands)

June 30, June 30,

2006 2005

Assets:

Cash and cash equivalents $ 366,527 $ 477,316

Accounts receivable, net 130,141 109,482

Contributions receivable, net 364,863 383,956

Student loans receivable, net 52,230 55,019

Investments, at fair value 24,242,768 19,148,960

Other assets 68,183 67,856

Land, buildings and equipment, net of

accumulated depreciation 2,486,930 2,263,170

Total assets $27,711,642 $22,505,759

Liabilities:

Accounts payable and accrued liabilities $ 232,537 $ 200,363

Advances under grants and contracts and other deposits 62,909 57,379

Other liabilities 171,399 123,950

Liabilities under split-interest agreements 117,319 81,097

Bonds and notes payable 1,954,253 1,582,893

Liabilities associated with investments 5,640,751 3,926,019

Advances from Federal government for student loans 34,200 32,825

Total liabilities 8,213,368 6,004,526

Net assets:

Unrestricted 9,788,012 8,535,925

Temporarily restricted 7,664,293 6,095,168

Permanently restricted 2,045,969 1,870,140

Total net assets 19,498,274 16,501,233

Total liabilities and net assets $ 27,711,642 $ 22,505,759

Detail of net assets:

Temporarily Permanently June 30, June 30,

Unrestricted Restricted Restricted 2006 2005

Endowment and student loans $ 5,668,230 $ 7,091,178 $ 2,045,969 $ 14,805,377 $ 12,400,236

Funds functioning as Endowment 3,186,759 112,480 - 3,299,239 2,857,230

Physical capital investment 629,285 290,103 - 919,388 755,259

Operating:

Accumulated general budget deficit (70,904) - - (70,904) (85,404)

Designated and restricted for specific purposes 374,642 170,532 - 545,174 573,912

$9,788,012 $ 7,664,293 $ 2,045,969 $ 19,498,274 $ 16,501,233

The accompanying notes are an integral part of these financial statements.

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25

Yale University Statement of Activitiesfor the year ended June 30, 2006 with summarized information for the year ended June 30, 2005

($ in thousands)

Temporarily Permanently

Unrestricted Restricted Restricted 2006 2005

Operating

Revenues and reclassifications:

Student income, net $ 235,931 $ - $ - $ 235,931 $ 223,717

Grant and contract income, primarily for research

and training 525,670 - - 525,670 507,220

Medical services income 302,911 - - 302,911 277,130

Contributions 16,292 75,001 - 91,293 112,531

Allocation of Endowment spending from financial capital 181,858 433,887 - 615,745 567,005

Other investment income 64,952 - - 64,952 23,564

Publications income 30,704 - - 30,704 29,254

Other income 103,813 - - 103,813 95,176

Total revenues 1,462,131 508,888 - 1,971,019 1,835,597

Net assets released from restrictions 508,041 (508,041) - - -

Total revenues and reclassifications 1,970,172 847 - 1,971,019 1,835,597

Expenses:

Instruction and departmental research 567,835 - - 567,835 508,736

Organized research 384,028 - - 384,028 354,329

Patient care and other related services 287,520 - - 287,520 269,992

Libraries and other academic support 182,639 - - 182,639 171,522

Student aid and services 293,134 - - 293,134 259,741

Public service 118,493 - - 118,493 111,054

Administration and other institutional support 129,923 - - 129,923 111,566

Total expenses 1,963,572 - - 1,963,572 1,786,940

Increase in net assets from operating activities 6,600 847 - 7,447 48,657

Non-operating

Physical capital:

Contributions - 56,950 - 56,950 26,425

Gain (loss) on swap contracts 51,404 - - 51,404 (30,873)

Other increases 11,752 - - 11,752 6,601


Increase in net assets from

physical capital activities 91,933 28,173 - 120,106 2,153

Financial capital:

Contributions 2,580 6,919 159,039 168,538 259,669

Total Endowment return, net of management fees 1,023,911 2,309,168 6,777 3,339,856 2,788,053

Other (decreases) increases (20,499) 3,825 10,013 (6,661) (5,596)

Allocation of Endowment spending to operating (181,858) (433,887) - (615,745) (567,005)


Increase in net assets from financial capital activities 1,170,054 1,540,105 175,829 2,885,988 2,475,121

Increase in net assets before cumulative effect adjustment 1,268,587 1,569,125 175,829 3,013,541 2,525,931

Cumulative effect of change in accounting principle (Note 8) (16,500) - - (16,500) -

Total increase in net assets 1,252,087 1,569,125 175,829 2,997,041 2,525,931

Net assets, beginning of period 8,535,925 6,095,168 1,870,140 16,501,233 13,975,302

Net assets, end of period $ 9,788,012 $ 7,664,293 $ 2,045,969 $ 19,498,274 $ 16,501,233


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26

Yale University Statements of Cash Flowsfor the years ended June 30, 2006 and 2005 ($ in thousands)

2006 2005

Operating activities:

Change in net assets $2,997,041 $2,525,931

Adjustments to reconcile change in net assets to net cash

provided by (used in) operating activities:

Depreciation and amortization 138,574 131,740

Unrealized (gain) loss on swap contracts (58,342) 30,873

Net investment gains (2,917,080) (2,349,130)

Contributions restricted for physical and financial capital (225,488) (286,094)

Other adjustments 9,057 8,000

Changes in assets and liabilities that provide (use) cash:

Accounts receivable (20,659) (5,929)

Contributions receivable 1,168 (14,726)

Other operating assets (8,011) (1,484)

Accounts payable and accrued expenses 19,327 15,368

Advances under grants and contracts and other deposits 5,530 481

Other liabilities 105,791 17,209

Net cash provided by operating activities 46,908 72,239

Investing activities:

Student loans repaid 11,162 11,228

Proceeds from sale of student loans 17,213 17,662

Student loans granted (26,431) (28,967)

Purchases related to capitalized software costs and other assets (4,101) (2,656)

Proceeds from sales and maturities of investments 11,897,781 12,519,989

Purchases of investments (12,176,988) (12,414,149)

Purchases of land, buildings and equipment (277,648) (285,482)

Net cash used in investing activities (559,012) (182,375)

Financing activities:

Contributions restricted for physical and financial capital 74,734 126,223

Contributions received for split-interest agreements 22,827 4,563

Payments made under split-interest agreements (9,744) (8,589)

Proceeds from long-term debt 311,030 11,264

Repayments of long-term debt (150) (252)

Interest earned and advances from Federal government for student loans 2,618 1,658

Net cash provided by financing activities 401,315 134,867

Net (decrease) increase in cash and cash equivalents (110,789) 24,731

Cash and cash equivalents at beginning of year 477,316 452,585

Cash and cash equivalents at end of year $366,527 $477,316


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27

Permanently Restricted Net Assets – Net assets that are subject to

explicit donor- imposed stipulations that they be maintained

permanently by the University. Generally, the donors of these

assets permit the University to use the returns on the related

investments over time for general or specific purposes.

The University’s measure of operations as presented in the

Statement of Activities includes income from tuition (net of cer-

tain scholarships and fellowships) and fees, grants and contracts,

medical services, contributions for operating programs, the allo-

cation of Endowment spending for operations and other rev-

enues. Operating expenses are reported on the statement of

activities by functional categories, after allocating costs for oper-

ation and maintenance of plant, interest on indebtedness and

depreciation expense.

The University presents non-operating activity as physical capi-

tal and financial capital, within the statement of activities. The

physical capital section includes contributions and other activi-

ties related to land, buildings and equipment that are not includ-

ed in the University’s measure of operations. Similarly, the finan-

cial capital section includes contributions, investment returns

and other activities related to Endowment and student loan net

assets utilized for long-term investment purposes. Financial capi-

tal also encompasses expendable contributions and the related

accumulated appreciation that have been designated to function

as Endowment (i.e., funds functioning as Endowment) by the

Yale Corporation.

Administration of the University’s Endowment is subject to the

general provisions of the Uniform Management of Institutional

Funds Act (umifa or “the Act”). Under the provisions of this

State law, a governing board may appropriate for expenditure,

for the uses and purposes for which an Endowment fund is

established, so much of the net appreciation as is deemed pru-

dent based on standards established by the Act. While a govern-

ing board must exercise ordinary business care in the appropria-

tion of such appreciation, the general provisions of umifa do

not mandate that institutions retain Endowment gains perma-

nently. Accounting principles generally accepted in the United

States of America require institutions that are subject to general

umifa provisions to report realized and unrealized net gains on

Endowment assets as increases in unrestricted net assets or tem-

porarily restricted net assets based on the absence or existence of

donor-imposed restrictions.

Recognizing the critical importance of maintaining its physical

capital as well as its financial capital over many generations, the

University began in the mid-1990’s to allocate funds directly

from the operating budget to a capital maintenance account.

Significant effort has gone into estimating an annual equilibrium

level funding target for internal purposes that would allow Yale’s

facilities to be maintained in excellent condition on a consistent

basis, thus avoiding deferred maintenance and the need to make

catch-up investments in facilities at a later date. While not an

Yale UniversityNotes to Financial Statements

1. Significant Accounting Policies

a. General

Yale University (“the University”) is a private, not-for-profit

institution of higher education located in New Haven,

Connecticut. The University has been granted tax exempt status

under section 501(c)(3) of the Internal Revenue Code. The

University provides educational services primarily for students

and trainees at the undergraduate, graduate and postdoctoral

levels, and performs research, training and other services under

grants, contracts and other similar agreements with agencies of

the Federal government and other sponsoring organizations. The

University’s academic organization includes Yale College, the

Graduate School of Arts and Sciences, ten professional schools

and a variety of research institutions and museums. The largest

professional school is the Yale School of Medicine, which con-

ducts medical services in support of its teaching and research

missions.

b. Basis of Presentation

The financial statements of Yale University include the accounts

of all academic and administrative departments of the University,

and affiliated organizations that are controlled by the University.

Financial statements of private, not-for-profit organizations

measure aggregate net assets based on the absence or existence

of donor-imposed restrictions. Three categories of net assets

serve as the foundation of the accompanying financial state-

ments. These classes are labeled unrestricted, temporarily

restricted and permanently restricted net assets. Brief definitions

of the three net asset classes are presented below:

Unrestricted Net Assets – Net assets derived from tuition and

other institutional resources that are not subject to explicit

donor-imposed restrictions. Unrestricted net assets also include a

portion of the appreciation on Endowment investments as

described in subsequent paragraphs of this note.

Temporarily Restricted Net Assets – Net assets that are subject to

explicit donor-imposed restrictions on the expenditure of contri-

butions or income and gains on contributed assets. The tempo-

rary restrictions may expire due to the passage of time or the

incurrence of expenditures that fulfill the donor-imposed restric-

tions. Temporarily restricted net assets are established with

restricted contributions from donors and restricted income gen-

erated from Endowments. Restrictions include support of specif-

ic schools or departments of the University, often for purposes

such as professorships, research, faculty support, scholarships

and fellowships, library and art museums, building construction

and other specific purposes.

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28

exact science, an estimate of the full capital replacement equilib-

rium level for 2006 is $164 million (unaudited). The University

reserved $130 million during the year from operating funds and

gifts for renovations. The University spent $162 million on the

renovation of its facilities in 2006, all of which was provided

from capital replacement charge reserve funds from 2006 and

prior. Over time, it is the University’s intent to increase the

annual funding of capital replacement costs from the operating

budget until such funding reaches the estimated full capital

replacement equilibrium level.

c. Cash and Cash Equivalents

Cash and cash equivalents are recorded at fair value and include

institutional money market funds and similar temporary invest-

ments with maturities of three months or less at the time of pur-

chase. Cash and cash equivalents awaiting investment as part of

Endowment net assets are reported as investments. Cash and

cash equivalents classified as investments were $192.5 million

and $459.9 million at June 30, 2006 and 2005, respectively.

Cash and cash equivalents do not include cash balances held as

collateral.

Supplemental disclosures of cash flow information includes the

following, in thousands of dollars:

2006 2005

Cash paid during the year for:

Interest $70,400 $58,500

Noncash investing activities:

Capital lease obligations 61,421 -

Land, buildings and equipment

purchases payable to vendor 47,599 36,270

Included in contributions restricted for physical and financial

capital of $225,488 for 2006 and $286,094 for 2005 are contribu-

tions in the form of investments of $169,574 and $50,298,

respectively.

d. Investments

The University’s investments are recorded in the financial state-

ments at fair value. The value of publicly traded fixed income

and equity securities is based upon quoted market prices and

exchange rates, if applicable. The fair value of significant direct

real estate investments is determined from periodic valuations

prepared by independent appraisers.

Fair values for certain private equity and real estate investments

held through limited partnerships or commingled funds are esti-

mated by the respective external investment managers if market

values are not readily ascertainable. These valuations necessarily

involve assumptions and methods that are reviewed by the

University’s Investments Office. The University records the cost

of managing its Endowment portfolio as a decrease in financial

capital within the appropriate net asset class in the Statement

of Activities.

The University invests its Endowment investment portfolio and

allocates the related earnings for expenditure in accordance with

the total return concept. A distribution of Endowment return

that is independent of the cash yield and appreciation of invest-

ments earned during the year is provided for program support.

The University has adopted an Endowment spending policy

designed specifically to stabilize annual spending levels and to

preserve the real value of the Endowment portfolio over time.

The spending policy attempts to achieve these two objectives by

using a long-term targeted spending rate combined with a

smoothing rule, which adjusts spending gradually to changes in

the Endowment market value.

Investments are exposed to various risks, such as interest rate,

market and credit risks. Due to the level of risk associated with

certain investments, it is at least reasonably possible that changes

in the values of investments will occur in the near term and that

such changes could materially affect the amounts reported in the

University’s financial statements.

The Yale Corporation approved a long-term targeted spending

rate of 5.25%, with an 80/20 allocation of prior year spending to

market value, effective in 2005. The actual rate of spending for

2006 and 2005, when measured against the previous year’s mar-

ket value, was 4.09 percent and 4.45 percent, respectively. Actual

spending rates have been lower than long-term targets in recent

years due to strong investment returns.

e. Derivatives

Derivative financial instruments are recorded at fair value

with the resulting gain or loss recognized in the statement of

activities.

f. Land, Buildings and Equipment

Land, buildings and equipment are generally stated at cost.

Buildings leased under capital leases are recorded at the lower of

the net present value of the minimum lease payments or the fair

value of the leased asset at the inception of the lease. Annual

depreciation is calculated on a straight-line basis over useful

lives, or over the lease term for capital leases, ranging from 15 to

50 years for buildings and improvements and 4 to 12 years for

furnishings and equipment.

g. Other Assets

Capitalized software and bond issuance costs are included in

other assets in the financial statements. Bond issuance costs are

amortized over the term of the related debt and capitalized soft-

ware costs are amortized over the estimated useful lives of the

software, ranging from 5 to 10 years.

h. Collections

Collections at Yale include works of art, literary works, historical

treasures and artifacts that are maintained in the University’s

museums and libraries. These collections are protected and pre-

served for public exhibition, education, research and the further-

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29

ance of public service. Collections are not capitalized; purchases

of collection items are recorded as operating expenses in the

University financial statements in the period in which the items

are acquired.

i. Split-Interest Agreements

The University’s split-interest agreements with donors consist

primarily of charitable gift annuities, pooled income funds and

irrevocable charitable remainder trusts for which the University

serves as trustee. Assets are invested and payments are made to

donors and/or other beneficiaries in accordance with the respec-

tive agreements.

Contribution revenues for charitable gift annuities and charitable

remainder trusts are recognized at the dates the agreements are

established. In addition, the present values of the estimated

future payments to be made to the beneficiaries under these

agreements are recorded as liabilities. For pooled income funds,

contribution revenue is recognized upon establishment of the

agreement at the fair value of the estimated future receipts, dis-

counted for the estimated time period until culmination of the

agreement. The discount rates used to calculate these liabilities

approximate a risk-free rate.

j. Beneficial Interest in Trust Assets

The University is the beneficiary of certain perpetual trusts and

charitable remainder trusts held and administered by others. The

estimated fair values of trust assets are recognized as assets and

as gift revenue when reported to the University.

k. Tuition and Fees

Tuition and fees revenue, which is included in student income on

the statement of activities, is generated from an enrolled student

population of approximately 11,380. The undergraduate popula-

tion of approximately 5,400 is a diverse group attracted from

across the United States and from many foreign countries.

Foreign students account for approximately 8 percent of the

undergraduate population. Net tuition revenue from undergrad-

uate enrollment represents approximately 60 percent of total net

tuition revenue.

The University maintains a policy of offering qualified applicants

admission to Yale College without regard to financial circum-

stance as well as meeting in full the demonstrated financial need

of those admitted. Student need in all programs throughout the

University is generally fulfilled through a combination of schol-

arships and fellowships, loans and employment during the acad-

emic year. Tuition and fees have been reduced by certain scholar-

ships and fellowships in the amounts of $135.6 million and

$126.7 million in 2006 and 2005, respectively.

l. Contributions

Unconditional promises to give that are expected to be collected

within one year are recorded at their net realizable value.

Amounts expected to be collected in future years are recorded at

the present value of estimated future cash flows. The discounts

on those contributions are computed using a risk-free interest

rate applicable to the year in which the promise is received.

Amortization of the discount is included in contribution revenue.

Conditional promises to give are not included as support until

such time as the conditions are substantially met. A facilities and

administrative charge is assessed against current use gifts when

received.

m. Grant and Contract Income

The University receives grant and contract income from govern-

mental and private sources. In 2006 and 2005, grant and contract

income received from the Federal government totaled $429.7

million and $415.4 million, respectively. The University recog-

nizes revenue associated with the direct costs of sponsored pro-

grams as the related costs are incurred. Recovery of facilities and

administrative costs of Federally sponsored programs is at rates

negotiated with the University’s cognizant agency, the Depart-

ment of Health and Human Services. The University and the

Federal government are currently operating under an agreement

that establishes facilities and administrative cost reimbursement

rates under Federal grants and contracts through June 30, 2009.

n. Medical Services Income

The University has agreements with third-party payors, includ-

ing health maintenance organizations, that provide payment for

medical services at amounts different from standard rates estab-

lished by the University. Medical services income is reported net

of contractual allowances from third-party payors and others for

services rendered, and further adjusted for estimates of uncol-

lectible amounts.

o. Net Assets Released from Restrictions

Reclassification of net assets is based upon the satisfaction of the

purpose for which the net assets were restricted or the comple-

tion of a time stipulation. Contributions and net investment

returns earned, which are restricted, are reported as temporarily

restricted support and reclassified to unrestricted when any

donor-imposed restrictions are satisfied. Restricted net assets

associated with physical capital assets are reclassified to unre-

stricted net assets when the capital asset is placed in service.

p. Use of Estimates

The preparation of financial statements in conformity with

accounting principles generally accepted in the United States of

America requires management to make estimates and judgments

that affect the reported amounts of assets and liabilities and dis-

closures of contingencies at the date of the financial statements

and the reported amounts of revenues and expenses during the

reporting period. Significant estimates made by the management

include the valuation of investments, the estimated net realizable

value of receivables, and the actuarially determined employee

benefit and self-insurance liabilities. Actual results could differ

from those estimates.

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30

q. Summarized 2005 Financial Information

The accompanying 2006 financial statements include compara-

tive summarized financial information for the year ended June

30, 2005. Such information does not include sufficient detail by

net asset class to constitute a presentation in conformity with

accounting principles generally accepted in the United States of

America. Accordingly, such information should be read in con-

junction with the University’s financial statements for the year

ended June 30, 2005, from which the summarized financial

information was derived. Prior year investments asset informa-

tion has been reclassified to conform to the current-year presen-

tation.

2. Investments

As described in Note 1d, investments are generally recorded at

fair value. The fair values of the University’s investments by

major type and related liabilities are as follows, as of June 30, in

thousands of dollars:

2006 2005

Investments, at fair value:

Cash $ 812,980 $ 459,895

Bonds 1,060,385 682,604

Common stock 3,702,998 2,463,874

Equity investments 11,512,657 10,719,657

Other investments 445,646 215,919

Assets held in trust 269,379 224,819

Consolidated investment

company assets 6,438,723 4,382,192

Total investments,

at fair value 24,242,768 19,148,960

Liabilities associated with investments:

Securities sold, not yet purchased 958,883 -

Reverse repurchase agreements 409,354 -

Other liabilities 240,099 -

Consolidated investment

company liabilities 4,032,415 3,926,019

Total liabilities associated

with investments 5,640,751 3,926,019

Net investments, at fair value $18,602,017 $15,222,941

Consolidated investment company assets hold fixed income and

equity securities. Consolidated investment company liabilities are

comprised of securities sold, not yet purchased, securities sold

under agreements to repurchase, and other liabilities. Based on

the legal structure of these companies, their liabilities are not

legal obligations of the University and will be settled utilizing

the assets of the investment company.

The University is required to provide collateral for securities

sold, not yet purchased. Fixed income securities of $3.6 billion

were provided at June 30, 2006 to collateralize these positions

initiated by the University and by its consolidated companies.

University policy with respect to repurchase agreements includ-

ing those initiated by consolidated investment companies, is to

take possession of the underlying assets. Fixed income securities

were obtained in the amount of $1.0 billion at June 30, 2006 as

collateral for repurchase agreements. The market values of the

underlying assets are reviewed daily to ensure that the amounts

are adequately collateralized and, when warranted, additional

collateral is obtained or provided. Nearly all underlying assets

and collateral are permitted to be sold or repledged.

The University Endowment maintains a diversified investment

portfolio with a strong orientation to equity investments and

strategies designed to take advantage of market inefficiencies.

The University’s investment objectives are guided by its asset

allocation policy and are achieved in partnership with external

investment managers operating through a variety of investment

vehicles, including separate accounts, limited partnerships and

commingled funds. Net Endowment investments are presented

below by asset class as of June 30, in thousands of dollars:

2006 2005

Endowment investments:

Domestic equities $ 2,429,502 $ 2,095,482

Absolute return 4,202,357 3,819,572

Private equities 2,973,806 2,201,684

Fixed-income 258,428 838,861

Real assets 5,101,960 3,875,555

International equities 2,753,030 2,035,069

Other 230,005 224,798

Total Endowment investments 17,949,088 15,091,021

Non-Endowment investments 652,929 131,920

Net investments, at fair value $18,602,017 $15,222,941

The Endowment portfolio includes beneficial interest in outside

trusts of $133.0 million and $144.0 million at June 30, 2006 and

2005, respectively. Non-Endowment investments include chefa

Y proceeds of $208.7 million at June 30, 2006 available for

approved construction and campus renovation projects.

The following investments held under split-interest agreements

are included in the Endowment portfolio in the schedule above,

in thousands of dollars:

2006 2005

Charitable gift annuities $107,869 $ 88,878

Pooled income funds 23,368 23,655

Charitable remainder trusts 96,984 80,771

$228,221 $193,304

The University may employ derivatives and other strategies to

(1) hedge against market risks, (2) arbitrage mispricings of relat-

ed securities and (3) replicate long or short positions more cost

effectively. Accordingly, derivatives in the investment portfolio

may include currency forward contracts, interest rate, currency

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31

and commodity swaps, call and put options, debt and equity

futures contracts, equity swaps and other investment vehicles

in certain circumstances. Yale does not use derivatives for

speculation.

Yale derivative positions directly held and those held by consoli-

dated investment companies included interest rate swap, credit

default swap, commodity swap contracts and currency forward

contracts. The fair value of these derivatives was $(32.9) million

at June 30, 2006. A loss of $34.7 million related to these transac-

tions is included within total Endowment return in the State-

ment of Activities. Derivatives held by limited partnerships and

commingled investment trusts in which Yale invests pose no off-

balance sheet risk to the University due to the limited liability

structure of the investments.

Certain investment transactions, including derivative financial

instruments, necessarily involve counterparty credit exposure.

Such exposure is monitored regularly by the University’s

Investments Office in accordance with established credit policies

and other relevant criteria. Collateral provided by Yale and its

consolidated investment companies related to derivative transac-

tions amounted to $145.6 million at June 30, 2006.

At June 30, 2006, approximately 69.7 percent of the University’s

Endowment investments were invested in limited partnerships

or limited liability companies. Under the terms of certain limited

partnership and limited liability company agreements for private

equity and real estate investments, the University is obligated to

remit additional funding periodically as capital calls are exer-

cised. At June 30, 2006, the University had uncalled commit-

ments of approximately $5.4 billion. Such commitments are gen-

erally called over a period of years and contain fixed expiration

dates or other termination clauses.

The University has various sources of internal liquidity at its dis-

posal, including cash, cash equivalents and marketable debt and

equity securities. If called upon at June 30, 2006, management

estimates that it could have liquidated approximately $6.9 billion

(unaudited) to meet short-term needs.

A summary of the University’s total investment return as report-

ed in the Statement of Activities is presented below, in thousands

of dollars:

2006 2005

Investment income $ 448,300 $ 438,923

Realized and unrealized gains (losses),

net of investment management fees 2,891,556 2,349,130

Return on the Endowment 3,339,856 2,788,053

Other investment income 64,952 23,564

Total return on investments $3,404,808 $2,811,617

Endowment investment returns totaling $615.7 million and

$567.0 million were allocated to operating activities in 2006

and 2005, respectively, using the spending policy described in

Note 1d.

3. Accounts Receivable

Accounts receivable from the following sources were outstanding

at June 30, in thousands of dollars:

2006 2005

Medical services $ 36,305 $ 36,098

Grants and contracts 48,031 50,962

Investment income receivable 15,183 7,959

Affiliated organizations 27,140 11,721

Yale University Press receivables 6,253 6,452

Other 17,273 15,504

150,185 128,696

Less: Allowance for doubtful accounts (20,044) (19,214)

$130,141 $109,482

Medical services receivables are net of an allowance for contrac-

tual adjustments in the amount of $32.4 million and $30.0 mil-

lion at June 30, 2006 and 2005, respectively.

The University and Yale-New Haven Hospital (“the Hospital”)

are parties to an affiliation agreement that establishes guidelines

for the operation of activities between these two separate organi-

zations. These guidelines set forth each organization’s responsi-

bility under the common goal of delivering comprehensive

patient care services. Under the terms of the arrangement, the

Hospital is responsible for providing a clinical setting and clini-

cal support for the University to carry out its teaching and

research missions. The University provides professional services

from faculty of the Yale School of Medicine and a variety of

other administrative and clinical services.

The net receivable from the Hospital amounted to $9.3 million

and $6.8 million at June 30, 2006 and 2005, respectively.

Balances are settled in the ordinary course of business.

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6. Other Assets

Other assets at June 30, in thousands of dollars, include:

2006 2005

Software costs, net of accumulated

amortization $32,711 $41,475

Inventories 12,868 11,367

Bond issue costs, net of accumulated

amortization 6,363 5,283

Other notes receivable 3,617 1,743

Deferred expenses 12,624 7,988

$68,183 $67,856

Amortization expense included in operating expenses amounted

to $11.8 million and $12.7 million in 2006 and 2005, respectively.

7. Land, Buildings and Equipment

Land, buildings and equipment at June 30, less accumulated

depreciation, in thousands of dollars, are as follows:

2006 2005

Land and real estate improvements $ 76,103 $ 75,625

Buildings 2,830,073 2,600,451

Buildings under capital leases 61,665 -

Equipment 391,948 400,236

3,359,789 3,076,312

Less: Accumulated depreciation

and amortization (1,181,156) (1,102,857)

2,178,633 1,973,455

Construction in progress 308,297 289,715

$2,486,930 $2,263,170

Depreciation expense included in operating expenses amounted

to $125.7 million and $119.0 million in 2006 and 2005, respec-

tively. Amortization expense on capital leases amounted to $1.1

million in 2006.

8. Other Liabilities

Other liabilities consist of obligations of the University that will

be paid over a longer period of time and consist of the following:

2006 2005

Financial aid grant obligations $ 15,703 $ 16,555

Compensated absences 42,579 38,697

Employee benefit obligations 94,136 13,875

Asset retirement obligations 16,500 -

Market value of interest rate swap contracts - 54,823

Other 2,481 -

$171,399 $123,950

During the year, the University adopted fin No. 47, “Accounting

for Conditional Asset Retirement Obligations, an interpretation

of fasb Statement No.143”, which requires recognition of an

4. Contributions Receivable

Contributions receivable consists of the following unconditional

promises to give as of June 30, in thousands of dollars:

2006 2005

Purpose:

Endowment $258,978 $260,094

Capital purposes 96,646 102,711

Operating programs 123,813 122,785

Gross unconditional promises to give 479,437 485,590

Less: Discount (40,883) (35,296)

Allowance for uncollectible accounts (73,691) (66,338)

Net unconditional promises to give $364,863 $383,956

Amounts due in:

Less than one year $126,177 $161,583

One to five years 330,303 314,257

More than five years 22,957 9,750

$479,437 $485,590

Discount rates used to calculate the present value of contribu-

tions receivable ranged from .98 percent to 6.37 percent at June

30, 2006 and June 30, 2005.

5. Student Notes Receivable

Student notes and interest receivable at June 30, in thousands of

dollars, include:

2006 2005

Perkins Loan Program $ 32,811 $ 33,564

YSL Loan Program 18,524 19,462

Other student loans 4,319 5,379

55,654 58,405

Less: Allowance for doubtful accounts (3,424) (3,386)

$52,230 $55,019

Student notes receivable include donor-restricted and Federally-

sponsored student loans with mandated interest rates and repay-

ment terms subject to significant restrictions as to their transfer

and disposition. Yale Student Loans (ysl) are made with

University funds to meet demonstrated needs in excess of all

other sources of student loan borrowings. Interest accrues at

fixed rates upon loan disbursement.

Amounts received from the Federal government to fund a por-

tion of the Perkins student loans are ultimately refundable to the

Federal government and have been reported as refundable

advances in the statements of financial position. The fair value of

student loan instruments could not be determined without

incurring excessive costs.

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33

asset retirement obligation that is conditional on future events,

such as the obligation to dispose of asbestos when a building is

renovated or demolished. Upon adoption of fin No. 47 it was

determined that the University had obligations for asbestos

remediation and other environmental clean up related to soil

contamination. The effect of this adoption, reflected as a cumu-

lative effect change in accounting principle in the University’s

statement of activities, amounts to $16.5 million. If this guidance

had been applied at June 30, 2005, the liability for asset retire-

ment obligations would have been approximately $22 million.

The change in net assets for the years ended June 30, 2006 and

2005 would not have been material.

9. Debt Obligations

Debt obligations of the University at June 30, in thousands of

dollars, consist of:

2006 2005

Facilities financing $1,954,253 $1,576,893

Student loan financing - 6,000

$1,954,253 $1,582,893

Total interest expense incurred on indebtedness was $77.8 mil-

lion and $61.4 million in 2006 and 2005, respectively. Interest

capitalized to land, buildings and equipment totaled $7.4 million

and $2.9 million in 2006 and 2005, respectively.

a. Facilities

The University has entered into various agreements to finance its

facilities additions, renovations and improvements. Debt obliga-

tions outstanding for such purposes at June 30, in thousands of

dollars, include:

Effective OutstandingInterest Rate Year of Balance

2006 Maturity 2006 2005

Connecticut Health and Educational Facilities Authority (chefa) tax-exempt bonds

Series S 2.96% 2027 $ 135,865 $ 135,865Series T 2.87% 2029 250,000 250,000Series U 2.84% 2033 250,000 250,000Series V 2.78% 2036 200,000 200,000Series W 5.13% 2027 87,903 87,826Series X 3.48% 2037/2042 350,000 350,000Series Y 4.23% 2035 310,783 -

Total chefa bonds 1,584,551 1,273,691Medium-term notes 7.38% 2096 124,516 124,506Taxable commercial

paper 4.27% 2006 179,642 174,424Capital Leases -

Buildings 5.75% 2032/2048 61,421 -Other notes

payable 7.85% 2020 4,123 4,272

$1,954,253 $1,576,893

chefa Series Y bonds consist of 1) $200 million Series Y-1

bonds at a fixed interest rate of 5%; 2) $50 million Series Y-2

variable rate bonds, currently bearing interest at a daily rate; 3)

$50 million Series Y-3 variable rate bonds, currently bearing

interest at a daily rate. Series Y-1, Y-2 and Y-3 bonds mature on

July 1, 2035. Series Y-1 bonds are subject to an optional redemp-

tion in July 2015. Series Y-2 and Y-3 bonds may be converted to

other variable rate modes or to a fixed rate at the discretion of

the University. Series Y-2 and Y-3 bonds may be tendered for

purchase on any business day. The original premium associated

with this issuance is $11 million, which is being amortized over

the life of the bond.

chefa Series X bonds consist of 1) $100 million Series X-1

bonds at a fixed interest rate of 5%. Series X-1 bonds mature on

July 1, 2042, and are subject to an optional redemption on July 1,

2013; 2) $125 million Series X-2 variable rate bonds, currently

bearing interest at a weekly rate; 3) $125 million Series X-3 vari-

able rate bonds, currently bearing interest at a daily rate. Series

X-2 and X-3 bonds mature on July 1, 2037. Series X-2 and X-3

bonds may be converted to other variable rate modes or to a

fixed rate at the discretion of the University. Series X-2 bonds

may be tendered for purchase on any business day with seven

days notice. Series X-3 bonds may be tendered for purchase on

any business day.

chefa Series W bonds bear interest at a fixed interest rate of

5.125%. The proceeds of Series W were used to refinance chefa

Series Q and R bonds of $87,600,000. Yale exercised its option

to redeem the series Q and R bonds, which had a 6% fixed inter-

est rate, on June 17, 2002. The refinancing required the payment

of a call premium in the amount of $1.7 million. Series W bonds

mature on July 1, 2027, and are subject to an optional redemption

in July of 2009. The original issuance discount associated with

this issuance is $1,924,680, which is being amortized over the 25-

year life of the bond.

chefa Series V bonds bear interest at a daily rate and mature on

July 1, 2036. The bonds may be converted from a daily rate peri-

od to other variable rate modes or to a fixed rate mode at the dis-

cretion of the University. The bonds may be tendered for pur-

chase on any business day.

chefa Series U bonds and one-half of Series T bear interest at

a weekly rate. The bonds may be converted from the weekly rate

period to other variable-rate modes or to a fixed-rate mode at the

discretion of the University. In the weekly mode, bonds may be

tendered for purchase on any business day with seven days

notice. On September 4, 2001, the University converted half of

chefa Series T from a weekly mode to a daily mode. Series T

bonds in daily mode may be tendered for purchase on any busi-

ness day.

chefa Series S bonds bear interest at a money market munici-

pal rate and are outstanding for varying interest rate periods of

270 days or less. The bonds may be converted from the money

ris247152_33 2/7/07 10:02 AM Page 33

34

market mode to other variable rate modes or to a fixed rate mode

at the discretion of the University. In the money market mode,

bonds may be tendered for purchase at the end of each rate

period.

Medium-term notes in the amount of $124.5 million are recorded

net of a discount of $484 thousand at June 30, 2006. The notes

mature in the year 2096, with a call provision in the year 2026.

The bonds bear interest at a fixed rate of 7.38%.

Commercial paper consists of notes issued in the short-term tax-

able market, and is sold at a discount from par. The maturities

of individual notes are issued in ranges from one day to no

more than one year, and fall on average in a range of thirty to

sixty days.

Certain lease agreements entered into by the University qualify

as capital leases with obligations of $61.4 million at June 30,

2006. The agreements call for the University to lease the build-

ings through 2032 and 2048.

Scheduled maturities of the facilities debt obligations, in thou-

sands of dollars, are as follows:

2007 $180,251

2008 695

2009 790

2010 890

2011 997

2012-2026 30,684

Thereafter 1,739,946

The University has a 364-day revolving credit agreement for up

to $200 million to provide alternative liquidity to support Yale’s

variable rate demand notes.

b. Interest Rate Swaps

The University has entered into interest rate swap agreements to

manage the interest cost and risk associated with its variable rate

debt portfolios. Under the terms of these agreements, the

University pays fixed rates, ranging from 4.51% to 6.54%, deter-

mined at inception, and receives the 3-month LIBOR on the

respective notional principal amounts. The following schedule

presents swap agreements in force related to this strategy at June

30, in thousands of dollars:

2006 2005

Notional amount of contract $ 540,000 $ 560,000

Fair value of swap contract $ 3,519 $ (54,823)

Net (gain) loss on swap contracts $ (51,404) $ 30,873

These financial instruments involve counterparty credit expo-

sure. The counterparties for these swap transactions are major

financial institutions that meet the University’s criteria for finan-

cial stability and creditworthiness.

c. Fair Value

The fair value of the University’s fixed rate bonds, $539.7 million

at June 30, 2006, is estimated based on quoted market prices for

the same or similar issues. The carrying value of commercial

paper and variable rate bonds and notes payable, which reflects

varying interest rate periods, on average 90 days, approximates

fair value because of the variable nature of the interest rates and

the short-term maturity of these instruments.

10. Pension Plans — Defined Contribution

The University maintains the Yale University Retirement

Annuity Plan as a contributory plan for faculty and certain staff

employees. Participants may direct employee and employer con-

tributions to the Teachers’ Insurance and Annuity Association

(tiaa) and College Retirement Equities Fund (cref), as well

as other investment options. Pension expense for this plan was

$51.6 million and $48.6 million in 2006 and 2005, respectively.

11. Pension and Postretirement Plans — Defined Benefit

The University has a noncontributory, defined benefit pension

plan for staff employees as well as a defined benefit faculty

retirement incentive plan. Pension benefits provided by the plans

are based on years of participation and the employee’s highest

annual rate of earnings during the last five years of employment.

In addition, the University provides postretirement benefits

including health benefits and life insurance based on years of

service and a pay-out of unused sick time. While the University’s

subsidy of the cost of comprehensive health care benefits and life

insurance differs among retiree groups, substantially all employ-

ees who meet minimum age and service requirements and retire

from the University are eligible for these benefits. Non faculty

employees are paid 25% of unused sick time upon retirement

from active status; effective in 2008, the University will pay 50%

of unused sick time in these instances.

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35

The following table sets forth the Pension and Postretirement

plans’ funded status and provides a reconciliation to the accrued

liability reported in the statement of financial position at June

30, in thousands of dollars:

Pension Postretirement

Plans’ Funded Status 2006 2005 2006 2005

Change in benefit obligation:

Benefit obligation,

beginning of year $646,739 $502,979 $423,602 $322,112

Service cost,

excluding assumed

administration

expenses 27,866 18,552 20,269 13,405

Interest cost 32,292 30,534 22,118 19,291

Benefit payments (19,972) (17,153) (14,417) (13,091)

Assumption changes (87,183) 97,603 7,338 71,117

Amendments (185) 2,116 - -

Actuarial loss 10,318 12,108 25,955 10,768

Benefit obligation,

end of year $609,875 $646,739 $484,865 $423,602

Change in plan assets:

Market value, beginning of year $591,796 $502,039 $202,345 $167,519

- Actual return on plan assets 84,254 101,154 34,879 28,598

- University contributions 9,242 6,338 4,578 19,390

- Benefits and expenses paid (20,828) (17,735) (14,665) (13,162)

Market value, end of year $664,464 $591,796 $227,137 $ 202,345

Funded status $ 54,589 $ (54,943) $(257,728) $(221,257)

Unrecognized transition obligation - - 26,021 29,739

Benefit payments advanced - - 4,703 4,416

Unrecognized net (gain) loss (158,467) (41,576) 158,508 153,838

Unrecognized prior service cost 79,059 94,315 13,447 14,831

Accrued benefit cost $( 24,819) $ (2,204) $ (55,049) $ (18,433)

The University uses a June 30th measurement date for itsdefined benefit plans.

The Benefit Obligation disclosed above represents the actuarialpresent value of future payments to plan participants for servicesrendered prior to that date, based on the pension benefit formu-la. In calculating the value, the participants’ compensation levelsare projected to retirement.

The Accumulated Benefit Obligation for the Pension Plan was$470.7 million at June 30, 2006 and $492.7 million at June 30,2005. The Accumulated Benefit Obligation differs from theBenefit Obligation above in that it includes no assumptionsabout future compensation levels. It represents the actuarial pre-sent value of future payments to plan participants using currentand past compensation levels.

The primary change in assumptions during the year was anincrease in the discount rate from 5.0% to 5.75%. This caused adecrease in the benefit obligation of $87.2 million for thePension Plan and $55.3 million for Postretirement Plans.

In addition, assumption changes to the trend in the futureincreases in health care cost resulted in an increase in thePostretirement Plan projected benefit obligation of $62.6 mil-lion.

Plan AssetsThe investment objective for the Pension and Retiree HealthPlans seeks a positive long-term total return after inflation tomeet the University’s current and future plan obligations. Assetallocations for both plans combine tested theory and informedmarket judgment to balance investment risks with the need forhigh returns.

The pension and retiree health long-term rate of return assump-tion is determined by adding expected inflation to expectedlong-term real returns of various asset classes, taking intoaccount expected volatility and correlation between the returnsof various asset classes.

Plan asset allocations by category at June 30 are as follows:

Pension Retiree Health2006 2005 2006 2005

Absolute return 23.8% 25.0% 24.6% 29.2%Domestic equity 15.0% 15.3% 22.7% 25.1%Fixed income 14.5% 19.5% 0.0% 0.0%Foreign equity 13.9% 14.8% 14.5% 15.0%Private equity 9.5% 8.2% 5.9% 4.1%Real assets 19.6% 15.0% 29.2% 20.4%Cash 3.7% 2.2% 3.1% 6.2%

ContributionsAnnual contributions for the pension and retiree health plans aredetermined by the University considering calculations preparedby the plan’s actuary as well as other factors. Expected contribu-tions in fiscal 2007 to the Pension Plan are $9.6 million and$27.2 million for the Retiree Health Plan.

Benefit PaymentsThe following benefit payments, which reflect expected futureservice, as appropriate, are expected to be paid out of the plans,in thousands of dollars:

Fiscal year Pension Postretirement

2007 $ 21,200 $ 14,9002008 22,700 16,3002009 24,400 17,6002010 26,500 19,1002011 28,800 20,7002012-2016 187,700 127,100

Benefit ObligationsAssumptions used in determining the obligation of the Pensionand Postretirement plans are:

2006 2005

Weighted-average discount rate 5.75% 5.00%Increase in future compensation levels 4.54% 4.54%Projected health care cost trend rate 10.20% 8.00%Ultimate trend rate 5.00% 5.00%Year ultimate trend rate is achieved 2013 2011

The health care cost trend rate assumption has a significanteffect on the amounts reported. For the fiscal year ended June

ris247152_35 2/7/07 10:02 AM Page 35

36

2006, a one percent change in the health care cost trend ratestructure would cause the Retiree Health plan’s benefit obliga-tion at June 30, 2006 to change by approximately 10.5 percentand would also cause the sum of the service cost and interestcost components of postretirement expense to change byapproximately 15 percent.

Net Periodic Benefit CostNet periodic benefit cost for defined benefit plans includes thefollowing components, in thousands of dollars:

Pension PostretirementNet periodic benefit cost for the fiscal year ended 2006 2005 2006 2005

Service cost $28,466 $19,152 $20,479 $13,505Interest cost 32,292 30,534 22,118 19,292Expected return

on plan assets (43,971) (40,082) (15,624) (14,127)Net amortization

- Transition obligation - - 3,717 3,717- Prior service cost 15,070 9,108 1,384 1,384- Net (gain) loss - (150) 9,423 4,644

Net periodic benefit cost $31,857 $18,562 $41,497 $28,415

Assumptions used in determining the net periodic benefit costsof the Pension and Postretirement plans are:

2006 2005

Weighted-average discount rate 5.00% 6.00%Expected long-term rate of return 8.50% 8.50%Compensation increase 4.54% 4.50%Health care cost increase 7.50% 8.00%Ultimate trend rate 5.00% 5.00%Year ultimate trend rate is achieved 2011 2008

12. Commitments and Contingencies

The University is involved in various legal actions arising in thenormal course of activities and is subject to periodic audits andinquiries by various regulatory agencies. Although the ultimateoutcome is not determinable at this time, management, aftertaking into consideration advice of legal counsel, believes thatthe resolution of these pending matters, except for the possibleoutcome resulting from the subpoenas received in June 2006referred to below, should not have a material adverse effect, indi-vidually or in the aggregate, upon the University’s financial posi-tion, results of operations or cash flows.

In June 2006, the University received subpoenas from theDepartment of Health and Human Services, the Department ofDefense and the National Science Foundation for documents andinformation relating to financial management of grants support-ing scientific research. The University is cooperating fully withthe investigation and is in the process of providing materialresponsive to the subpoenas. It is too early at this time to deter-mine what, if any, liability may result from this investigation.

Minimum lease commitments at June 30, 2006 under agree-ments to lease space, in thousands of dollars, are as follows:

Operating Lease Capital Lease Payments Payments

2007 $ 7,346 $ 7,1392008 5,770 7,1142009 4,470 7,0862010 3,248 6,8242011 2,215 6,400Thereafter 7,531 127,529

30,580 162,092Executory costs - (29,910)Interest on capital leases - (70,761)

$30,580 $61,421

The University has entered into certain agreements to guaranteethe debt and financial commitments of others. Under theseagreements if the original debt holder defaults on their obliga-tions the University may be required to satisfy all or part of theremaining obligation. The total amount of these guarantees isapproximately $10.6 million at June 30, 2006.

ris247152_36 2/7/07 10:02 AM Page 36

The O∞cers of Yale University

The President and Fellows of Yale University

Essay and Editorial Design: ClearAgenda, Inc./Designlounge, Inc.

Financial Pages Design: Strong Cohen

Printing Supervision: Yale Printing and Graphic Services

Photo Credits:

Michael Marsland pp. Cover, 2, 6, 10 center, 11

Khai Fung p. 10 left

Bill O’Brien p. 10 right

Tony Rinaldo pp. 4, 8

Neil Selkirk p. 5

Rachel Weiss-Malik pp. 7, 9

PresidentRichard Charles Levin, b.a., b.litt., ph.d.

ProvostAndrew David Hamilton, b.sc., ph.d., f.r.s.

Vice President and SecretaryLinda Koch Lorimer, b.a., j.d.

Vice President for Finance and AdministrationShauna Ryan King, b.a., m.b.a.

Vice President for New Haven and StateAffairs and Campus DevelopmentBruce Donald Alexander, b.a., j.d.

Vice President for DevelopmentIngeborg Theresia Reichenbach, staatsexamen

Vice President and General Counsel Dorothy Kathryn Robinson, b.a., j.d.

PresidentRichard Charles Levin, b.a., b.litt., ph.d.

FellowsHer Excellency the Governorof Connecticut, ex officio

His Honor the Lieutenant Governorof Connecticut, ex officio

George Leonard Baker, Jr., b.a., m.b.a.Palo Alto, California

Edward Perry Bass, b.s.Fort Worth, Texas

Roland Whitney Betts, b.a., j.d.New York, New York

Gerhard Casper, ll.m., ph.d, ll.d. (Hon)

Atherton, California

Susan Crown, b.a., m.a.Chicago, Illinois

Charles Daniel Ellis, b.a., m.b.a., ph.d.New Haven, Connecticut

Jeffrey Powell Koplan, b.a., m.d., m.p.h. Atlanta, Georgia

Maya Ying Lin, b.a., m. arch, d.f.a. (Hon)

New York, New York

Margaret Hilary Marshall, b.a., m.ed., j.d.

Cambridge, Massachusetts

William Irwin Miller, b.a., m.b.a.Columbus, Indiana

Indra Krishnamurthy Nooyi, b.s., m.b.a., m.p.p.m.Greenwich, Connecticut

Barrington Daniels Parker, Jr., b.a., ll.b.Stamford, Connecticut

Theodore Ping Shen, b.a., m.b.a.Brooklyn Heights, New York

Janet Louise Yellen, b.a., ph.d.Berkeley, California

Fareed Zakaria, b.a., ph.d.New York, New York

ris247152_ibc 2/7/07 10:03 AM Page ibc

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