All Hands on Deck; YU Continues to Navigate Troubled Waters
In recent years, an abundance of information has cropped up about Yeshiva University's investment strategies and monetary dealings throughout the past decade. The reports have painted an unfavorable picture of YU's financial judgment as well as its organization. Major news sources, such as CBS and JTA, wasted no time in reporting the decline of one of the most prominent Jewish non-profit entities in the United States, an institution that has been characterized as a dimming beacon of American Jewry. As far as most of the media was concerned, the academic future of Modern Orthodoxy was now teetering on the edge. A pretty compelling read, is it not? The unfortunate truth is that the hull of YU’s financial infrastructure has been quickly flooding, but that doesn’t mean we need to abandon ship quite yet. Before we discuss the various strategic changes YU is in the midst of making, let’s look at the history of the financial crisis.
It is undoubtedly true that the past few years have marked a decline in Yeshiva's financial status. The institution has been downgraded by both Moody's and Standard & Poor’s, two big credit rating agencies, and has recently been forced to liquidate $72.5 million worth of assets after monetizing $128 million dollars in real estate during Winter of 2013. Most recently, YU announced that it will be ceding operations of Albert Einstein College of Medicine to Montefiore Medical Center, which will relieve the Yeshiva of significant annual costs. These post hoc measures are a response to a near $525 million loss in investments and the accumulation of $567 million in debt. That is a pretty big blow. How did it all happen?
Well, for starters, Yeshiva University deals with pretty significant expenses as is. As Carolyn McLean, an analyst at S&P, told the Forward, YU's 2013 operating deficit of $64 million can be attributed to Einstein Medical Center alone, and YU's operating deficit in the past three years have been $106 million, $47 million, and $107 million, respectively; pretty hefty stuff.
In YU's official financial statement, it appears much of its deficit is also attributable to reduced research grants and increases in financial aid—which had gone up to 50% from 2007 to 2008—as well as investments in faculty, facilities, and updated technology.
Considering YU’s enormous expenses, due in no small part to its separate campuses for men and women, Yeshiva University is a gas guzzler of an institution. However, the conversation does not end there. A major paradigm shift in Yeshiva University’s investment strategy played a big role in the deteriorating fiscal condition of the school.
Between 2003 and 2008, Yeshiva University’s allocation of investments to hedge funds increased dramatically, which ultimately resulted in losses for Yeshiva. By the first half of 2008, alternative investments came to dominate 80% of YU’s portfolio. Now, that number has decreased to about 60%, reflecting a transition to a more conservative investment plan.
The change in YU’s approach to spending came largely with the installment of a new administrative body, beginning with the hiring of President Richard Joel in 2003. The president had lofty ambitions at the beginning of his term in office, ambitions which would entail dramatic campus-wide changes that required radical paradigmatic alterations, both in allocation of operating expenses and investments. President Joel’s experience as International Director and President of the Hillel: The Foundation for Jewish Campus Life tailored his skillset toward communal growth and outreach, and that is what he brought to the Yeshiva University table. He sought to transform Yeshiva University from an academic institution into a community, ushering in an era of campus renovations, construction projects, and other improvements to the quality of student life. The president entitled his agenda “Enoble and Enable,” but these high expectations for YU’s future were met with equally high costs.
A thorough investigation of Yeshiva University’s finances reveals a 68% increase in spending between 2001 and 2008. Although the report includes expenditure beginning two years before President Joel took office, this is a clear demonstration of drastic changes in operations. Not to mention that, over the same period, revenues only increased by 25%.
In 2004, President Joel set out to revamp Yeshiva University. This began with the issuance of $100 million in bonds to fund a whole host of projects, one of the larger projects being a biomedical research facility at Einstein. “I was aggressive with the board in wanting to spend,” admits a reflective President Joel, “but the system wasn’t geared toward aggressive spending.”
In 2008, Yeshiva University was caught in a global economic landslide, yet Yeshiva University’s annual expenses continued to grow. As President Joel recalls, “like many other institutions, we were severely impacted by the 2008 recession, yet chose to continue to build.” Yeshiva University indeed continued to build, dedicating the Jacob and Dreizel Glueck Center for Jewish Study in August 2009.
Prior to 2012, no official department was devoted to overseeing investment activity or ensuring that investment strategies were in accordance with the fiscal capacity of the university. Under President Joel’s leadership, the Board of Trustees organized an Investment Committee in 2003 that consisted primarily of prominent hedge fund managers. Notwithstanding the general business acumen of the committee, there was little diversity in the body of experts orchestrating Yeshiva University’s investment strategy. This committee effectively took the reigns and rode at a strong gallop toward the edge of a fiscal cliff.
In 2001, Yeshiva University had 46% of its endowment placed in alternative investments and 41% in treasury bonds. According to one report in 2005, YU sold a majority of its U.S. treasury bonds and invested the money in stocks and hedge funds. At this point, hedge funds came to constitute 65% of its investment portfolio. As mentioned above, this grew to a staggering 80% by 2008. Under the purview of the Investment Committee, trends changed rapidly and dramatically.
Hedge fund culture certainly pervaded the stock market in the years prior to the recession, but there are conflicting reports as to whether or not Yeshiva University’s investment activity reflected the norm at the time. According to one investigation, at its highest, hedge funds constituted 21.7% of Yeshiva University’s total endowment, which is over three times the average for institutions with a comparable allocation in investments.
Despite the foregoing numbers, a statement issued by President Joel in June 2014 refutes what he considers exaggerated reports of YU’s risky investing. According to a chart disclosed in President Joel’s statement, which records Yeshiva University’s long-term investment pool, YU outperformed the median return for U.S. college and university endowments between 2002 and 2013 by 1%. Criticism of these numbers points to the ambiguity of the data collected and the absence of the phrase “long-term investment pool” in any financial statements, audits, or similar records. Additionally, this chart includes a year prior to when President Joel took office.
In the same statement, President Joel asserted that YU did not lose $1.3 billion, as purported by many media outlets. This is a valid claim, as nearly half of the $1.3 billion allegedly lost was actually accumulation of debt, which is not technically considered a loss in financial terms.
Little is known about the activity of YU’s Investment Committee, as much of the exchanges between members have been in confidence due to the lack of transparency within Yeshiva University’s financial infrastructure. However, in 2013, investigations carried out by JTA exposed dubious behavior and potential conflict of interest issues within the institution.
Yeshiva University’s Investment Committee consisted mostly of hedge fund managers who had university money invested in their own funds. Ezra Merkin, who had been collecting management fees from Yeshiva for money invested in his fund, Ascot Partners, was the Chairman of the Investment Committee. Additionally, Merkin’s company was a feeder fund for Bernie Madoff’s ponzi scheme. According to President Joel’s statement, Yeshiva University’s previous conflict of interest policies had been “in line with other major universities.” However, there were still many loopholes within the policy that allowed for conflict of interests to exist.
While investments with Madoff ultimately only accounted for $100 million of the $525 million lost in investments, the overall influence of Merkin and other hedge fund managers who were funding their own companies likely led to a greater reliance on hedge funds than was safe for the university.
In both fiscal years 2009 and 2010, YU experienced the brunt of its financial decline. According to a June 2011 Moody’s report, Yeshiva University suffered a reduction in application volume as well as undergraduate enrollment. Its total financial resources declined from $1.8 billion in its 2007 fiscal year to $1.14 billion in 2010, a 38% drop. Although these percentages are not atypical of average university losses at that time, this marked the beginning of a persisting trend in YU’s financial status. While the administration would not comment on its history regarding investment management, the Moody’s report also mentioned that YU’s high exposure to hedge funds and alternative investments left YU open to risk of further limitations on liquidity. This means that, until 2011, little change to the university’s investment strategy took place, despite its losses.
Between 2007 and 2010, tuition revenues grew by a thin 2%, and pressure on the university caused by a weakening student market was projected to increase. Yeshiva University sought to resolve this issue by hiring more full-time faculty, investing more in its honors program, and hiring a Vice Provost for Undergraduate Studies. These expenses were a long term investment for the university, but, as the data would suggest, they only increased annual deficits, and yielded virtually no returns. In fact, between YU’s 2010 and 2011 fiscal years, revenues from tuition and fees dropped by near 2%.
The argument seems to be made quite frequently that YU endured no greater a loss than any other comparable university or institution. However, Yeshiva University saw a decline in total net assets by nearly $95 million in 2010, despite 10.1% endowment returns. According to a Moody’s report, this decline is “highly unusual” given that 2010 was a year of “strong positive endowment returns for most universities.”
By the 2011 fiscal year, YU had reported larger deficits in operating cash flow than any other research university rated by Moody’s. The administration turned to its donor base and tuition revenues to remedy this issue. In YU’s 2013 financial statement, its tuition revenues increased by around 9% compared to 2011.
In an official credit report, poor ratings were also attributed to weak financial management. Yeshiva University is now working on installing a software system, known as Banner, to produce its financial reports. Millions of dollars are going into this project. Banner is a resource that has been on the market for years and is commonly used by universities. President Joel notes that, before Banner, the systems YU used to generate financial reports were “completely outdated.”
After the global financial crisis of 2007, a once well-funded Gibraltarian fortress of an institution more closely resembled the ravaged city of Pompeii, financially speaking. The question still remains, where does Yeshiva University stand now, and what has been done to return YU to its former financial fortitude?
Unfortunately, the most recent financial report, issued this past March, forebodes a grim future for YU, given the cocktail of financial troubles the university faces. Moody’s downgraded YU from B1 to B3 status, reflecting “weakening financial viability given the rapid deterioration of unrestricted liquidity from severe and ongoing operating deficits.” The report took into consideration YU’s ability to sell prime real estate holdings in order to pay off bondholders and other creditors. As mentioned above, YU capitalized on this real estate. The report also notes that YU’s “extremely thin unrestricted liquidity" demanded enormous endowment draws and “release of temporarily restricted assets.”
Despite the negative outlook, liquidating real estate assets will certainly avail YU in paying down debt, but one of the more major shifts should come from the university’s new deal with Montefiore.
Montefiore will be assuming a majority of operational responsibility for Einstein, which had previously been responsible for two thirds of YU’s annual deficit. The contract is officially termed the “Memorandum of Understanding,” and allows YU to tap into revenues generated by Montefiore’s clinical operations while also giving Montefiore more control over management. This will free up a lot of capital that could be put to good use both in paying down debts and in rebuilding YU’s academic infrastructure with the hope of increasing enrollment rates. In addition to financial relief, Montefiore’s assumption of more ownership over Einstein will allow it to more effectively manage the system, because it will actually be within the system.
Yeshiva University and Montefiore will be involved in what President Joel refers to as “mutual due diligence.” Montefiore will take responsibility for operations and finances of research within the medical school, and Yeshiva University will take responsibility for the academic component of the medical school without the research.
Concern has been raised that selling Einstein to Montefiore will deprive YU of the prestige that came with its ownership of Einstein Medical School. President Joel retorts that the university is not selling the medical school; a new deal is being created in which YU will shift the “operating responsibility and fiscal responsibility to where it belongs."
On March 26th, 2012, President Joel announced the installment of Ahron Herring as Chief Investment Officer at Yeshiva University. Among Herring’s credentials are positions with MIT Investment Management Company and Merrill Lynch & Co. The newly founded investment department should provide the necessary oversight to ensure more responsible fiscal decisions in the future.
Additionally, YU recently hired Jacob Harman as the new Vice President of Business Affairs and Chief Financial Officer. Harman will be in charge of developing and executing financial plans and other initiatives to help stabilize YU’s finances. Harman has worked for over 35 years as a financial executive, working most recently as Senior Audit Partner in the Office of General Counsel at KPMG.
As of September 12th, 2014, Yeshiva University refinanced five Manhattan properties including Yeshiva College and Stern College for women. In the deal, YU sold $175 million in taxable bonds. A spokesperson for the university tells the Mortgage Observer that this will help raise “additional liquidity and runway to support university initiatives in the coming years.” This debt replaced a series of short-term loans due this fiscal year, including $60 million in debt with Bank of America. This should give YU some breathing room for the time being, and has been described as “exceptionally important” by a member of the administration, but it is still only a short-term solution to a long-term issue.
Although some action has been taken, much more needs to be done before YU can truly get back on its feet. The major fear at this point is total liquidity depletion before YU is able to implement a plan of recovery, and, as stated by Moody’s, “…it could take several years before management, in conjunction with consultants, can stabilize financial performance.”
After speaking with members of faculty and staff, it seems there is still one looming question on everyone’s mind. What now? Thus far, the administration has been focused on treating the symptoms without addressing the actual malady itself. A fundamental restructuring of YU’s financial strategy must take place, and the Board knows it.
YU currently takes in $200 million annually from its Manhattan campuses and spends $250 million. “This cannot continue,” cautions Dr. Selma Botman, Vice President of Academic Affairs and Provost at Yeshiva University. “We need to get our revenue in line with our expenses.” The administration, along with members of faculty and staff, collaborate weekly to devise a new plan.
Among the solutions proposed are changes in organizational structure of classes, blending shared services such as honors programs and advising, increasing blended courses—for which faculty would alternate between teaching an online class at the Wilf campus and an in-person class at the Beren campus and vice versa—and increasing class sizes. Task forces have also been formed with the intention of orchestrating horizontal and vertical integration, which would mean potentially offering courses that are interdisciplinary across graduate schools.
As of now, no official organizational plan has been offered by the trustees, although faculty has been prompted to aid in the development of a comprehensive plan. While there will still be a serious revision of spending, Dr. Botman notes that “we cannot cut our way to a balanced budget.” The university will continue to tap into its philanthropic base and work to increase enrollment.
YU has also been working alongside Alvarez and Marsal (A&M), a leading global professional services firm that specializes in turnaround management and business advisory, to formulate non-academic solutions. Besides the refinancing of the Manhattan properties, which was immensely important, A&M has aided in cost cutting, promoting voluntary retirement, and other forms of damage control to relieve a total of $20 million in debt.
Additionally, the university has been developing new Masters degree programs, such as speech pathology, occupational therapy, and physical therapy, in order to generate revenue.
During the YU faculty council meeting on September 18th, a flow chart was presented that outlined the projected outlook of the university’s debt. Currently, Yeshiva University has a $150 million deficit, $100 million of which will be taken over by Montefiore. Since Einstein generated $23 million in overhead costs, only $77 million will be realized of the $100 million transferred to Montefiore, leaving the university with a $73 million deficit. Yeshiva University has recently booked $20 million in savings from its work with A&M, which places the debt at $53 million. The expenses for the refinancing performed by debt services will hike the debt back up another $9 million, which lands the deficit at $62 million. A&M has expressed considerable confidence that it will be able to recover $37 million of this $62 million, which would reduce YU’s deficit to a manageable $25 million, although it has not disclosed a specific plan by means of which it will accomplish this recovery.
One major concern of the faculty, which has been expressed in articles past, is the disproportionate distribution of salary. Prominent members of the administration receive greater pay at Yeshiva University than similar positions at a majority of colleges nationwide. However, Dr. Selma Botman made it very clear in the council meeting that this is due to an understaffed administration. “When I look around to see who’s getting the job done, every one of them rolls up his sleeves and does the work,” Dr. Botman insists. According to Dr. Botman, there are simply not enough members of the staff to distribute the labor evenly, and the administration is left to pick up the slack.
An even greater and more pertinent concern among staff members is what will actually be done moving forward. There has been a lot of discussion about potential plans, but nothing definitive. Faculty is still left in the dark by an administration that offers little to no transparency in their financial dealings, and when the cuts come, faculty members don’t know who will be affected. “We have been asked to make these cuts, but we have never seen a detailed financial plan” reveals one professor in attendance at the meeting. “There is a degree of skepticism among faculty.” A member of the administration reassures those in attendance, as a result of the new financial software system adopted by the school, “there is more transparency now than there has ever been,” but an ongoing failure to disclose hard numbers or strategies lends little substance to statements like this.
The faculty is also concerned about the academic restructuring being proposed. Larger classes and blended courses will compromise the academic excellence offered by YU. The intimate classroom environment that makes Yeshiva University such an attractive option for so many students will be substituted by an impersonal academic system run through YU Global, an online academic software system recently purchased by the university.
On September 23rd, President Joel came out with a statement updating the YU community about the current state of Yeshiva University finances. He mentioned a number of the changes discussed in the Council Meeting and entitled the financial plan for the future the “Roadmap to Sustainable Excellence,” but didn’t offer many details of the plan. He also did not mention a concrete timeline within which the school hopes to accomplish its goals, just that “the implementation of the Roadmap will take place with all deliberate speed.” Furthermore, the impression was given that there is, in fact, a finalized plan, when during the Council Meeting the reality seemed to be that no definite course of action had been agreed upon among the Board of Trustees. Regardless, the point is well taken that steps toward improvement are being made and that we are in the nascent stages of recovery.
Despite the salvo of criticism that has rained down on YU governance, there is still comfort to be found in its unique strengths as an institution. Many reports have cited YU as having a distinct market niche; they offer services academically and religiously that exist nowhere else in the world. I would even venture to say that Yeshiva University has more than a market niche. Like the religious worldview it represents, it has a deep and inexorable sense of purpose as an institution. The administration knows that the survival of YU as a symbol of Modern Jewry is imperative. They understand that a fundamental change in the substructure of the university’s organization must be effectuated, and that is certainly a start. There are still issues that need to be addressed, most importantly the outlining of a comprehensive fiscal plan going forward, but the proper managerial oversight has finally been established. A lack of administrative management is what led YU into this fiscal trap, and installing financial leadership and forming departments that can localize and target specific issues is the first necessary structural step to getting out of it. It is important to be hopeful about the future of YU, and I believe we can be confident that, with the organizational restructuring that will come from recent changes in administrative management, there is reason to be. However, we must also be realistic; our limited access to the decisions being made upstairs makes it difficult for us to draw informed conclusions about YU’s future. Yes, YU has a substantial market niche, yes, we finally realize that we have to revamp our system, but we have to crystallize this realization into action. I do not believe we need to abandon ship—being optimistic about our future is exactly the wind in our sails necessary to move this institution forward—but we must have concrete action to supplement that optimism; we need a sail.