Princeton’s endowment shrank by 23 percent this past fiscal year—beating Harvard’s 30 percent loss—but the decrease was buffered by the school’s decision to finance its operating expenses using bonds and other sources of cash, rather than drawing on its endowment.

The move to prioritize and preserve endowment resources at a time when budgetary crises are sweeping higher education sets Princeton apart from its peers. And the decision—which appears to defy calls for schools to spend more from their endowments to sustain services and employment—may actually reflect remarkable foresight and could strengthen Princeton’s future spending capacity.

“To preserve the long-term purchasing power of the endowment, we chose not to transfer funds from the endowment to the operating budget last spring,” wrote Princeton President Shirley M. Tilghman in a letter to the community on Tuesday, noting that utilizing the endowment would have required selling equities at unattractive prices. “That has proved to be a wise and prudent decision, given the recent recovery in the markets.”

In January, Princeton raised $1 billion through taxable bond sales. Shortly after, Harvard issued $2.5 billion in debt.

Endowment payout will fund almost half of Princeton’s $1.3 billion operating budget this year.

The Princeton University Investment Company, which manages the school’s endowment, reported investment losses of 23.7 percent this past year—better than the 30 percent loss predicted in the spring. The loss brings the total value of Princeton’s endowment as of June 30 to $12.6 billion, down from $16.3 billion last year.

Despite the better-than-anticipated returns, Tilghman said Princeton will proceed with its plan to reduce the school’s total operating budget by $170 million over this year and the next, and warned that additional layoffs would be needed this fall.

“Our goal in paring down the budget was to preserve the quality of the educational experience of our undergraduate and graduate students, so that no one 25 years from now would say that he or she attended Princeton at a time when opportunities were limited,” she wrote.

Like Harvard, Princeton has implemented salary freezes, halted capital projects, slowed faculty recruitment, and offered a voluntary retirement incentive program for hundreds of staff—initiatives that, along with other budget cutting measures, yielded an $11 million budget surplus last year that will be used to alleviate this year’s cost-cutting.

Tilghman acknowledged that some have criticized the school’s diversified investment portfolio, which includes illiquid assets such as real estate and private equities, for “expos[ing] the University to unacceptable levels of risk.” She said Princeton would be “reviewing [its] overall investment strategy” to help it weather future severe downturns.

But she noted that in this “once-in-70-year recession,” nearly all investment classes experienced significant losses, and she said that preliminary examinations suggest “marginal, not radical, changes may be warranted.”

—Staff writer Peter F. Zhu can be reached at pzhu@fas.harvard.edu.