University of Southern Indiana Foundation
Endowment Spending Policy - February 2, 2017
Spending Philosophy
The Foundation believes that a “reasonable” spending policy should do several things. First, it should provide sufficient funds for operations. It should also leave sufficient funds for the assets to grow, at a minimum, so that inflation-adjusted spending is perpetuated. The policy should minimize the impact of the volatility of the markets on annual spending and should be clearly articulated and embrace a challenging, but achievable, investment objective.
Given these beliefs, the Committee has established the following spending policy goals:
Total Return Concept
The total return concept allows the Foundation to set a spending rate that is independent of the income earned by the Foundation’s Portfolio in any given year. The Committee in conjunction with Foundation management will establish a spending rate which is intended to preserve the inflation-adjusted value of the assets. In setting spending rates, the Committee recognizes that there is more to successful investing than merely maximizing current income. Capital appreciation over time can be significant.
The Foundation believes that a prudent balanced approach to investing can offer the potential for a total return consisting of income plus appreciation that will cover inflation and provide for a reasonable level of spending. Based on the investment goals and risk tolerances stated in the Foundation’s investment policies, an asset allocation strategy with a target of 70% equities and 30% fixed income investments is appropriate.
Primary Benefits of Total Return Concept
Donors can be assured that their funds are being managed in an effective manner that balances current demands and future needs.
Investment managers will be encouraged to design long-term strategies aimed at providing a proper balance between income and long-term growth and not subject to sudden shifts in interest rates or market value. Investment managers will not be forced to focus their investment strategy on required distributions from income alone. Because distributions will be based on a rolling twelve-quarter average of the market value, the amount available for distribution should slowly increase over time due to contributions and a conservative spending rate.
Fund managers will have a predictable flow of funds since funds made available for distribution will not be determined solely by changes in current investment income.
Spending Rate Determination
Each year Foundation management and the Committee will review the financial status of the Foundation and set the spending rate to balance current need with growth for the future. The Committee has set a spending rate of 4.25% for endowed funds. To ensure a more stable and predictable distribution stream, a rolling twelve-quarter average market value of each endowment will be applied to the 4.25% spending rate in calculating annual distributions.
Other Considerations
Applying the spending rate to a rolling twelve-quarter average market value of endowed funds will reduce the variability in the annual dollar distributions from endowed funds. In periods of higher than average investment returns, using a rolling twelve-quarter average will mitigate large increases in annual distributions that may result if using a single point in time market value. Likewise, in periods of lower than average investment returns, this approach will mitigate large decreases in annual distributions. While there is the risk of spending at a level that exceeds earnings over a significant time period, proper monitoring of the investment managers, and prudent determination of annual spending rates should reduce the Foundation’s exposure to this possibility.
In summary, the spending policy and total return concept allow the Foundation to be more responsive to near-term planning needs while positioning its funds to maintain purchasing power over the long term.