Policy 1604: Endowment Payout Formula
Subject Area: Endowment Spending
Responsible Office: Office of the Vice President for Operations and Chief Financial Officer
Originally Issued: July 1971
Revised: October 1993, November 2004, January 2010, July 2016
Refer Questions To: John Kroll, 773-702-1941
Purpose: To establish a spending policy rule that will preserve the purchasing power of the endowment over time while supporting the annual budgetary goals of the University.
The University maintains a total return policy which permits the payment from the Total Return Investment Pool (TRIP) of a portion of capital gains realized or unrealized to the University budget as income. This total return concept takes into account the fact that the return on endowment over a period of time is comprised not only of interest, dividends, and rents, but also of growth in the market value of endowment assets.
In order to protect the real value of TRIP over time, the Trustees have mandated that payouts from TRIP to the operating budget will be determined annually. The amount will be fixed within a range of 4.5 to 5.5 percent of the average endowment market value for the preceding twelve quarters ending June 30 preceding the new fiscal year. The primary purpose of the payout policy is to ensure that the endowment maintains its real, inflation-adjusted value while supporting the academic and administrative needs of the University.
The use of a range formula to determine payout requires active management on the part of the administration and the trustees. Annual decisions about spending need to be guided, in part, by recognition of the balance that must be maintained between prudent spending for current operations and long-term asset preservation. The use of a range enables University decision-makers to reduce the impact of market volatility on the operating budget by adjusting payout within the range in response to market fluctuations. A longer-term benefit of the range formula is that it enables the University to preserve asset appreciation during extended periods of market appreciation, and, it provides the opportunity to increase spending during extended periods of market depreciation.
1. The Chief Financial Officer will recommend to the Financial Planning Committee the annual endowment payout for the fiscal year beginning the following July 1 as part of the annual budget process. The recommendation will be presented each year at the February meeting of the Financial Planning Committee. The Financial Planning Committee in turn will make a recommendation to the full Board of Trustees for final approval.
2. After discussion with the Executive Committee, the President may recommend to the Financial Planning Committee one or more special payouts, in addition to the payout determined under the formula, in support of the annual budget or to fund programmatic or strategic initiatives. Such payouts may be expressed as a percentage of the average endowment market value (both restricted and unrestricted) for the prior twelve quarters ending June 30 or as a fixed dollar amount. Special payouts will have a beginning and end date. The Financial Planning Committee in turn will make a recommendation to the Board of Trustees for final approval.
3. All endowment and similar funds invested in TRIP will be subject to the endowment payout policy.
4. The endowment payout policy requires that annual payout be within a range of 4.5 to 5.5 percent of the average TRIP endowment market value (both restricted and unrestricted) for the prior twelve quarters ending June 30. This range is exclusive of any special payouts approved as described in paragraph 2 above.
5. The endowment payout for all endowment and similar funds not invested in TRIP will be determined in accordance with any restrictions in the instruments creating such endowment or similar funds.