Spending Policy Forum 2013 JFNA Investment Institute Palm Beach Gardens, Florida

Policy Development Example | Spending Policy Approaches Description Traditional Pre-specified percentage of moving average of market value – typically 5% of a three year moving average of beginning market values Inflation Based Increase spending each year based on rate of inflation Income Based Spend all current income Banded Inflation Last year’s spending plus an inflation rate, but bound by ranges, e.g. – no more than 6.5% nor less than 3.5% Spending Reserve Segregation of 5-10% of market value in separate account, invested in 90 day treasury bills. Reserve is drawn down when endowment performance is less than policy target Stabilization Fund A fund created from endowment returns in excess of the target spending rate which is used to control the long run growth of the total endowment. The stabilization fund is invested alongside the endowment, but with a different (higher) spending rate. “Yale Rule” The amount released under the spending rule is based on a weighted average of prior spending adjusted for inflation (80 percent weight) and the amount that would have been spent using 5 percent of current Endowment market value (20 percent weight). “Stanford Rule” The calculation is an average weighted 60% on the actual payout from the current year and 40% on the target payout rate. This policy results in a “smoothing” of the payout amount, and it is designed to cushion the university from swings in the yearly endowment value due to market fluctuations. February 12, 2013 2013 JFNA Investment Institute | Palm Beach Gardens, FL

Effective Spending Rate By Fiscal Year NOTE: All performance information reflects net total returns. Fiscal year end for the majority of educational institutions is June 30th. For the foundations and operating charities sectors fiscal year end is typically December 31st. Information for educational endowments is drawn from the NACUBO-Commonfund Study of Endowments. Information for other sectors is drawn from the Benchmarks Study for the respective sectors. Copyright 2013 The Common Fund for Nonprofit Organizations and the National Association of College and University Business Officers. All rights reserved. February 12, 2013 2013 JFNA Investment Institute | Palm Beach Gardens, FL

Educational Endowments Spending Policy   Educational Endowments Foundations Operating Charities Total Top Quartile Percentage of a moving average 75% 66% 47% 42% 72% 50% Spend all current income 4% 8% 6% 5% Average percentage 4.7% 5.1% 5.0% Decide on an appropriate rate each year 11% 14% 20% 19% 25% Grow distribution at a predetermined inflation rate * 0% 1% 3% Spend a pre-specified percentage of beginning market rate 12% Average pre-specified percentage spent 4.8% 4.9% 1.0% Last year's spending plus inflation with upper and lower bands 2% Weighted average or hybrid method (Yale/Stanford Rule) 7% 9% 13% Meet IRS minimum of 5 percent 56% Other NOTES: * Less than 1 percent, results not meaningful or not applicable. NOTE: All performance information reflects net total returns. Fiscal year end for the majority of educational institutions is June 30th. For the foundations, operating charities and healthcare sectors fiscal year end is typically December 31st. Information for educational endowments is drawn from the NACUBO-Commonfund Study of Endowments. Information for other sectors is drawn from the Benchmarks Study for the respective sectors. Copyright 2013 The Common Fund for Nonprofit Organizations and the National Association of College and University Business Officers. All rights reserved. February 12, 2013 2013 JFNA Investment Institute | Palm Beach Gardens, FL

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Controlled Growth Distribution Policy Jewish Federation of Metropolitan Chicago Unrestricted Endowment Distribution Policy Target distribution = 2.5% more than prior year Adjustments will be made to ensure that … … distribution equals 4% to 7% of assets … … this notwithstanding, year-over-year change must fall within range of +8% to –4% Additional risk controls: No increase – in dollars or as % of assets – allowed in year following a distribution cut

Under “normal” conditions … CGDP Flowchart Under “normal” conditions … For existing endowments baseline is previous year’s distribution For new endowments baseline is set at 5.5% of assets … distribute 2.5% more than previous year as long as distribution falls within 4-7% of assets … raise distribution to 4% of assets, unless: … increase distribution by +8% above previous year … reduce distribution to 7% of assets, unless: … reduce distribution by -4% below previous year … … that the distribution cannot go up (in dollars or % of assets) in any year following a cut If the normal increase would cause the distribution to fall above or below 4-7% of assets … If distributing 4% of assets would require raising the distribution by +8% or more from the prior year … If distributing 7% of assets would require cutting the distribution by -4% or more from the prior year … Subject to the requirement …

CGDP Objectives Greatly improve payout consistency Budget focused distribution policy based on dollar amount, not percentage Greatly reduced market dependence – eliminates “feast or famine” reliance on market performance Distributions grow steadily in real terms - targeted annual increases with limits Limits frequency and severity of distribution cuts Balance tensions between long- and short-term objectives Growing endowment assets is a long-term process Managing budgetary needs is a short-term process Key Benefits: More predictable distributions Less year-to-year variability Endowment assets growing in real terms rather than shrinking Larger distributions over very long run

Joseph in Egypt Revisited Navigating Fat Years and Lean Years

‘Steady State’ (Smooth Spend-Down) Endowment Outlays

Barriers to ‘Replacement’ Funding ‘Branding’ Lack of Alternatives Grantee Dependency

‘Big Finish’ (Large Terminal Grants) Endowment Outlays

‘Big Start’ (Major Initial Grants) Endowment Outlays

From the Beginning, Think About Ending Can the Mission Be Completed? If Not, Can It Be Carried On When You’re Gone? What Resources Will You Need at the End to Ensure Success?