Endowment Payout Process Posted July 2013

Confidential Stanford University Confidential Stanford University Endowment Payout Process Tutorial Segments 1.Basic Mechanics of Endowment Payout Process 2.Commonly Used Endowment Reports Financial Management Services2

Basic Mechanics of Endowment Payout Process

Confidential Stanford University Confidential Stanford University  Endowed funds in the Merged Pool (Stanford’s primary investment pool) receive a “spendable” dollar amount monthly to support university expenditures per donor wishes and restrictions. This is known as “payout.”  Payout per share is approved by the Board of Trustees every February for the following fiscal year.  The University balances the need for stable and predictable current spending with the need to preserve endowment principal to support spending into perpetuity to create intergenerational equity.  An endowment “income fund” holds the payout produced by the fund’s investment in the Merged Pool.  Income funds are accounted for in the SU or operations ledger  The principal investment is accounted for in the EN or endowment ledger What is Endowment Payout? 4 Financial Management Services

Confidential Stanford University Confidential Stanford University Payout Timing & Spending Flexibility Financial Management Services Monthly Payout = # shares X payout per share 12 Sep OctNovDecJanFeb MarAprMay JunJulAug $1k Fund-holding orgs may spend anticipated payout anytime during the fiscal year Example: Fund with 1,000 Shares Annual Payout = $12/share; Monthly Payout $1/share 5

Confidential Stanford University Confidential Stanford University Financial Management Services Payout Impact on Share Value Share value declines by $1/month as payout is distributed 1,000 X $298 =$298,000 Oct $1K Aug 1,000 X $288 =$288, $1K 1,000 X $297 =$297,000 Nov $1K Dec 1,000 X $296 =$296,000 $1K Example: Fund value = $300K (1,000 shares, $300/share). Annual Payout = $12/share; Monthly Payout $1/share 1,000 X $299 =$299,000 $1K Sept 1,000 X $300 =$300,000 This simple illustration only depicts how payout decrements share value and does not consider market fluctuation. 6

Confidential Stanford University Confidential Stanford University Evaluating Payout Resources Financial Management Services “Payout Resources” are the monies available for a fund (i.e., earnings, appreciation, full market value) to make monthly payout. Pure B LimitedPure B Unlimited FFE (Quasi Shares) # of Shares1,000 Book Value$250,000 Market Value$300,000 Payout Resources $50,000 (MV – BV) + earnings $300,000 (MV) + earnings $300,000 (MV) + earnings Example: Monthly Payout Amount = $1/share ($1,000 per fund) Payout to Income Fund $1,000 Vast majority of Stanford Endowment funds have sufficient resources for full payout. 7

Confidential Stanford University Confidential Stanford University Evaluating Payout Resources in Funds with Multiple Share Types (Pure & Quasi) Financial Management Services Pure B SharesQuasi Shares # of Shares Book Value$175,000$75,000 Market Value$210,000$90,000 Payout Resources$35,000$90,000 Payout to Income Fund $700$300 Share types in a fund will be evaluated separately for payout resources and will fund payout proportionately Payout is covered proportionately. Pure covers pure payout; quasi covers quasi. Fund still gets full payout. Example Fund: 1000 shares in total; monthly payout per share = $1 8

Confidential Stanford University Confidential Stanford University Do Funds Sometimes Have Insufficient Payout Resources? 7 of 10 Financial Management Services Affects Pure B Limited Funds only, and only when fund is “underwater” Monthly payout = earnings and any available appreciation There are very few funds in this category Endow_128_Endow_Investment report displays Quasi, Pure Limited, and Pure Unlimited to assess Payout Resources Undistributed payout stays in principal side of fund

Confidential Stanford University Confidential Stanford University When Payout Resources are Less than Payout Amount? (affects Pure B Limited Shares only) Financial Management Services Pure B Limited Healthy Pure B Limited Underwater (no appreciation) Pure B Limited Partially Underwater (insufficient appreciation) # of Shares1,000 Book Value$250,000$350,000$299,500 Market Value $300,000 Payout Resources $50,000 + $100 earnings $100 earnings only $500 + $100 earnings Example: Monthly Payout Amount = $1/share ($0.10 earnings, $0.90 appreciation) Payout to Income Fund $1000$100$600 Undistributed Payout N/A$900$400 Payout of earnings and available appreciation Undistributed payout is reinvested 10

Confidential Stanford University Confidential Stanford University 1,000 X $299 =$299,000 Undistributed Payout Purchases New Shares to Restore Fund Value Financial Management Services Payout Resources > Payout “Healthy” $900 Undistributed payout 1,000 X $300 =$300,000 $1000 Payout To Income Fund After payout Payout Resources < Payout “Underwater” 1,000 X $300 =$300,000 $100 Payout To Income Fund (Actual Earnings) After payout & reinvestment Before payout Buys 3.01 shares at $299 /share 1,003 X $299 =$299,900 Applies to all funds that do not get full payout (e.g., Pool A) Before payout $1,000 =$300,000 $100 =$300,000 11

Confidential Stanford University Confidential Stanford University Funds with Pure B Limited and Quasi Shares: Decapitalization Policy Financial Management Services Pure B Limited Shares Quasi B Shares # of Shares Book Value$240,000$100,000 Market Value$210,000$90,000 Payout Resources $70 earnings only $90,000 Payout to Income Fund $70$300 If pure portion does not have enough payout resources to make payout on pure shares, total payout will be impacted Payout on pure shares is made with available pure resources only. Total payout to fund = $370 Reinvest Undistributed Payout $630$0 Option to de-capitalize quasi shares to make up ‘missed’ payout Example Fund: 1000 shares in total 12

Commonly Used Endowment Related Reports

Confidential Stanford University Confidential Stanford University YEAR-TO-DATE FUND STATEMENT WITH TRANSACTION DETAIL By Project For Non-Sponsored Funds For the period ending November 30, 2013 Information contained in this report is incomplete if the Report Period is after the LAST CLOSE Report Prompts: 001: Award NumberKXXXX005: Award Purpose%009: Award Donor%013: Set of BooksSU 002: Award Owner%006: Award Free-form%010: Award Start Date%014: Award Status% 003: Award Manager%007: Award Lvl Control%011: Award End Date%100: Award Org% 004: Award Type%008: Award Lvl Restr%012: Award Name%200: Ending PeriodNOV-2013 KXXXX ProjectOrgObjectSourceJournalDescriptionDateAmountYTD Total Beginning Balance 0.00 Receipts Receipts - Endowment Payout ZZZZ Endowment Payout "Payout"09/01/1310, ZZZZ Endowment Payout "Payout"10/01/1310, ZZZZ Endowment Payout "Payout"11/01/1310, Total - Unspecified General Operations 30, Total Receipts 30, Transfers (95,000.00) Total Transfers (95,000.00) Expenses Total- Project XXXXX Total Expenses.00 Fund Balance (65,000.00) Net Investments Total Net Investments Available Balance (65,000.00) Endowment Payout Note: Endowment payout is distributed monthly. The following information is a projection for planning purposes only and not a guarantee of future payout or return. Year-to-date PayoutAnticipated Remaining Payout (1) Anticipated Annual PayoutAnticipated Available Balance 30, , , , ( 1) Anticipated Remaining Payout = latest monthly payout multiplied by number of months remaining in the fiscal year Fund_153 Report Financial Management Services14

Confidential Stanford University Confidential Stanford University Fund_154a Report – data download Financial Management Services Anticipated Remaining Payout: current month payout times the number of months remaining in the fiscal year Anticipated Available Balance: actual available balance plus anticipated future payout A BCDEFGHIJLMOQRSTUVWX ABA + B Award Beginning Balance Receipts - Endowment Payout Expenses Avail Balance [Due to/from] Anticipated Remaining Payout Anticipated Available Balance KXXXX , (95,000.00) (65,000.00) 90, , YTD Payout November Nov payout x 9 months 15

Confidential Stanford University Confidential Stanford University Use Fund_128 Report – data download tab to assess health of Pure B Limited Funds Financial Management Services  Report Purpose  Summarize share book and market value by fund/pool  Allows users to:  Analyze limited and unlimited shares separately  Determine available payout resources for each share type CURRENT Limited & Unlimited combined Pool B Pure Shares Pool B Pure Book Value Pool B Pure Market Value KXXXX 15, ,000, ,065, KXXXA 10, ,000, ,710, LimitedUnlimited Award Pool B Pure Shares (Limited) Pool B Pure (Limited) Book Value Pool B Pure (Limited) Market Value Pool B Pure Shares (Unlimited) Pool B Pure (Unlimited) Book Value Pool B Pure (Unlimited) Market Value KXXXX 15, ,000, ,065, KXXXA 10, ,000, ,710,

End