Aligning Spending Policy with Your Institution’s Long-Term Goals

June 28, 2022 |
1 minute read
|

Commonfund has designed a set of questions to help guide a committee—and staff—toward selecting the most appropriate spending policy. We have used these questions as a guideline for conversations with our Outsourced Chief Investment Officer (OCIO) clients and, through thoughtful examination of these considerations, many institutions have determined that a 12-quarter moving average policy may not be the most appropriate policy to achieve their long-term goals.

For many institutions, Commonfund believes that an ideal spending policy is one that offers some combination of the following:

  • Provides a consistent, and growing, level of annual support in most years (i.e., a policy that minimizes negative spending).
  • Offers a sufficient amount of long-term, total support of the operating budget while leaving enough capital in the endowment to compound for future generations.
  • Allows the endowment to prudently take as much risk as needed to meet its long-term return objective.
  • Allows an investment committee to stick with an allocation plan, especially during periods of sizable market drawdowns.

Once an ideal spending policy is determined, all key constituents (trustees, investment committee members, finance staff, development staff, donors, etc.) should be educated on the formula and the rationale for employing that methodology.

Question to Consider:
How reliant is the institution on the endowment?

Commonfund Guidance:

  • What percentage of the operating budget is covered by the distribution from the endowment?
  • What has been the trend of this support?
  • Will the endowment be relied upon more in the future?
  • What has gift flow been as a percent of the endowment? Has this grown?

Question to Consider:
What is the overall goal of the spending policy?

Commonfund Guidance:

  • Maximize long-term spending
  • Maximize short-term spending
  • Consistency of spend (i.e., limit spending volatility and drawdown)
  • Balance between the three options above

Question to Consider:
How would the institution be affected if the spending declined year over year? What would the impact be if this occurred consistently? What’s the maximum drawdown in institutional/organization support that can be tolerated?

Commonfund Guidance:

  • An endowment liquidity analysis and stress test should be refreshed at least annually to help answer these questions.
  • This should be incorporated within the institution's overall financial stress tests to gain a comprehensive understanding of the reliance on the endowment.

Question to Consider:
How about financial flexibility?

Commonfund Guidance:

  • Annual fund giving
  • Restricted/unrestricted endowment
  • Access to other sources of liquidity (lines of credit)
To learn more, request your copy of Endowment Spending Policy: Often Overlooked but Critical to success.

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Anthony Peretore

Author

Anthony Peretore

Managing Director

Anthony Peretore

Author

Rachel Stavola Clivaz

Associate Director

Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.

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Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.