The spending policy was implemented effective with fiscal year
2006 for all endowment funds administered by The Arch Foundation
for the University of Georgia. The Investment Committee of the
Foundation's Board of Trustees establishes the rate used in the
spending calculation each year.
OBJECTIVE
The objective is to develop a spending plan designed to achieve
an investment return that will protect the future purchasing
power of each endowed fund. This is the point where spending
levels remain within earnings and the rate of appreciation of
principal is at least equal to the inflation rate.
1. Arch's Investment Policy (see
IX.) is designed to compliment
Arch's Spending Policy.
2. A Spending Policy establishes a reasonable and prudent spending
plan for an Endowment fund. The primary objective is to
determine how much to spend currently and how much to invest
to preserve future spending.
3. A Spending Policy that balances current and future spending
can be defined by a basic formula that links the Fund's annual
Growth (Total Return) with Costs (Spending + Inflation). TOP
SPENDING RULES
The Spending Policy sets a limit on the amount of expenditures
from endowment funds by requiring the calculating and tracking
of a Total Spending Budget for each endowment fund. Funds
invested by Arch for less than one full fiscal year are prohibited
from spending under the Spending Policy to allow the accumulation
of earnings to fund future spending. Only the dividends,
interest, or capital gains earned by the endowment funds can
be used to fund the Total Spending Budget; at no time will the
endowed gifts (or corpus) of the Fund be invaded to fund expenditures. Gifts
made to fund current expenditures are not endowed and, therefore,
are not subject to the Spending Policy. All expenditures
are subject to Arch's policies of Expenditure Control (see
VIII). TOP
The Total Spending Budget will be established at the beginning
of each fiscal year and reported to the fund representatives. Every
year, a fund may receive additional allocations to its Total
Spending Budget, subject to available funding. At the end
of each fiscal year, the remaining Total Spending Budget will
be allowed to roll over to the next fiscal year as defined below. Estimates
of the Total Spending Budget for the next fiscal year will be
prepared after the spending rate is decided by Finance and Compensation
Committee of Arch's Board of Trustees. Those estimates
will be available to the fund representatives before the beginning
of the next fiscal year, as early as March. TOP
DEFINITIONS
Terms in italics are defined later in the section. Please
contact Arch's Accounting Office if further explanation is needed. TOP
Total Spending Budget - represents the spendable balance for
each endowed fund. It is funded by the dividends, interest,
and capital gains earned by the fund and may not, at any time,
exceed those amounts. Each year, a Current
Year Spending Budget will be determined as prescribed herein and added to the
balance of the Total Spending Budget. Expenditures, excluding
investment and administrative fees, from the fund will reduce
the Total Spending Budget. At the end of each fiscal year,
the Total Spending Budget can be rolled over to the next fiscal
year, subject to the Rollover Limit and available Investment
Return. TOP
Current Year Spending Budget
- the lesser of the Spending
Calculation or Investment
Return not already reserved for the Total Spending
Budget. The Current Year Spending Budget will be estimated
in the February preceding the next fiscal year and finalized
in July of the new fiscal year. TOP
Spending Calculation - the result of applying the Spending
Rate to the average principal balance of the fund over the preceding
36 months. The Spending Calculation will be performed in
the February preceding the next fiscal year. Endowed funds
less than 7 months old will not receive a Spending Calculation,
as they will not be held for one full fiscal year by the beginning
of the next fiscal year. For funds held less than 36 months,
the average principal balance will use all available history
of the fund and exclude investment appreciation (object code
29350 on the status reports) so that the average is based solely
on corpus. TOP
Spending Rate - the rate established each year by the Investment
Committee of Arch's Board of Trustees. Once the rate is
determined for the next fiscal year, it will be communicated
in a memo along with the estimates of the Total Spending Budget
for the next fiscal year.
Investment Return - consists of dividend/interest yield (posted
to the income sub-account of a fund) and market appreciation
(posted to the principal sub-account of a fund). Using
the total return concept, income is always used first, and, when
required, capital appreciation will be liquidated and funds will
be moved from principal to cover the Total Spending Budget. The
original investment (corpus) will NOT be touched. Once
these gifts are invested in Arch's long-term portfolio, they
will remain there in perpetuity. Only the appreciation
from these assets will be used to fund the Total Spending Budget. The
effect of market depreciation is excluded from total return,
as the endowment is allowed to utilize dividend/interest yield
despite market losses. Please note that if there is market
depreciation in a given year, the spending budget risks not being
fully funded the next fiscal year. TOP
Rollover Limit - represents the total of the Current Year Spending
Budgets for the three previous fiscal years. Along with
Investment Return, it is used as the ceiling in determining how
much of the remaining Total Spending Budget can roll over to
next fiscal year. This determination will be made at the
end of each fiscal year. For example, if a fund received
Current Year Spending Budgets of $5 in each of the three previous
fiscal years, then the Rollover Limit at the end of the third
year will be $15. The Rollover Limit will be reported through
the fiscal year so that fund representatives have the ability
to monitor how much of the Total Spending Budget can roll over
to next fiscal year. Any amounts of the Total Spending
Budget that exceed the Rollover Limit will expire. The
funding for those expiring amounts will remain in the endowed
fund as Investment Return. TOP
EXAMPLE
As an example, we will assume a fund normally receives a Spending
Budget of $5 each year but doesn't spend it all. At the
end of this fiscal year, the fund has $10 remaining in the Total
Spending Budget and $13 of Investment Return. The $10 of
Remaining Total Spending Budget will roll over to the next fiscal
year since it does not exceed the Rollover Limit or Investment
Return. TOP
After funding the Rollover Spending Budget of $10, there is
only $3 of available Investment Return to fund the Spending Calculation
of $5. The lesser of the two is $3, and that is the Current
Year Spending Budget for the next fiscal year. Adding the
Rollover Spending Budget and the Current Year Spending Budget
together gives a Total Spending Budget of $13 for the fund.
Above, we assumed that the Rollover Limit was $15 based on the
fund having received Spending Budgets of $5 in previous years. Since
the Current Year Spending Budget is $3, the Rollover Limit for
next fiscal year would be $13 ($5 + $5 + $3).
If Investment Return at year-end had been sufficient, the fund
would have a Total Spending Budget of $15. TOP
REPORTING
Upon request, the Financial Services Office can provide detail
behind any calculations performed in the reports. All reports
will be made available through the on-line reporting system. TOP
1. Estimated Total Spending
Budget Report - This annual report
displays the Estimated Total Spending Budget for the next fiscal
year and is available for viewing and printing in March. A
copy of the report is at Exhibit VII.A. The Estimated Rollover
Spending Budget is calculated by taking the lesser of the remaining
Total Spending Budget, current Investment Return, and the Rollover
Limit. Also, the Next Year Spending Budget is estimated
by taking the lesser of the Spending Calculation and current
Investment Return (less the funding needed for the Rollover Spending
Budget). The Rollover Spending Budget and the Next Year
Spending Budget are combined to create the Estimated Total Spending
Budget. The estimates used in this report will be impacted
by actual spending and market fluctuations experienced between
the date of the report and fiscal year-end. TOP
2. Opening Total Spending
Budget Report - Each August, an Opening
Total Spending Budget report will be available for viewing and
printing and will give the Total Spending Budget for the newly
begun fiscal year. This report repeats the calculations of the
Estimated Total Spending Budget report discussed above using
actual fiscal year-end figures. A copy of the report is at Exhibit
VII.B.
The Spending Calculation is included in a note at the bottom
of the report to allow fund representatives to consider this
figure as a guideline in planning their spending for the newly
begun fiscal year. Spending at a rate higher than the Spending
Calculation is only advised for funds with a surplus of Investment
Return. TOP
3. Monthly Total Spending
Budget Report - Each month a report is available
for viewing and printing that tracks expenditures, obligations,
and the Remaining Total Spending Budget for each fund. A copy
of the report is at Exhibit VII.C. TOP
Beginning Total Spending
Budget - This is the amount provided
in the Final Total Spending Budget report (#2 above). The
Component of Rollover Spending Budget and Current Year Spending
Budgets are also shown.
Expenditures - Each month the report will reflect expenses incurred
to date. These expenses are categorized into five areas:
operating, equipment, travel, scholarship, and transfer (to UGA
or related entity) expenses. These expenditures reduce the fund's
Total Spending Budget. The investment and administrative
fees are not deducted from a fund's Total Spending Budget.
Obligations - Any encumbrances or obligations that have been
approved and processed will appear as a reduction from the Total
Spending Budget.
Remaining Total Spending
Budget - Represents the balance available
for spending this fiscal year and, if unspent at fiscal year-end,
the amount available to be rolled over to next fiscal year subject
to the Rollover Limit and available Investment Return.
Spending Rollover - This note is included to remind the fund
representatives about the process of rolling over unspent Total
Spending Budgets to the next fiscal year. The Rollover
Limit is given as a reminder of the maximum that can be rolled
over. The spending budgets used to calculate the Rollover
Limit are displayed below. If the Remaining Total Spending
Budget exceeds the Rollover Limit, the fund representative should
consider whether to utilize more of the spending budget to avoid
expiration, or allow that excess spending budget to expire and
the related funding remain in the endowed fund as Investment
Return. TOP
FUNDING SPENDING
Investment
Return limits the Total Spending Budget, as it is the source
of funds for expenditures. As defined above, Investment
Return consists of dividend/interest yield (posted to the income
side of a fund) and market appreciation (posted to the income
sub-account of a fund) and market appreciation (posted to the
principal sub-account of a fund). Expenditures are charged to
the spendable cash sub-account of the fund. Therefore, dividend/interest
yield and capital appreciation will be transferred to the spendable
cash sub-account to the extent the Total Spending Budget exceeds
the spendable cash balance of the fund. This is called
the "cash need" approach. TOP
Once the Total
Spending Budget is set at the beginning of a fiscal year, Arch's
Accounting Office will determine the cash need by comparing the
Total Spending Budget to the spendable cash sub-account of the
fund. The cash needed will be liquidated for each fund
from Arch's long-term investment pool in such a manner not to
adversely affect the investment strategy of Arch. The Director
of Finance will consult with the Finance and Compensation Committee
of Arch's Board of Trustees as needed to ensure that the investments
are liquidated in an appropriate manner. Funds that have
not yet been liquidated are still considered appropriated for
spending. The endowed fund will bear the investment risk
associated with these appropriated funds until they are liquidated. However,
the appropriated funds will be made available even if the investment
losses are experienced after the Total Spending Budget is determined. Liquidating
to fund cash need should be reviewed on at least a quarterly
basis until all appropriated amounts are liquidated.
As discussed earlier, the Current Year Spending Budget, which increases the
Total Spending Budget, is calculated on principal balances. Therefore,
allowing the spendable cash balance of a fund to accumulate beyond
the Total Spending Budget does not help to increase the Investment
Return or future purchasing power of the fund. TOP
The Current
Year Spending Budget can increase each year as a result of any
or a combination of three events:
• new gifts
• market appreciation
• transfer of income to principal
Spendable cash balances greater than the Total
Spending Budget will be transferred to principal. Those
amounts will be reinvested as Investment Return and made available
to fund future Current Year Spending Budgets. TOP |
