Endowment Spending

Published: September 20th, 2002

Category: Memos

Paul A. Robell, Vice President for Development & Alumni Affair

As you are aware, market returns for the last few years have been much worse than any of us could have anticipated. While doing better than our peers and also exceeding our benchmarks (that is, we lost less money than others), the Foundation’s endowment pool had returns of -8.6% for 2000-2001 and -6.9% for 2001-2002.

You will recall that two years ago we adopted a new endowment spending plan which is designed to allow significantly more spending during the good times, and a quicker response during the bad times. When implemented two years ago, spending increased across the campus by $5.2 million annually. Unfortunately the last two years have been challenging ones and the Investments and Finance Committees of the University of Florida Foundation Board of Directors determined last week it is necessary to reduce overall spending from the endowment in order to preserve future purchasing power.

For your information, our investment advisers project long term “real” returns (before inflation) for the endowment of 5.5%. If you are familiar with our current spending policy, we are currently spending 6% of 110% of market value, which will result in cannibalizing the real purchasing power of the endowments. Accordingly, effective as of July 1, 2002, the Board of Directors has approved a reduction in the endowment transfer rate for expenditures from endowments from 5% to 4.5%. This rate, plus the Foundation administrative fee, will make total spending 5.5%, which is equal to the long term projected real returns for the endowment. It is possible that this spending rate could be reduced further in the future; most major endowments in the U.S. spend a total of 4-4.5%. We are still attempting to currently “spend” as much as is prudent and possible.

We warned of a possible 20% reduction in spending this year and that has essentially come to pass. As of July 1, 2002, in accordance with our policy, the investment value of each endowment will be reduced to 110% of market value (it is currently at 123%) and the spending transfer rate will be reduced from 5% to 4.5%, resulting in a 19.62% reduction in spending this coming year.

The committees also voted to make the performance adjustment twice a year. If the market recovers significantly by the end of December, we could see a positive adjustment at that time. We know these returns will come as no surprise to anyone.

If you have any questions, please do not hesitate to contact me at probell@uff.ufl.edu, Leslie Bram at lbram@uff.ufl.edu or Ken Hillier at khillier@uff.ufl.edu.

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