Endowments

[Host] When you serve on an endowment board, there’s a lot of emphasis on raising funds, investing wisely and good governance. But there’s often less attention paid to the endowment’s spending policy. Quanda Allen, First Vice President of the Foundations and Endowments Specialty Practice for SunTrust Bank, explains why it’s essential to develop a disciplined spending policy—and how it’s done.

[Quanda Allen] First and foremost, a disciplined spending policy really balances current and future needs when determining the purpose, structure and governance of endowment assets. It also impacts current budgets, future initiatives, capital projects, investment strategies and administrative expenses. A disciplined spending policy also limits volatility, and it truly eases organizational strain and ultimately allows the organization to build long-term sustainability of endowment assets, which is crucial.

[Host] Here’s how having that disciplined spending policy helped one SunTrust client, an Atlanta-based church.

[Allen] What they decided to do was to really bifurcate their spending policy and apply a 5 percent spending policy over a 36-month average to all endowment gifts prior to 2010. And then for all new gifts from that point forward, they applied a 3 percent spending policy over a 36-month average. And by design, what this allows them to do is to really bring their spending policy down to more of a 4 percent effective spending rate, which considers the importance of the long-term sustainability of the endowment without impacting their operational budget too significantly in the short term.

[Host] When it comes to creating a spending policy, Allen says there are two essential types of considerations—qualitative and quantitative.

[Allen] Qualitative considerations really get to the heart of what is the purpose of the endowment? Are there specific donor restrictions? Do we have obligations that this particular endowment must meet?

Beyond qualitative considerations, there are sound quantitative analysis to support spending policy; specifically, you want to make sure that you understand the overall fiscal health of the organization and the role that the funds would play in the overall operational budget.

The second quantitative analysis that you want to undertake is really begin looking specifically at the obligations of spending. So, are there grants that this particular spending policy needs to meet? Is it funding a program? Are there long-term capital expenses?

As you think about quantitative considerations, you also want to make sure that your investment strategy is aligned with the risk tolerance of the organization and the investment time horizon. You want to insure that the spending policy that you have in place is aligned with the overall return expectations for the investment strategy.

And you also want to make sure that you're considering cost, and those are investment related costs because ultimately they do impact the overall funds that are available to be spent. And finally, inflation is an important consideration. Oftentimes, organizations will use a spending policy that includes inflation as a part of the overall calculation. So your inflation or deflation expectations are very important as it relates to this sort of process.

[Host] One of the key elements of a spending policy is to define exactly how the endowment will use the funds. But your spending policy shouldn’t stop there. Allen elaborates on other components to include.

[Allen] First and foremost, you want to address the preservation of purchasing power expressed in a target return or a measure greater than inflation. So at the end of the day, you're actually using a specific spending policy target, and that can be expressed as a single number or a range. You also want to insure that you include in the spending policy language that prevents erratic spending.

And finally, you want to make sure that your spending policy addresses the role of inflation and investment related expenses.

[Host] If your organization already has a spending policy, Allen says advisory services like those offered by SunTrust, can help to refine it.

[Allen] What we can do is sort of compare the spending objectives against expected return assumptions. And that's a very important exercise because it helps an organization understand the extent to which they're gonna be successful in meeting their obligations. The second thing that we can do is really to examine the strategic asset allocation that's outlined in the investment policy statement to really determine if that allocation is appropriate and/or realistic. And finally, if a spending method has already been selected, we can make recommendations for the spending policy to really insure that the asset allocation reflects future liabilities of the organization.

[Host] For more information, read the SunTrust white paper “Endowment Spending: Designing a Policy that Works,” or contact the SunTrust Foundations & Endowments Team at 866-223-1499, or visit us online at suntrust.com/foundations. If you enjoyed this podcast, please consider subscribing to the Foundations and Endowments Podcast Channel via iTunes, or download our podcast app in the Google Play Store, by searching SunTrust.