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Endowment Spending and the Pandemic

October 1, 2020 | Commentary

  • For months now our lives have been disrupted by the COVID-19 pandemic.  Schools and foundations have been hit hard.  Expenses surrounding programs have risen while revenues remain highly uncertain.  How to best address these budget challenges is occupying a great deal of trustee and administration time and energy.
  • Mechanical spending rules based on a moving average of endowment values are considered best practice and have the advantage of smoothing out volatile returns and providing more certainty to the budget process.
  • In extreme times like these, it may be best to temporarily suspend the spending formula in favor of providing support for the basic mission.  As long as these extra outlays do not become a permanent feature, the first goal of fulfilling essential needs can be met without too great an impact on future generations.
  • The objective of an endowment is not to grow without bounds, but to contribute regularly to the programs of the school or foundation and promote inter-generational equality while also serving as a rainy-day fund.  Suspend the spending rule and dip further into the endowment, as necessary.  When extraordinarily good parts of the cycle recur, do the reverse, and forego some of the outsized spending increases implied by the rule.  Allow that capital to keep growing in the endowment to provide better for moments just like this.

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