Increase or decrease endowment earnings distribution by X% for the next fiscal year. The X% change is to be approved by the Board of Trustees. The resulting total distribution (“$Y”) will fall within a band defined by a minimum (“Floor”) of 4% and maximum (“Cap”) of 6.5% of a three-year moving average of endowment market value.
Implementation Guidelines
- The policy reflects a desire to balance current resource needs of the University with the long-term objectives of preserving the purchasing power of the endowment for future generations and ensuring reasonable year-over-year stability of future endowment payouts.
- The payout, $Y, as a percent of a three-year moving average of endowment market value should fall within a targeted range of 4.5% to 5.5% in the intermediate term.
- An appropriate starting point for determining X% is the rate of inflation embedded in Rice University’s cost structure. A suggested approach for estimating inflation for Rice is to calculate the most recent year-over-year percentage increase in CPI and add a factor that adjusts the CPI rate for the higher costs associated with higher education.
Policy for Activation of New Endowments
A “reserves test” will be applied to each endowment fund to determine if sufficient reserves (appreciation) exist to support budgeting of the fund at the full rate. Appreciation is the difference between the historical gift value and the market value of the endowment. This is a prudent approach to activating endowments and helps minimize the budgetary impact should there be a sustained period of investment difficulty.
In normal market conditions, individual endowments will be activated based on their market value at December 31 prior to the fiscal year in which the fund will be activated. An endowment fund will be activated at 4.5% of its December 31 market value if sufficient appreciation exists to cover 2 years of distribution at the 4.5% rate. If the endowment fails to meet this test, then the activation rate will be 2.0%.
Endowments initially activated at 2.0% will be reevaluated each fiscal year to determine if the endowment has accrued sufficient appreciation to increase the endowment payout to the full 4.5% activation rate.