From , the Consolidated Endowment Fund (CEF) Spending Policy was 5.0% of a three-year moving average market value.

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1 STANDING COMMITTEES F 7 Finance and Asset Management Committee Consolidated Endowment Fund (CEF) Spending Policy INFORMATION This item is being presented for information only. BACKGROUND The Board of Regents, with advice from University of Washington Investment Management Company (UWINCO) Board and staff, provides oversight of the University s investment program and directs two key policy decisions: 1. Strategic Asset Allocation; and 2. Spending. From , the Consolidated Endowment Fund (CEF) Spending Policy was 5.0% of a three-year moving average market value. In March 2009, the Board of Regents approved an interim spending policy that lowered then frozen program distributions at approximately half that of FY 2008 levels. The action was taken to prevent further erosion of the endowment following the severe meltdown in global financial markets in the last half of In October 2010, the Board of Regents adopted a new spending policy to replace the interim spending policy that affected program distributions in FY 2009 and FY The following amendments to the CEF Spending Policy were adopted: Reduction in total spending (program distributions plus administrative fees) from 6.0% to 5.0%; Reduction in program distributions from 5.0% to 4.0%; Extension of the averaging period from three years to five years; and Change in administrative fee distribution from period end calculation to the same averaging formula used for program distributions. The new policy maintained a 1% administrative fee 80 bps to Advancement and 20 bps to Investments. F 7/207-17

2 STANDING COMMITTEES Finance and Asset Management Committee Consolidated Endowment Fund (CEF) Spending Policy (continued p. 2) SPENDING POLICY OBJECTIVES AND UWINCO RECOMMENDATION: At the heart of effective endowment investment planning is the attempt to balance the following objectives: Balance the competing demands of current and future endowment beneficiaries; Maximize the stability and predictability of distributions; and Ensure the endowment is understandable and acceptable to donors and campus. CEF unit values and distributions have increased steadily since 2010 in a low inflation environment. Higher inflation could erode the CEF purchasing power over time. Reducing the spending rate would result in higher future distributions years from the implementation date. In May 2017, the UWINCO Board advised the Board of Regents to reduce total spending (program distributions plus administrative fees) on the CEF from 5.0% to 4.5%. The recommendation from UWINCO Board was informed by capital market return forecasts suggesting a prolonged low return environment. If implemented, a phased reduction in spending will provide departments with an opportunity to plan for decreased funding to programs. Three and five year transition periods beginning July 2018 are under consideration. Attachment CEF Spending Policy Review F 7/207-17

3 CEF Spending Policy Review July 13, 2017 ATTACHMENT

4 Executive Summary The Board of Regents provides oversight and directs two key policy decisions Strategic asset allocation and spending Consolidated Endowment Fund (CEF) unit values and distributions have increased steadily since 2010 in a low inflation environment. Spending risk is increasing due to projected lower returns Many peer universities are considering endowment spending reductions Results in higher distributions in years Other considerations include donor expectations, university priorities, and Federal legislative developments UWINCO Board recommends reducing the spending policy rate from 5.0% to 4.5% The UW is considering 3 and 5 year implementation strategies 2

5 Background From 2001 to 2009, the UW s spending policy was 6.0% of a three year moving average market value In October 2010, the Board of Regents: Reduced spending to 5.0% Extended the averaging period from three years to five years In 2017, the UWINCO Board advised the Board of Regents to reduce total spending from 5.0% to 4.5%. 3

6 Spending and Inflation A total return of ~7.0 to 8.0% is required to maintain endowment purchasing power. Total Nominal Return* Required to Meet the Long-Term Spending Target Endowment Distributions Advancement Office UWINCO Expected Inflation Total Return Required 4.0% 0.8% 0.2% 2.0% 7.0% Long-Term Policy Rate } Internal Fees Consumer Price Index * Return is assumed net of external service fees (manager, consulting, custodial and legal) of approximately 75 basis points. Required Nominal Return Matrix Inflation Spending Rate (including internal fees) 3.0% 4.0% 5.0% 6.0% 7.0% 1.0% 4.0% 5.0% 6.0% 7.0% 8.0% 2.0% 5.0% 6.0% 7.0% 8.0% 9.0% 3.0% 6.0% 7.0% 8.0% 9.0% 10.0% 4.0% 7.0% 8.0% 9.0% 10.0% 11.0% 5.0% 8.0% 9.0% 10.0% 11.0% 12.0% 6.0% 9.0% 10.0% 11.0% 12.0% 13.0% 7.0% 10.0% 11.0% 12.0% 13.0% 14.0% 8.0% 11.0% 12.0% 13.0% 14.0% 15.0% Long-term spending plus inflation rate estimate 4

7 Decrease in Distribution from 5.0% Rate Impact of 10 and 20 bps reduction 5% Distribution FY17 10 bps Decrease 20 bps Decrease Academic / Other units Student Support $32,901 ($658) ($1,316) Faculty Support 27,075 (541) (1083) Academic Support 18,589 (372) (744) Research Support 8,794 (176) (352) Institutional Support 1,580 (32) (63) Non-University Endowments 1,429 (29) (57) Endowed Program Support 90,367 (1807) (3615) General Operating Support 22,451 (449) (898) Total Program Distributions 112,818 (2256) (4513) Advancement & UWINCO Support 28,205 (564) (1128) Total Endowment Funding $141,023 ($2,820) ($5,641) Scenario 1: 5 years at 10 bps per year Scenario 2: 1 year at 10 bps, then 2 years at 20 bps Year 1 Year 2 Year 3 Year 4 Year 5 5 Year Cum. ($2,820) (5,640) (8,460) (11,280) (14,100) ($42,300) ($2,820) (8,460) (14,100) (14,100) (14,100) ($53,580) Dollars in (000 s) 5

8 The Path Forward Implement a reduction in spending rate starting July 2018 Review proposed implementation plan and impact with Board of Regents in February 2018 Propose final recommendation to Board of Regents in March