A well-considered spending rule is one of the most important policy components for not-for-profit institutions. Asset allocation rightly demands a significant level of attention because of its involvement in capital creation, but allocation decisions are most heavily influenced by understanding how much an institution needs to spend in order to serve its community and achieve its mission. For investment committees, the prudent stewardship of assets includes developing a spending policy that instills discipline not only under normal economic conditions, but also in times of market stress.
An effective policy optimizes what economist James Tobin coined “intergenerational equity,” the idea that “the trustees of endowed institutions are the guardians of the future against the claims of the present.” Spend too little and reduce the endowment’s impact today; spend too much and potentially reduce its impact tomorrow. If there was predictability around future performance the calculus would be infinitely less difficult, but because institutions don’t enjoy this luxury they must manage these competing priorities accordingly.
In this report we provide some structure for the spending policy decision by framing it around three central questions: