Spending Policies

Non-profit organizations establish endowments to support their mission. We feel Spending Policies are essential to govern how endowment assets are spent and in striving to ensure that capital is preserved and sustained for long term use. Maintaining a balance between current spending and asset growth can be a critical responsibility of non-profit organizations. If too much is spent, assets may be depleted. If too little is spent, the organization may fall short in fulfilling its commitment to the people and/or causes it supports.

A typical Spending Policy provides the following:

  • A definition of how assets are to be used in pursuit of the organization’s mission,
  • A disciplined and reasoned approach to determining the appropriate level of spending, and
  • A predictable and consistent process (organization-based, not member-based, as members change over time).

Typically, Spending Policies are developed in conjunction with Investment Policy Statements. Some organizations start by developing an Investment Policy Statement while others begin by developing a Spending Policy and then formulating an asset allocation strategy designed to accommodate the requirements of the Spending Policy. The approach taken is not important either approach will work. What is important is that the organization develops the two policies in concert, using compatible assumptions, recognizing that the Investment Policy Statement and the Spending Policy are interrelated and need to work together.

Over the years, two basic approaches to spending have emerged:

  • Total return. Spending rates are often stated as a percentage of assets. To smooth out the effects of short term variations in market values, some organizations base their calculations on a moving average rather than just the last year end’s market value. For example, an organization might set its spending rate as a percentage of the average value of the endowment portfolio over the last five years.
  • Income earned. This approach limits spending to dividend and interest payments.
    The goal of this approach is to assure organizations that they will never spend all of their assets but the approach may not balance current and future needs effectivel