Outlook on Spendable Policy

Spring is here, and that means it’s almost time to calculate how much you have to spend in the coming year. The end of March marks the end of our 2018 fiscal year’s third quarter, and these quarterly numbers are used to calculate spendable amounts. As you may recall, the available spendable amount is 5 percent of the previous 12-quarter moving average of the funds market value.

Why 5 percent? That is a great question, and one we continue to ask ourselves. Is a 5 percent spendable policy sustainable over time? Should we be thinking about making changes to our spendable allotment? In order to answer these questions, we weigh:

  • The expected rate of return on investment

Minus

  • Projected inflation (2-3 percent to ensure the “buying power” of gifts over time)
  • Fees and administrative costs

While there is some educated guesswork involved, we can look at past performance to get a close approximation of how a fund will perform.

The most recent data, gathered for the 2016 Council on Foundations – Commonfund Study of Investments of Endowments for Private and Community Foundations showed the effective spending rate for community foundations declined slightly to 4.7 percent from 4.8 percent in 2015.

It seems likely we will need to make a downward adjustment to our spending policy in the future to help maintain and grow fund balances. This is something we don’t do lightly, and you can be assured we will give you fair notice and make incremental moves to arrive at a new, stable percentage. The good news is that even with a lower spendable amount, unspent funds remain in your endowment where they have the potential for growth. Happy spring and happy grantmaking!

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@2015 Southwest Initiative Foundation, an equal opportunity provider and employer.

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