The University’s Board of Regents will vote this week on a proposal to alter their endowment spending rule, which dictates how much of the endowment can be spent each year.
Regents have been discussing a potential change to the University’s endowment spending rule since April, though very little about their discussions is known publicly since they have taken placed in private committee meetings.
However, in a proposal outline released to the public earlier today, Tim Slottow, the University’s executive vice president and chief financial officer, outlined the proposed change, which would decrease the annual endowment payout rate from 5 percent to 4.5 percent.
In an interview late last month, Regent Andrea Fisher Newman (R–Ann Arbor) told the Daily that the regents had been discussing a possible change to the rule, hinting that a possible decrease may be forthcoming.
“I think the objective is, if you were to decrease (the spending rule), we would want to make sure that the funding doesn’t actually go down,” Newman said. “You might have a slight decline if you decreased it, at least initially, but overall the anticipation would be that (the amount paid out annually) would stay the same or go up.”
For instance, if the Board of Regents approves lowering the payout rate by one-half percent, the endowment may pay out less money next year. However, reinvestment of the additional one-half percent could increase the net worth of the University’s endowment more quickly. As a result, future endowment payouts would likely be on par with or greater than those currently allocated.
According to Slottow’s proposal, the University will be safeguarded against a potential fall in the overall dollar amount paid out of the endowment by gradually implementing the change over the next several years in a “flexible manner.”
The June timing of the proposal means the payout change will coincide with the Board of Regents’ approval for the University’s 2010-2011 budget and student tuition rates.
Both the budget and tuition rates can be affected by the amount of money available from the University’s endowment, which partially pays for a wide variety of expenses at the University, including student financial aid and program support in certain areas across campus.
According to the University’s Office of Public Affairs and Media Relations’ website, the endowment contributed $244 million to help cover expenses in the University’s budget last year.
Asked about the proposed change last week, University spokeswoman Kelly Cunningham declined to comment on the topic, saying she couldn’t confirm anything about the potential change.
The University’s endowment currently pays out five percent of its overall value annually. However, the University’s total endowment value is determined by a seven year rolling average calculated at the end of every fiscal quarter, which means that the percent paid out of the endowment may be slightly more or less than five percent of its current market value.
The University’s seven year rolling average procedure replaced a three year rolling average procedure in 2006 as a way to provide more stable payouts against market unpredictability. Prior to its three year rolling average policy, the University paid out the full interest earned on its investments.
In an April interview, University President Mary Sue Coleman said discussions around the topic were a routine evaluation based on prior action taken by the University’s Board of Regents.
“We changed from a three-year rolling average to a seven year rolling average about four years ago,” Coleman said in April. “And so in that action item, we did four years ago, we said periodically we wanted to go back and look at just the rule itself of five percent, so that’s the discussion we’ve been having.”
In the same interview, Coleman said in evaluating the spending rule, it’s important to keep in mind that the endowment serves not only the University’s current needs but also its future ones.
“We’re trying to balance paying for the future with providing enough money for the units today and that’s a tricky balance,” Coleman said.
However, at the time, Coleman would not say whether an increase or decrease would be more likely.
In an interview on the same day, Tim Slottow, executive vice president and chief financial officer, also refused to state explicitly whether an increase or decrease might be forthcoming.
However, until asked about the possibility of increasing the University’s endowment payout, Slottow only discussed the possibility of a decrease, adding that it might make more sense for the University at the present.