GRAND RAPIDS — In a report given at the University’s Board of Regents Meeting yesterday, University officials hinted that they may be considering a change to the annual payout from the University’s endowment.

And while officials say they’re in the process of reviewing the endowment’s payout policy, they said it hasn’t yet been decided whether any change would be made or if a change would increase or decrease the endowment’s payout.

In a routine report to the Board of Regents, Regent Katherine White (D–Ann Arbor) said the board’s Finance, Audit and Investment Committee was reviewing the payout policy to determine how effective the current payout rate was.

“We also reviewed our endowment spending rule,” White said in her report, adding that all eight of the regents were present for the committee meeting. In addition to the regents, several University officials were present at the meeting, including University Provost Teresa Sullivan, Vice Provost Philip Hanlon, who will succeed Sullivan as provost in July, and the University’s Chief Investment Officer Erik Lundberg.

The University currently operates under a five-percent annual payout rule, meaning that each year five percent of the seven year rolling average of the University’s endowment value — determined by calculating the mean of the endowment’s past 28 quarters’ actual value — is allocated to the University’s budget.

The process, which was adopted in 2006, replaced a three-year rolling average process as a way to insulate the University from market volatility and to provide steady and reliable funding streams to the University’s units. According to the University’s Office of Public Affairs and Media Relations’ website, the endowment contributed approximately $244 million in expendable revenue to the University’s budget last year.

In an interview after yesterday’s meeting, University President Mary Sue Coleman said the review was being conducted because a stipulation mandating it was included in the regents’ vote that implemented the current 5-percent payout policy.

“We changed from a three-year rolling average to a seven-year rolling average about four years ago,” Coleman said. “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.”

Coleman said the reason behind reviewing the policy is to ensure that the payout amount is still in the best interest of both the short-term and long-term needs of the University.

“We’re trying to balance paying for the future with providing enough money for the units today and that’s a tricky balance,” Coleman explained, saying it is important to consider the effects of possibly raising or lowering the endowment payout.

However, Coleman stressed that no final decisions on the issue have been made yet.

In an interview with The Michigan Daily following yesterday’s meeting, Timothy Slottow, the University’s executive vice president and chief financial officer, echoed Coleman’s comments.

Slottow said University officials were indeed considering modifications to the current five-percent payout rule. And while Slottow said all options are on the table right now, he indicated that reducing the endowment payout might make more sense at this point in time.

Such discussion comes amidst a challenging budget round for the University, in which University officials say they are planning for as much as a 20- to 25- percent cut in state appropriations. Such a cut would eliminate approximately $68 million from the University’s budget unless additional revenue can be found from another source.

To cope with some of the budget hardships, Coleman has called on the University to “double its efforts” in cost containment. The University has eliminated $135 million in annual recurring costs over the past seven years. Last year, Coleman said she expected that another $100 million in cost cutting would be in place within two years.

Cutting the mandatory endowment-spending rule could mean less money for units on campus. However, if the payout rule cut is modest, nominal funding could be maintained at current levels or even increased if the endowment’s performance does not diminish.

Even though the University’s endowment lost $1.6 billion in real terms last year, the seven year rolling average value of the endowment was such that it allowed for an increased payout to the University’s budget, Slottow explained.

The University’s spending rule has remained fairly consistent over the past 25 years, having only been changed twice since 1986.

Starting in 1986, the endowment payout was determined based on how well investments performed in a given year — meaning that if the endowment rose 5 percent overall, then 5 percent would be allocated in the budget. That rule changed in the 1990’s, when the payout rule was set at 5.5 percent of the endowments’ calculated value.

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