Endowment Payout Process

Posted July 2013

Endowment Payout Process Tutorial Segments

1. Basic Mechanics of Endowment Payout Process

2. Commonly Used Endowment Reports

Stanford University Financial Management Services Confidential 2

Basic Mechanics
of Endowment
Payout Process
What is Endowment Payout?

 Endowed funds in the Merged Pool (Stanford’s primary investment pool)

receive a “spendable” dollar amount monthly to support university
expenditures per donor wishes and restrictions. This is known as “payout.”
 Payout per share is approved by the Board of Trustees every February for
the following fiscal year.
 The University balances the need for stable and predictable current spending
with the need to preserve endowment principal to support spending into
perpetuity to create intergenerational equity.
 An endowment “income fund” holds the payout produced by the fund’s
investment in the Merged Pool.
 Income funds are accounted for in the SU or operations ledger
 The principal investment is accounted for in the EN or endowment ledger

Stanford University Financial Management Services Confidential 4

Payout Timing & Spending Flexibility

Example: Fund with 1,000 Shares

Annual Payout = $12/share; Monthly Payout $1/share

$1k $1k $1k $1k $1k $1k $1k $1k $1k $1k $1k $1k

Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Monthly Payout = # shares X payout per share

12

Fund-holding orgs may spend anticipated payout anytime

during the fiscal year

Stanford University Financial Management Services Confidential 5

Payout Impact on Share Value

Example: Fund value = $300K (1,000 shares, $300/share).

Annual Payout = $12/share; Monthly Payout $1/share

$1K $1K $1K $1K $1K

1,000 X 1,000 X 1,000 X 1,000 X 1,000 X

$300
$299 $298 $297 $296 $288
=$300,000
=$299,000 =$298,000 =$297,000 =$296,000 =$288,000

Sept Oct Nov Dec . . . . . . . Aug

Share value declines by $1/month as payout is distributed

This simple illustration only depicts how payout decrements share value
and does not consider market fluctuation.

Stanford University Financial Management Services Confidential 6

Evaluating Payout Resources

“Payout Resources” are the monies available for a fund (i.e., earnings,
appreciation, full market value) to make monthly payout.
Example: Monthly Payout Amount = $1/share ($1,000 per fund)
Pure B Limited Pure B FFE
Unlimited (Quasi Shares)

# of Shares 1,000 1,000 1,000

Book Value $250,000 $250,000 $250,000
Market Value $300,000 $300,000 $300,000
$50,000 $300,000 $300,000
Payout Resources (MV – BV) (MV) (MV)
+ earnings + earnings + earnings

Payout to $1,000 $1,000 $1,000

Income Fund

Vast majority of Stanford Endowment funds have sufficient resources for full payout.

Stanford University Financial Management Services Confidential 7

Evaluating Payout Resources in Funds with
Multiple Share Types (Pure & Quasi)
Share types in a fund will be evaluated separately for
payout resources and will fund payout proportionately

Example Fund: 1000 shares in total; monthly payout per share = $1

Pure B Shares Quasi Shares

# of Shares 700 300

Book Value $175,000 $75,000
Market Value $210,000 $90,000 Payout is covered
proportionately. Pure covers
Payout Resources $35,000 $90,000
pure payout; quasi covers
quasi. Fund still gets full
Payout to $700 $300
Income Fund payout.

Stanford University Financial Management Services Confidential 8

Do Funds Sometimes Have Insufficient Payout
Resources?
• Affects Pure B Limited Funds only, and only when
fund is “underwater”
• Monthly payout = earnings and any available
appreciation
• There are very few funds in this category
• The OBI Endowment Investment Summary by Pool report
displays Quasi, Pure Limited, and Pure Unlimited to
assess Payout Resources
• Undistributed payout stays in principal side of fund

Stanford University Financial Management Services Confidential 7 of 10

When Payout Resources are Less than Payout
Amount? (affects Pure B Limited Shares only)
Example: Monthly Payout Amount = $1/share ($0.10 earnings, $0.90 appreciation)
Pure B Pure B Pure B
Limited Limited Limited
Healthy Underwater Partially
(no appreciation) Underwater
(insufficient
appreciation)

# of Shares 1,000 1,000 1,000

Book Value $250,000 $350,000 $299,500
Market
$300,000 $300,000 $300,000
Value
Payout $50,000 + $100 $500 + Payout of
Resources $100 earnings earnings only $100 earnings earnings and
available
Payout to appreciation
$1000 $100 $600
Income Fund
Undistributed
Undistributed payout is
Payout N/A $900 $400
reinvested

Stanford University Financial Management Services Confidential 10

Undistributed Payout Purchases New Shares to
Restore Fund Value
Before payout After payout

Payout Resources 1,000 X 1,000 X

> Payout $300 $299 =$300,000
“Healthy”
=$300,000 =$299,000
$1000 Payout $1,000
To Income Fund

Before payout $900 Undistributed After payout & reinvestment

payout

Payout Resources 1,000 X 1,003 X

< Payout
“Underwater” $300 Buys 3.01 shares at
$299 =$300,000
=$300,000 $299 /share =$299,900
$100 Payout To Income Fund $100
(Actual Earnings)
Applies to all funds that do not
get full payout (e.g., Pool A)
Stanford University Financial Management Services Confidential 11
Funds with Pure B Limited and Quasi Shares:
Decapitalization Policy
If pure portion does not have enough payout resources to
make payout on pure shares, total payout will be impacted
Example Fund: 1000 shares in total
Pure B Limited Quasi B Shares
Shares

# of Shares 700 300

Book Value $240,000 $100,000
Market Value $210,000 $90,000 Payout on pure shares is
made with available pure
Payout Resources $70 $90,000 resources only.
earnings only
Total payout to fund = $370
Payout to Income
$70 $300 Option to de-capitalize
Fund
quasi shares to make up
‘missed’ payout
Reinvest $630 $0
Undistributed Payout

Stanford University Financial Management Services Confidential 12

Commonly Used
Endowment
Related Reports
(In the OBI Revenue and
Fund Management
Dashboard)
 Fiscal to Date Fund Statement
    YEAR-TO-DATE FUND STATEMENT WITH TRANSACTION DETAIL    
  By Project    
  For Non-Sponsored Funds    
  For the period ending November 30, 2013    
Information contained in this report is incomplete if the Report Period is after the LAST CLOSE

Report Prompts:
001: Award Number KXXXX 005: Award Purpose % 009: Award Donor % 013: Set of Books SU
002: Award Owner % 006: Award Free-form % 010: Award Start Date % 014: Award Status %
003: Award Manager % 007: Award Lvl Control % 011: Award End Date % 100: Award Org %
004: Award Type % 008: Award Lvl Restr % 012: Award Name % 200: Ending Period NOV-2013
KXXXX
  Project Org Object Source Journal Description Date Amount YTD Total
Beginning Balance              
                Beginning Balance 0.00
Receipts              
  Receipts - Endowment Payout            
  1000000 ZZZZ   Endowment Payout   "Payout" 09/01/13 10,000.00  
  1000000 ZZZZ   Endowment Payout   "Payout" 10/01/13 10,000.00  
  1000000 ZZZZ   Endowment Payout   "Payout" 11/01/13 10,000.00  
  1000000         Total - Unspecified General Operations   30,000.00  
               
          Total Receipts   30,000.00 30,000.00
               
Transfers            (95,000.00)  
          Total Transfers   (95,000.00) (95,000.00)
Expenses              
  1999999         Total- Project XXXXX    
            Total Expenses   .00 .00
               
                 
Fund Balance           Fund Balance (65,000.00)
Net Investments              
                   
          Total Net Investments   .00 0.00
               
Available Balance           Available Balance (65,000.00)
                                                   
  Endowment Payout Note: Endowment payout is distributed monthly. The following information is a projection for planning purposes only and  
not a guarantee of future payout or return.
Year-to-date Payout Anticipated Remaining Anticipated Annual Payout Anticipated Available Balance
Payout (1)
30,000.00 90,000.00 120,000.00 25,000.00
(1) Anticipated Remaining Payout = latest monthly payout multiplied by number of months remaining in the fiscal year

Stanford University Financial Management Services Confidential 14

Fund Statement – Fiscal Year Merged Pool Anticipated Payout Summary

YTD Payout Nov payout

November x 9 months

Anticipated Remaining Payout: current month payout times the number of months remaining in the fiscal year

Anticipated Available Balance: actual available balance plus anticipated future payout

Stanford University Financial Management Services Confidential 15

 Use Endowment Investment Summary by Pool
to assess health of Pure B Limited Funds
                      CURRENT            

                      Limited combined  
Limited & Unlimited  Unlimited        

Pool B Pure Pool B Pure Pool B Pure Pool B Pure Pool B Pure Pool B Pure
Award                   Pool Shares
B Pure Pool B Pure
(Limited) Pool B Pure
(Limited) Shares (Unlimited) (Unlimited)      

(Limited) Book Value

Shares Book Value Market
Market Value
Value (Unlimited) Book Value Market Value
                                 
KXXXX
KXXXX                            15,000.00
15,000.00 3,000,000.00
3,000,000.00 4,065,000.00
4,065,000.00            

           
KXXXA                   10,000.00  2,000,000.00  2,710,000.00  10,000.00 2,000,000.00 2,710,000.00      

           

 Report Purpose
 Summarize share book and market value by fund/pool

 Allows users to:

 Analyze limited and unlimited shares separately
 Determine available payout resources for each share type

Stanford University Financial Management Services Confidential 16

End