How Growth in Princeton

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• How Growth in Princetons Endowment Affects The
  Operating Budget

for presentation before the Academic and
Administrative Managers Group June 8, 2006
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or, in other words,
3

• If PRINCO is earning 17
• returns, how come you wont
• increase my budget?

for presentation before the Academic and
Administrative Managers Group June 8, 2006
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The Concept of a Spending Rate

• A spending rate is the amount of money
  distributed into the operating budget divided by
  the value of the endowment
• Example if the endowment were 100, and we
  flowed 4 into the operating budget, the spending
  rate would be 4

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Princeton does not have a fixed spending rate

• Neither do Princetons peers
• If we did, then 17 returns would add (more or
  less) 17 to the amount of endowment income
  transferred to the operating budget
• And, conversely, a 2 loss would mean cuts in the
  amount transferred to the operating budget
• A fixed spending rate would produce too much
  volatility

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The Concept of a Spending Rule

• A spending rule is a mechanism that regulates how
  the endowments contribution to the operating
  budget changes from year to year
• A spending rule should have three objectives
• Achieve a balance between present and future
  needs
• Provide stability and predictability
• Insulate endowment managers from short-term
  incentives

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Princetons Spending Rule

• In general, Princetons spending rule pursues
  these goals by stipulating a fixed rate of
  increase (or growth rate) in transfers from
  endowment earnings to the operating budget
• Right now, that rate of increase stands at 5 per
  year

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Example

• Suppose that in FY 2006, 4.00 flowed from the
  endowment into the operating budget
• In FY2007, (1.05) x 4.00 4.20 would flow into
  the operating budget
• The 4.00 transfer would increase by 0.20
  regardless of endowment performance

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Princeton also has a Target Range

• The University has hoped that its spend rate
  would be in a range between 4 and 5 of the
  endowment
• To sustain a spend rate between 4 and 5, plus a
  growth rate of 5, the University endowment has
  to grow by around 9.5 annually (the sum of the
  spend rate and the growth rate)

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Missing the range

• If the endowment does worse than 9.5, the spend
  rate will rise
• If it does better than 9.5, the spend rate will
  drop
• For the last 25 years, PRINCOs returns have been
  closer to 15

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When the spend rate gets too low or too high, the
Trustees intervene

• Two kinds of possible alterations
• They can increase or decrease the annual growth
  rate
• They can make a targeted, one-year increase (or
  decrease) in the amount of funds contributed to
  the operating budget
• You can do some combination of these things

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The Trustees Have Authorized Seven Spending Rule
Changes

• All these changes have responded to a spending
  rate that is too low
• The most recent was in FY2002
• Another one authorized effective FY2007

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Form of the Change

• Annual growth rate does not change
• However, in FY07, the contribution from the
  endowment to the operating budget will grow by 5
  plus 24.8 million (a total increase of nearly
  15)
• This should bring the annual spending rate above
  4.0

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What Does it Mean?

• Trustees directed the University to use most of
  the allocation to true up the books
• Short-term pressures against a background of
  long-term health
• We had been using capital reserves to address
  certain recurring expenditures
• The added funds will not support new program
  they will pay for items that had previously
  depended upon capital reserves

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What Benefits Should You Expect to See?

• Some enhanced IT services
• More flexibility for future Priorities Committees
• An opportunity to plan for uses of increases in
  your restricted fund accounts

16
Energy Renovations

• Energy 5.0 million
• Renovations 4.2 million
• We have paid for rising energy costs by relying
  on capital reserves to pay for renovations
• We had promised to rebuild the renovations line
  in the operating budget

17
The Recruitment and Retention of Faculty

• The costs of recruiting and retaining faculty
  members have risen dramatically
• Not limited to the sciences
• Again, we have had to rely on capital reserves
• Add 3 million annually to the Science Fund

18
Expansion of the Development Office

• In FY03 and FY04, the University added
  approximately 40 positions to the Development
  Office
• Justified by return-on-investment we are seeing
  a return of more than 10 for each 1 we spend
• To fully incorporate these positions into the
  operating budget, we will allocate 6.2M of the
  spending rule change

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Information Technology

• Support for existing term-funded positions
• An area critical to the Universitys research,
  teaching, and administrative infrastructure
• You will see significant improvements here

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Improvements to IT

• Quintuple the bandwidth of our internet
  connection
• Accelerate completion of the wireless network
• Simplify the charging structure for internet
  connections
• Enhance central support for shared educational
  software applications
• Add new support for University websites
• Total allocation 3.4 million

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Library Acquisitions

• Have not been able to keep up with inflation or
  expenditures by peers
• Recurring Priorities Committee Issue
• Will be adding 1.1 million to the Library
  acquisitions budget

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Term Positions Initiatives

• A number of existing, high priority positions
  have depended on term funds
• Includes positions in the compliance program,
  human resources, the art museum, student life,
  and athletics
• Also some term programs, including Flu Fest,
  will now have operating budget support
• Supported by an allocation of 1.9 million

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Restricted Funds

• The Trustees have asked the Provost to solicit
  plans for the use of restricted funds that are
  under the stewardship of individual academic or
  administrative units
• These plans must be consistent with the
  restrictions on the gift and, if possible, with
  university priorities
• A memorandum describing this process will go out
  during the summer