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Spending Policy
Definition
A spending policy defines the methodology by which an endowment calculates its annual distribution. The policy specifies the spending rate (typically 4-6% for perpetual endowments), the base to which the rate is applied (current market value, trailing average, or a blend), and any smoothing mechanisms. Spending policies are the primary mechanism through which investment policy and mission needs intersect — they determine how much is available for current beneficiaries versus preserved for future generations.
In the Context of Endowment Management
For private foundations, the spending policy must account for IRS §4942's 5% minimum distributable amount requirement. University endowments operating under UPMIFA must consider the preservation of purchasing power when setting spending rates. The choice between simple market value, rolling average, hybrid, and banded inflation rules has material consequences for both grantmaking stability and long-term corpus preservation.