Spending rules dictate how returns on an endowment can be spent by an institution. Organizations may apply one spending rule to all of their endowment funds or assign different rules to groups of funds (Note: a client should have distributions impacting units when implementing multiple spending rules within the same pool). A client user is able to create multiple spending rules, assign funds to a spending rule and track changes within the spending rules. The following article shows you how to set up a new spending rule in Fundriver.
Check out a video tutorial on setting up a spending rule and running reports here!
Log in to Fundriver and click on the ORGANIZE tab.
Click on SPENDING RULES.
Click the green ADD button to add a new spending rule.
Name your spending rule and enter a brief description.
Select a TYPE for your spending rule. See below for more information on Spending Rule types. A Spending Rule TYPE is required, even if it is a Blank Rule.
Spending Rule Types
Blank Rule - Nothing is calculated. All funds are required to have a spending rule even if they do not calculate spending. Due to/Due From funds often are assigned blank spending rules, as are other funds.
Dollar Amount Per Unit – The spending amount is the number of shares times the rate entered into this rule. This is more commonly used in clients over $300 million. In most cases, spending needs to impact unit price (not the number of units) and all funds need to take a distribution.
Fixed - When a fund is required to post a fixed dollar amount of distributions (i.e. $1,000 per year), the fund must be assigned to this Fixed Spending Rule. Please reference example #4 below for fixed distributions rule set up. Note that if you are looking to add a fixed dollar amount to an individual fund, you would do so within the Distribution Account section of the Fund Profile screen by adding a distribution rule. See this article for further instruction.
Osher - Gift agreements received with Osher Lifelong Learning grants set specific spending parameters for how Osher funds should be managed and spent. Fundriver accounts for these gifts through the use of a standard Osher spending rule; the minimum amount of spend each year will be 50% of the investment earnings, net of investment fees, determined once per year, based on the average rate of return for the 12 calendar quarters preceding the determination date (or if less, the number of complete quarters the Osher Endowment has been held), but in no event less than an amount equal to 5% of the invested principal amount as of the beginning of Grantees' prior fiscal year.
Percent Average V1 – This is the most common rule. It can be configured to calculate based on the average fund value, pool value, or unit price. Continue reading on for instructions on selecting parameters.
Percent Average V2 - This rule type is available in newer databases. This rule is the same as Percent Average, however you would select this rule to capture merged funds. When merging funds, this rule is used to bring over the history of the old fund into the new fund.
Percent of Income – This is rarely used. It is designed for funds that can only distribute income or realized gains. This to support funds following pre-UMIFA guidelines.
Prior Year Spending – This rule calculates an increase from the prior year spending plus a percent of any new gifts. (Less common.)
Proportional Distribution – This distributes a fixed amount across all funds assigned to the rule. If a fund that participates in the rule does not take a distribution, the total may not add up to the amount entered. There may also be rounding issues causing the total distribution to be off a few pennies. This rule can be used when spending impacts units or unit price.
Yale Method - The Yale Method spending rule is a blend of the average market value and prior year spending rules. It can be configured in Fundriver to work on the fund or pool level. The system default is calculated based on the pool. See this article for a more in depth training on the Yale Method.
Note: If your database does not have any of the above spending rules, please reach out to support! We would be happy to add it for you.
Posting Frequency: How often does your organization post distributions? Options are: monthly, quarterly, semi-annual and annual.
Transaction Type: If your organization utilizes custom transaction types, you'll be able to select a transaction type other than distribution here.
Allocation Date: Also known as valuation date used to calculate spending draw.
Auto Reinvest for Spending Thresholds not met (check box): If your organization uses the reinvest threshold or authorize date (as seen in image below) check this box if you want Fundriver to calculate the draw and post the reinvestment as a separate transaction type (example: external transfer in). If your organization adjusts unit price for distributions this box must be checked. By leaving the box unchecked, the system will NOT post a distribution and matching reinvestment when the amounts net to zero.
If underwater - % to Distribute: Enter as a full number. Enter 0 if the fund is not permitted to spend underwater. Enter 100 if a fund can take distributions underwater. If a fund can take 90% of the allocation if it is underwater, then enter 90, etc.
HG Threshold %: In the image referenced above, the client has a 102% HG Threshold, therefore the allowed amount to spend is the difference between the Market Value and 102% of Historic Gift value;
Limit to Amount Above Historical Gift (check box): This box will allow spending up to the point that the fund would go underwater, therefore preserving the corpus.
Auto Reinvest (check box): By checking this box, funds that are not allowed to spend due to being underwater will post a distribution and a matching reinvestment transactions. Both transactions will net to zero. Example: A fund has a historical gift value of $100,000. The market value of the fund as of the spending allocation date is $95,000. This fund is underwater; MV < HG. The spending policy determines that $2,500 would be available to spend if there was no underwater limitations. Checking the Auto Reinvest check box will post a distribution of $2,500 and a matching external transfer in (or income to principal- depending on client setup). The two transactions net to zero. Leaving the box unchecked will show no available spend on the spending reports and no transactions will be posted.
Additional Underwater Examples:
Distribute 100%- UNCHECK Limit to Amount Above Historical Gift, this will allow full spending when a fund is underwater.
Distribute 0%- UNCHECK Limit to Amount Above Historical Gift, this will prevent spending when a fund is underwater. If a fund is above water, the full amount will be distributed (will put fund underwater).
Distribute 0%- CHECK Limit to Amount Above Historical Gift, this will prevent spending when a fund is underwater. If a fund is above water, spending will occur but only to the amount above historical gift.
Spending Calculation Parameters
Avg of: Description of each option is below.
% to Distribute: Enter a whole number. For example 5% should be entered as “5” not “.05”. Enter the annual rate for spending.
Periods For Average: If the rule is trailing 3 years using quarterly values, then enter 12. If the rule says trailing 3 years using annual values then enter 3.
Period Length: Options for averaging are monthly, quarterly, annual, semi annually.
Fixed Periods (check box): Does your organization average all available quarters? Or only available averages? The example below shows a fund that was created in March 2016. When the average of fixed periods box is checked, Fundriver would add zeros for the periods where no value was available. Leave the box unchecked would average only available fund values.
Save New Rule
Once you have selected your spending rule and applied applicable parameters, click SAVE.
A message will appear confirming your rule was successfully saved.
Click on the ASSIGN PRIMARY RULES tab.
Select your new rule from the SPENDING RULE table.
Highlight funds on the left to which you would like to apply the rule. Move them to the right box by clicking the arrow button. Once moved over, the funds are assigned.
If you would like to apply the rule to all funds, click the SELECT ALL box and then move the funds by clicking on the arrow button. You can also hold down the CTRL button + click to select multiple funds.
ASSIGN SECONDARY SPENDING RULE
You now have the option to add a secondary spending rule. This would be utilized if a fund had more than one spending rule assigned to it. An example of this would be if the standard spending policy is 5% but the fund allows an additional 3%, that 3% would be the secondary rule.