Spending Rules dictate how earnings on an endowment can be spent. Spending Rules are typically based upon an organization’s spending policy. Organizations may apply one Spending Rule to all of their endowment funds or assign different rules to groups of funds.
- Note: a customer should have distributions impacting units when implementing multiple Spending Rules within the same pool. Please reach out to Balance Support with questions about this.
A Client User can create multiple Spending Rules, assign funds to a Spending Rule and track changes within the Spending Rules. Read on to learn more about how to set up a new Spending Rule in Balance.
TABLE OF CONTENTS
- Create a Spending Rule
- Spending Rule Types
- Parameters Withdrawal Fields
- Underwater Distributions
- Additional Underwater Examples
- Spending Calculation Parameters
- Save your New Spending Rule
- Assign a Rule
- Assign a Secondary Spending Rule
Create a Spending Rule
Navigate to Organize > 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. This is a required field, even if it’s a Blank Rule. See below for more information on Spending Rule Types.
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 to Blank Spending Rules (as are funds that do not spend).
Dollar Amount Per Unit – The spending amount is calculated as the number of units a fund holds in the pool multiplied by the rate entered into the Spending Rule. This is more commonly used by larger organizations. In most cases, spending distributions need 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 Spending Rule. Note: If you are looking to add a fixed dollar amount to an individual fund, you would do so by assigning to this Spending Rule and then adding a Distribution Rule within the Distribution Account section of the Fund Profile screen. See this article for further instruction. Please reference example #4 below for fixed distributions rule set up.
Osher – Gift agreements received with Osher Lifelong Learning grants set specific spending parameters for how Osher funds should be managed and spent. Balance 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. The spending calculation for the Osher rule can be previewed through the Spending Allocation Report for Osher Life Long Learning report. This report is located in the Spending folder under Reports.
Percent Average – The Percent Average Spending Rule is the most common rule used. It can be configured to calculate spending distributions based upon the rolling average of either the fund’s value, the pool value, or unit price. This rule will include the history of a merged fund when calculating the spend amount. View this article for instructions on how to merge funds.
Percent of Income – This is rarely used. It is designed for funds that can only distribute income or realized gains. This is to support funds following pre-UMIFA guidelines.
Prior Year Spending – This rule calculates an increase from the prior year’s spending plus a percent of any new gifts. (Less common.)
Proportional Distribution – This rule distributes a fixed amount across all funds assigned to the rule based upon the units that the fund holds in the pool. NOTE: If a fund that participates in this rule does not participate in spending, 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 – This rule is a blend of the average market value and prior year spending rules. It can be configured in Balance to calculate at the fund or pool level. The system default is calculated based on the pool level. See this article for a more in depth training on the Yale Method.
Parameters Withdrawal Fields
Posting Frequency: How often does your organization post spending distributions to your general ledger? 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. If you need a custom transaction type, please reach out to Fundriver Support.
Allocation Date: “As Of Date” or “Look Back Date” that your funds are valued at for your spending policy calculation. For example: if your policy uses a 12-month rolling average starting at 12/31/2022. The 12-month period would look back from the Allocation Date (12/31/2022).
Auto Reinvestment 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 Balance to calculate and post the Distribution transaction and then post the Reinvestment as a separate transaction type (example: External Transfer-In). If your organization adjusts unit price for distributions, then 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.
Spending Thresholds: By default, only one condition needs to be met to allow spending (either Reinvest Threshold or Authorized Date). The Reinvest Threshold looks at a fund’s historical gift value as of the Spending Rule Allocation Date. The Authorized Date is compared to the current posting period date. These thresholds, either individually or in combination, are used to determine if a fund has met the condition and is allowed to spend. If a fund has not met the threshold conditions, it will reinvest the calculated spend back to principal (historical gift).
Notes on Spending Thresholds:
- If you want to have the Reinvest Threshold look at Market Value instead of Historical Gift, please reach out to Fundriver Support to have this setting changed.
- If you want the Authorized Date to use the spending rule’s Allocation Date instead of the Current Posting Period, please reach out to Fundriver Support to have this setting changed.
- Both the Historical Gift or Market Value thresholds are not a one-time condition and will prohibit spending if the values dip below the thresholds. The Authorized Date threshold looks at a Post Date in the future that the fund must have been in place to participate in spending. By default, only one condition needs to be met to allow spending. If both a date and dollar threshold are populated and you want BOTH conditions to be met, please reach out to Fundriver Support to have this setting adjusted.
If Underwater - % to Distribute: This setting determines if an Underwater fund (i.e., Market Value is less than Historical Gift/Corpus) can participate in spending.
- You would enter the amount as a full number. Enter 0 if the fund is not permitted to spend when underwater. Enter 100 if a fund can participate in spending if it’s underwater. If a fund is allowed to take 90% of the allocation if underwater, then enter 90, etc.
HG Threshold %: This setting limits how far the Historical Gift/Corpus of an Underwater fund can be invaded.
- In the image referenced above, the customer has a 102% HG Threshold, therefore the allowed amount to spend is the difference between the Market Value and 102% of Historical Gift value. See below for an illustration:
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 Historical Gift/Corpus.
Auto Reinvest (check box): By checking this box, underwater funds that are not allowed to spend 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 were 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 customer 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
If spending is allowed on funds up to 10% of Historical Gift/Corpus, the setup would be as follows:
When the fund is above water, the spend will take the fund below water (less than Historical Gift value) and allow spending just to an underwater mark of 10% of corpus.
- Example: A fund has a historical gift value of $100,000. The market value of the fund as of the spending allocation date is $102,000. The spending policy determines that $5,000 would be available to spend if there were no underwater limitations. The below setup would allow the fund to take the full distribution. After the distribution, the fund's value would be $97,000. The fund would now be underwater but the value is above the 90% of corpus threshold.
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.
* Note: If you are using the average of the POOL, you will need to check the Auto Reinvest box as well. This rule assumes everyone gets a distribution at the same rate, so you have to Distribute, then Reinvest for the total spend amount to work properly. You have to auto-reinvest the calculated amount (even if it’s underwater) so that all funds get a distribution at the same rate.
- Customer databases that have distributions programmed to impact unit price will need to have this box checked as well.
Spending Calculation Parameters
Note: The fields and descriptions listed below for Spending Calculation Parameters are based on the Percent Average Spending Rule Type. The spending calculation parameters will differ based on Spending Rule Type.
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, Balance would add zeros for the periods where no value was available. Leave the box unchecked would average only available fund values.
Save your New Spending Rule
Once you have selected your Spending Rule and applied applicable parameters, click SAVE.
A message will appear confirming your rule was successfully saved.
Assign a Rule
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.
Note: Since this is a required field, you cannot mass-Unassign funds from a Spending Rule. You would need to assign the funds to another Spending Rule.
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 a Secondary Spending Rule
You have the option to add a Secondary Spending Rule. An example of this would be if the standard spending policy is 5% but the fund is allowed to spend an additional 3%; that 3% would be set up as the Secondary Rule.
When the Spending Rule and fund assignments are completed, you may preview the estimated spending amounts by viewing the Estimated Spending Report (with Column Grouping and Drill Down). This report is located in the Spending folder under Reports.