Smoothing Payout in Volatile Financial Times

Smoothing Payout in Volatile Financial Times

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March 14, 2013

Our Mission

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The California Endowment's mission is to expand access to affordable, quality health care for underserved individuals and communities, and to promote fundamental improvements in the health status of all Californians.

Spending Considerations

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• Multi-generational long-term mission• Perpetual endowment: 5% spend

However…• Willing to spend >5% when needs dictate

History of Spending Policies

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2000 – No Clear Policy – Principled Approach

2007 – Fixed

2011 – Weighted Average

TIME

SPENDING

A2 D A B C

• Curved Line represents 5% of Corpus• Straight Line represents actual spending plan• Below the Line generate carryovers• Above the Line use carryovers

A – Recession endingB – Expansion phase slowsC – Growth slows belowD - Beginning of recession

2007 – A Fixed Approach to Spending

Source: TCE Presentation to Board San Francisco 11/20/06

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2011 – Spending Policy Review

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• Hired Angeles Advisors • Benchmarked vs Other Foundations• Three Most Common:• Moving Average• Fixed/Banded Inflation• Hybrid/Yale

• Monte Carlo Simulation 10 Years

9Source: Angeles Advisors March 2011

Why Historical Average?

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• Most Common

• Easy to Explain/Defend/Understand

• Most Downside Protection

• Adequate Smoothing of Payout

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Spending Policy – Related Considerations

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• Overspend Still Allowed for Special Opportunities

• Perpetuity and Spending Policies Revisited Periodically

• Best Case/Worst Case Scenario Planning

Appendix

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“Perpetuity – With a Caveat”

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“Spending Level for a given fiscal year is determined at 5.0%* of the 3-year moving average value of TCE’s non-charitable use assets.”*However, the board affirmed a commitment to overspend this level, even aggressively, should a momentous opportunity to advance our mission arise.

Source: From TCE Spending Policy April 2012