3.3.2 Expendable Funds Investment, Return Allocation and Buffer Policy

Source: https://adminguide.stanford.edu/chapters/financial-administration/infrastructure-charges-and-expendable-funds/expendable-funds Parent: https://adminguide.stanford.edu/chapters/financial-administration/infrastructure-charges-and-expendable-funds

Authority

Approved by the Vice President for Business Affairs and Chief Financial Officer. Approved by the Stanford University Board of Trustees on December 5, 2017.

Last Updated

December 10, 2024

Formerly Known As Policy Number: 37.4

This policy replaces the “Expendable Funds Investment, Interest Allocation and Buffer Policy” adopted by the Board of Trustees on June 9, 2016. The policy was most recently updated by the Board of Trustees on June 13, 2023 and December 4, 2023.

1. Expendable Funds Investment and Return Allocation Policy

The university has two pools for managing expendable funds, the Endowment Income Funds Pool (“EIFP”) and the Expendable Funds Pool (“EFP”).

a. Endowment Income Funds Pool

The EIFP comprises funds holding unspent prior year payout distributed from pure endowment funds (including amounts reinvested in those funds).

Investment Policy: One hundred percent of the assets in the EIFP are to be invested in cash and liquid short-term investment vehicles managed in the Short-term Investment Pool (“STIP”).
Return Allocation Policy:Each endowment income fund holding unspent prior years’ payout will receive an allocation equal to the net return on the STIP, less the cost to administer the portfolio.

b. Expendable Funds Pool

The EFP holds the following types of expendable funds:

Endowment Income Funds – current year payout distributed from pure endowment funds and all payout from Funds Functioning as Endowment (“FFE”) not yet expended
Restricted Funds – gifts or other restricted expendable funds not yet expended
Designated Funds – funds designated for a specific school, department, faculty or purpose, not yet expended
Unrestricted Funds – university, school, department, auxiliary or faculty funds held in reserve or pending expenditure
Gifts Pending Designation – gift funds received for which the purpose has not yet been designated and which are not invested in the Merged Pool or Intermediate Pool
Plant Funds – funds designated for facilities, not yet expended.
Recycling Pool – proceeds from internal debt amortization available to lend to projects
Insurance and Benefit Program Reserves – reserves held for claims within self-insurance programs
Student Loan Funds – funds available to lend for student loans
Agency Funds – funds held by Stanford University on behalf of third parties

Investment Policy

Depending on the University’s operating and other liquidity requirements, the University’s Chief Financial Officer or their designee will determine appropriate balances to be invested in the Intermediate Pool (IP) or cash and liquid investment vehicles managed in the STIP. The remainder of the EFP is to be cross-invested in the MP. The University may also draw on a bank line or other debt vehicle to fund liquidity needs as deemed necessary by the University’s Chief Financial Officer or their designee.

Return Allocation Policy

Funds invested in the EFP are grouped into two categories for purposes of allocating investment returns.

a. Money-Market Accounts

The following types of Expendable Funds will be treated as “Money-Market Accounts” and will receive an allocation equal to the net return on the STIP:

Restricted Funds, only when stipulated by donor requirement
Gifts Pending Designation, excluding class gift funds and donor funds of less than $100,000
Plant Funds, raised from gifts exceeding $1 million
Insurance and Benefit Program Reserves
Student Loan Funds
Agency Funds

b. Zero-Interest Accounts

All other Expendable Funds will be treated as “Zero-Interest Accounts.” Investment returns on these funds will not be allocated to the individual fund, but will be accumulated and distributed to the funds, as described below:

School of Medicine (SoM) Dean’s Unrestricted Fund will receive an allocation related to zero-interest account balances controlled by the SoM dean’s office, departments, and faculty.
Graduate School of Business (GSB) Dean’s Unrestricted Fund will receive an allocation related to zero-interest account balances controlled by the GSB dean’s office, departments, and faculty.
Hoover Institution’s Finance and Director’s Office Unrestricted Fund will receive an allocation related to zero-interest account balances controlled by Hoover’s Finance and Director’s Office, departments, and faculty.
Provost’s General Fund will receive an allocation related to all other zero-interest account balances.

Effective Sept. 1, 2024, the allocation shall be 5.5% of the zero-interest account average monthly balances during the prior fiscal year.

2. Buffer Policy

The total allocation to Money-Market Accounts, General Fund and Dean's Unrestricted Funds will differ from the investment returns of the EFP. These differences will be buffered by the "Tier I Buffer" and the "Tier II Buffer."

The Tier I Buffer is the University's unrestricted FFE funds, excluding Land Development Funds. These funds are fully invested in the MP and receive a regular MP-based payout used to support the Provost's General Fund.
The Tier II Buffer is a single unrestricted FFE fund. This fund is primarily invested in the MP. A fraction of the Tier II Buffer is invested in separately managed investments such as the President’s Venture Fund. The portion of the Tier II Buffer invested in the MP receives a regular MP-based payout that is distributed at the President’s discretion (“President’s Funds”). In addition, the President is authorized to withdraw up to $30 million in principal each year to be used at their discretion.

To the extent there is a shortfall in EFP investment returns relative to stipulated allocations, principal will be withdrawn from the Tier I and Tier II Buffers to make up such shortfall, as follows:

First, from the Tier I Buffer up to a limit of 20% of the fiscal year-end market value of the Tier I Buffer in any fiscal year
Second, from the Tier II Buffer until fully depleted
Third, from the remainder of the Tier I Buffer

To the extent there is a surplus of EFP investment returns relative to stipulated allocations, excess returns will be added to the Tier I and Tier II Buffers as follows:

First, to the Tier I Buffer until such time as the value of the Tier I Buffer, in total, equals 35% of the total value of the EFP ("the target threshold")
Second, to the Tier II Buffer