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Univ. cuts endowment payout rate

To ensure that the economic downturn does not adversely affect the stability of growth in the University's endowment spending, administrators have decided to lower the endowment's payout rate from 10 percent to about 3 percent.

The payout rate - the percentage of the endowment that contributes to the operating budget - is the cap on how much of the endowment can be spent in a given year. Administrators estimated that reducing it will mean the University will have tens of millions of dollars less to spend in the next fiscal year.

Executive Vice President Tallman Trask said that, ideally, the payout rate is determined so that it reduces the likelihood in the future that the University would have to cut the rate to zero or have negative growth.

When the endowment made a whopping 58.8 percent return on its investments three years ago, the 10 percent figure was especially prudent planning, administrators said. Because the University did not spend all of the return, much of that money is still in the long-term pool. Given the last two years, in which the endowment's long-term pool shrunk - by 4.6 percent in the 2000-01 fiscal year and by 3.8 percent in the 2001-02 fiscal year - administrators said the new adjustments to the payout rate were in order.

"The real question is how many years can you just let it run at 10 [percent]," Trask said. "We're just trying to keep the likelihood that we fall off the cliff as unlikely [as it was at 10 percent]."

Provost Peter Lange said the action should ensure steady growth through the next few years, allowing the University's spending to grow even if the national economic forecast remains poor.

Lange said that when the change was announced to deans in January, none of them objected - in fact, they welcomed the measure.

"We have no problem with that kind of intelligent planning," said William Chafe, dean of the faculty of arts and sciences.

Chafe said spending is based on a three-year rolling average of the endowment's performance and that next year, the 58.8 percent figure would no longer be part of the average.

"It's important to provide a hedge against a precipitous drop," he said. "You need to protect yourself against variances. It's meant to stabilize, meant to avoid significant dips and rises."

Trask said the Board of Trustees will discuss the action at its February meeting and ultimately make a decision as part of its budget deliberations at the May meeting.

"So far as we can tell we are one of the few universities in this position," Trask said. "Most are projecting flat distributions or reductions."

Duke's endowment, which is managed by its own Duke Management Company, is smaller than most of its peer universities - at $2.37 billion, it is dwarfed by Princeton University's $8.3 billion, Stanford University's $7.6 billion or Harvard University's $17.5 billion.

Nevertheless, administrators say that because of the smaller endowment size, Duke's spending is not tied so closely to the stock market, the ultimate performance of which determines how well the endowment's invested funds perform on a year-to-year basis.

"Ironically... given that we have a smaller endowment, we are less directly affected by the downturn than some of our peers that have a huge proportion of their resources every year coming from endowment income," said President Nan Keohane. "It means we're somewhat cushioned in the lean years."


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