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Attachment B

[[underlined]]Smithsonian Institution[[/underlined]] 

[[underlined]]Endowment funds income payout policy[[/underlined]] 

In FY 1973, the Smithsonian adopted "total return" as the investment goal for its endowment funds. In part, this provided that income to be derived from investment funds, in lieu of interest and dividends received by the fund in that year, should be a prudent amount determined in relation to the value of funds, taking into account both present and future needs of the Institution. This was further defined to provide that the income should be 4-1/2% annually based upon the moving five-year average market values of the funds adjusted for additions of new money. The expectation at the time was that market values would reflect growth of dividends and interest and allow, over the longer term at least, a rising amount of income for the beneficiaries.
 
Actually, of course, the years since 1973 have been ones of general public disenchantment with the stock market. While earnings and dividends generally continue to rise, market prices, rather than reflecting those increases, have fallen below those of 1973. As a result, the amount of income paid out under the formula approved in that year has also fallen (See chart attached). The effect on the Freer Gallery has been:

1974- $876,000
1975-  839,000
1976-  764,000
1977-  746,000
1978-  725,000
1979-  698,000*

*Based on present 4-1/2%-5 year market average formula. 

Based upon present market values and those of previous years, income payout will decline further in 1979 if the Institution continues to follow the formula. Thus, beneficiaries such as the Freer Gallery and restricted fund research projects of the Smithsonian Scientists would be hurt by both