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The causes for underexpenditures rest as much with personnel shortages in selected areas as well as overambitious plans versus the realism of possible accomplishment combined with a surfeit of funds generated during the busy tourist season near year end. As a result, the Institution returned some $343,000 in Federal Funds to the Treasury at the end of Fiscal 1987. Of greater significance, the Unrestricted Trust Fund Balance was restored to $5,000,000 a full year ahead of schedule and $3,500,000 was set aside in reserves to complete the underground passageway between the Freer and the Quadrangle and the new restaurant addition to the Air and Space Museum. In addition, respectable balances were retained in many of the restricted funds' income accounts.

With this background and on-going concerns about the stability of the financial markets, the Smithsonian is recommending a more conservative approach to the Endowment Fund pay-out for FY '89. Specifically, rather than applying a fixed rate of return percentage say 4 1/2 or 5% to the five year average of the funds, [[underline]] staff proposes for your approval increasing the pay-out over the prior year in line with the Consumer Price Index. The result would be a per share pay-out of $9.81 or 3.5% over the sum paid out in FY '88. [[/underline]] The pay-out would be fully covered by anticipated dividends and interest; approximately $400,000 in remaining dividends and interest would be reinvested in the Fund.

As will be seen on Exhibit 1, were the Institution to apply the fixed rate of return formula strictly as in past years, available funding could jump as much as 26%. The downside of such a jump would be the necessity to dip into appreciation to make the pay-out and the expectation that such an increase might be sustained. Given the volatility of the current financial markets, such an expectation seems unrealistic. Discussion with other institutions utilizing the fixed rate of return by both the Secretary and the Treasurer indicate that the general wisdom at this time is a more conservative approach to Endowment spending.

The Committee's comments on this matter are most welcome. If the Committee concurs with the recommendation, the following resolution will be put forth for Regents approval at their May 9th meeting:

VOTED that the Board of Regents accepts the Report of the Investment Policy Committee and approves for fiscal year 1989 a total return income payout rate of $9.81 per share for all endowment funds.