Our Spending Policy
Policy Objectives
The spending policy statement must have predictable cash flow, manage inflation, and cover administration costs.
Predictable Cash Flow
Rates of return in capital markets are highly variable from year to year and it would not be prudent to introduce this same level of variability into the annual charitable grants. It is necessary, therefore, to attempt to define a spending policy from investment income that, over the longer-term, is consistent with the income being earned.
The spending policy on investment income is independent of the actual income earned and may provide for an amount that is more or less than the interest, dividends and capital appreciation recorded in any one year. The Foundation's income will include interest income, dividend income, and net realized gains or losses of bonds and equity assets. Unrealized gains may be considered by the Investment Committee in determining Spending Limit.
Managing Inflation
While growth of the endowment may be generated in part by additional gifts, there is an obligation of the Foundation to guard against the effects of inflation, which can result in reducing purchasing power. Only in this way can the Foundation ensure that the grants made in future will have no less community impact than they do today.
The spending limit must reflect, therefore, a conservative policy through which a continuing part of the annual income generated is re-invested to maintain or increase the "real value" of the endowment principal and its distributions over the longer-term.
Minimum Administrative Costs
The benefits of the Foundation's activity are maximized when the administrative costs are kept to an absolute minimum. This requires that Board and staff exert every effort to obtain volunteer assistance, solicit donated services and implement programs to raise funds to defray administrative costs. These efforts must, in turn, be re-enforced by strict and consistent guidelines in respect to the portion of annual income, which can be diverted to support administrative, and development activity.
Approved Spending Limit, Distributable Income, Administration Fee, Inflation Protection, Stabilization Reserve
The Investment Committee will prepare for the fall meeting of the Board of Directors, a recommendation to book the current year annual Spending Limit, which will determine the Distributable Income for the following year. The Investment Committee will also recommend any changes in the Administration Charge, and Inflation Protection for all Contributed Capital Funds. The annual spending limit and the Administrative Charge will increase or (decrease) the Stabilization Reserve Account.
All Contributed Capital Funds will receive a Distributable Income calculated on the average of the opening and closing fund balance during the year at the annual approved rate.
All Contributed Capital Funds will be charged an Administration Fee calculated on the average of the opening and closing fund balance during the year at the annual approved rate.
The Investment Committee may consider an Inflation Protection allowance up to but not greater than the prior year annual CPI rate. The investment Committee will review the annual CPI rate published by Statistics Canada. The inflation protection rate will be viewed with consideration to the account balance in the Capital Stabilization Reserve Account.
The Capital Stabilization Reserve Account must be in a credit balance before consideration can be given to inflation protection.
Contributed Capital Funds may receive inflation protection calculated on the average of the opening and closing fund balance during the year at the annual approved rate.
The Contributed Capital Funds will have a separate account category called Capital Stabilization Reserve Account. Any excess income not included in Distributable Income, Administration Charge, and Inflation Protection will be added to this account category. This Capital Stabilization Reserve Account is intended to grow and be an offset to those years when underperformance may occur.
Calculation of Spending Limit
The primary objectives of this spending policy are to provide predictability and sustainability of cash flows for granting purposes. There are two essential factors that must be considered in the spending limit calculation.
- A long-term sustainable rate of return must be determined. Recognizing that short-term returns will fluctuate and that the Foundation's funds are perpetual, the spending limit must be based on a long-term historical rate of return. A 4-year average annualized rate of return is deemed appropriate for this purpose.
- An appropriate stabilization reserve account balance is necessary to fund grant payments during periods of below average investment returns. Although our investment policy requires a conservative investment position, times of significant volatility are inevitable. It is possible for below average or even negative returns to persist for several quarters. To maintain our ability to continue granting at a predictable level, a stabilization reserve account balance of the equivalent of two years base spending limit is appropriate.
Base Spending Limit - Annualized 4 year rolling average of the Investment Manager portfolio* return
*Actual returns in excess of the 4 year rolling average will be used to increase the balance of the stabilization reserve account unless it is currently fully funded. In this case, additional funds can be distributed or added to fund balances as inflation protection at the discretion of the Board.
Optimum Stabilization Reserve Account Balance - 2 years of the base spending limit
Managing Stabilization Reserve Account Balance
It is the intention of this Spending Policy to prevent encroachment on fund capital. From time to time, however, it is possible the Stabilization Reserve Account will be in a negative balance. If this occurs, it is desirable to accelerate the replenishment of the reserve to protect future granting. Subject to Board approval and allowable excess disbursement room in our historical CRA disbursement quota, the base-spending limit will be reduced by 25% until such time as the Stabilization Reserve Account is in a positive balance. When the Stabilization Reserve is in a positive balance but below the optimum reserve balance, the spending limit will be reduced by 10%. When the Stabilization Reserve is at or above the optimum level there will be no reduction in spending limit.
Stabilization reserve negative
Reduce spending limit by 25%
Stabilization reserve positive but below optimum
Reduce spending limit by 10%
Stabilization reserve at or above optimum
No reduction in spending limit