In Short

■ An endowment fund is intended to provide perpetual annual income to its sponsor. That annual income should be reasonably predictable and over the long term should at least maintain its buying power.

■ Our endowment fund can best meet these objectives if annual income is calculated under the Total Return, or Imputed Income, approach— such as a reasonable percentage of the fund's average market value over the last five years.

APPENDIX 9

The Total Return or Imputed Income Method

1. For any fiscal year, Imputed Income equal to 5% of the Base Market Value of the Endowment Fund shall be withdrawn and realized as income for that year.

2. The Base Market Value shall be the average market value of the Endowment Fund on December 31 of the last five calendar years. The market value at prior year-ends, however, shall be increased for contributions (or decreased for withdrawals, if any, other than withdrawals of Imputed Income) made subsequent to those years according to the following procedure: A contribution (or special withdrawal other than Imputed Income) shall be valued at 95% for the first year-end prior to the contribution (or special withdrawal); 90% for the second prior year-end; 85% for the third prior year-end; and 80% for the fourth prior year-end.3

3. The timing of withdrawals of Imputed Income during each fiscal year shall be at the discretion of the Finance Committee. At the time an Imputed Income withdrawal is to be made, the Investment Committee shall decide from which investment manager(s) the withdrawal shall be made. If a separately managed account does not hold enough cash to meet the withdrawal, the manager of that account shall sell assets sufficient to meet the withdrawal.

4. Withdrawals of Imputed Income shall be allocated to the accounts of the various owners of the endowment fund4 on the basis of the relative market values of those owners' accounts as of the latest year-end.

On the following page is a sample Imputed Income worksheet.

3If we don't adjust prior yearend market values for subsequent contributions, the effect would be to take only 1% (1/5 x 5%) of a new contribution in year one, because the latest year-end market value determines only one-fifth of Base Market Value. Similarly the effect would be 2% in year two, 3% in year three, etc.

4Such as "Donor Designated, Restricted to Program X," or "Board Designated, Unrestricted."

Sample Imputed Income Worksheet

-Adjusted Year-End Market Values -

Entry

12/31/99

MV

0

0

0

0

0

Year '00

C

100,000

80,000

85,000

90,000

95,000

12/31/00

MV

100,000

80,000

85,000

90,000

95,000

Year '01

C

56,500

45,200

48,025

50,850

12/31/01

MV

165,816

130,200

138,025

145,850

Year '02

C

550,000

440,000

467,500

12/31/02

MV

800,000

578,025

613,350

Year '03

C

300,000

240,000

12/31/03

MV

1,210,000

853,350

Year '04

C

8,000

12/31/04

MV

1,210,000

Year '05

C

12,000

12/31/05

MV

1,390,000

12/31/00

12/31/01

12/31/02

12/31/03

100,000 53,675

153,675 495,000

165,816 522,500

648,675 255,000

688,316 270,000

800,000 285,000

903,675 6,400

958,316 6,800

1,085,000 7,200

1,210,000 7,600

910,075

965,116

1,092,200

1,210,000 11,400

974,716 1,102,400 1,228,400 1,221,400 1,390,000 5,916,916

Market

Date

C = Net Contributions (net of any withdrawals other than of Imputed Income) MV = Market Value

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