3.3.2 Expendable Funds Investment and Payout

Expendable Funds include all University funds that are not endowment funds. They represent a significant component of University investment capital and had an average total balance of $3.1 billion in FY2011. Expendable Funds include a diverse collection of approximately 15,000 separate funds including several different types of funds:

• Endowment Income Funds: Unexpended payout from pure endowment funds and funds functioning as endowment ("FFE").
• Recycling Pool: Proceeds from internal debt amortization available to lend to projects.
• Insurance and Benefit Program Reserves: Reserves held for claims within self-insurance programs.
• Student Loan Funds: Funds available to lend for student loans.
• Plant Funds: Gifts designated for facilities, not yet expended.
• Agency Funds: Funds held by Stanford University on behalf of third parties (e.g., Stanford Health Care, Lucile Packard Children's Hospital).
• Gifts Pending Designation: Gift funds received for which the purpose has not yet been designated and which are not invested in the Merged Pool.
• Restricted Funds: Gifts or other restricted expendable funds not yet expended.
• Designated Funds: Funds designated for a specific school, department, faculty or purpose, not yet expended.
• Unrestricted Funds: University, school, department, auxiliary or faculty funds held in reserve or pending expenditure.

a. Endowment Income Funds
Endowment Income Funds holding unspent prior years' payout from pure endowments (but not from FFE) will have that payout invested in the "Endowment Income Funds Pool (EIFP)." One hundred percent of the assets in the EIFP are to be invested by Stanford Management Company (SMC) in cash vehicles.¹

b. Expendable Funds Pool
All other Expendable Funds will be invested in a single, merged investment pool, the "Expendable Funds Pool" ("EFP"). A minimum of approximately $100 million of the EFP is to be invested by SMC in cash vehicles, rebalanced periodically at the discretion of the Chief Financial Officer and the Treasurer's Office. A higher minimum target level for cash vehicles may be established by the University's President or Chief Financial Officer as deemed appropriate. The remainder of the EFP is to be cross-invested in the Merged Pool ("MP"). ²

a. Endowment Income Funds
Each endowment income fund holding unspent prior years' payout on pure endowments will receive an allocation equal to the return on cash vehicles, less any management expenses.

b. Money-Market Accounts
The following types of Expendable Funds will be treated as "Money-Market Accounts" and will receive an allocation equal to the return on cash vehicles, less any management expenses:

• Recycling Pool
• Insurance and Benefit Program Reserves
• Student Loan Funds
• Plant Funds, only for gift funds exceeding $1 million
• Agency Funds
• Gifts Pending Designation, excluding class gift funds and donor funds of less than $100,000
• Restricted Funds, only when stipulated by donor requirement

c. Zero-Interest Accounts
All other Expendable Funds will be treated as "Zero-Interest Accounts" and receive no allocation to the individual fund.

Each of the Provost’s General Fund, School of Medicine (“SoM”) Dean’s Unrestricted Fund and Graduate School of Business (“GSB”) Dean’s Unrestricted Fund will receive an allocation related to the zero-interest account balances.

• SoM Dean's Unrestricted Fund will receive an allocation related to zero-interest account balances controlled by the SoM Dean's office, departments and faculty.
• GSB Dean's Unrestricted Fund will receive an allocation related to zero-interest account balances controlled by the GSB dean's office, departments and faculty.
• Provost's General Fund will receive an allocation related to all other zero-interest account balances.

The allocation shall vary between 0% and 5.5% of the zero-interest account average monthly balances during the prior fiscal year:

• The allocation shall be 0% if the prior year's return of the EFP is less than or equal to 0%
• The allocation shall be 5.5% if the prior year's return of the EFP is greater than or equal to 5.5%
• The allocation shall be equal to the prior year's return of the EFP if the actual return is greater than 0% and less than 5.5%

To the extent the allocation on zero-interest account balances is less than 5.5% in any year, the Provost and Deans may, at their individual discretion, elect to offset the shortfall by reducing an equivalent amount of the contribution in that year from general funds and deans' funds to the Capital Facilities Fund ("CFF").

The total allocation to Money-Market Accounts, General Fund and Dean's Unrestricted Funds will differ from the investment returns of the EFP. These differences will be buffered by the "Tier I Buffer" and the "Tier II Buffer."

• The Tier I Buffer is a group of unrestricted FFE funds. These funds are fully invested in the MP and receive a regular MP-based payout used to support Provost's General Fund.
• The Tier II Buffer is a single unrestricted FFE fund. This fund is also fully invested in the MP, and it receives a regular MP-based payout that is distributed at the President's discretion ("President's Funds"). In addition, the President is authorized to withdraw up to $30 million in principal each year to be used at his/her discretion.

To the extent there is a shortfall in EFP investment returns relative to stipulated allocations, principal will be withdrawn from the Tier I and Tier II Buffers to make up such shortfall, as follows:

• First, from the Tier I Buffer up to a limit of 20% of the year-end value of the Tier I Buffer in any fiscal year
• Second, from the Tier II Buffer until fully depleted
• Third, from the remainder of the Tier I Buffer

To the extent there is a surplus of EFP investment returns relative to stipulated allocations, excess returns will be added to the Tier I and Tier II Buffers as follows:

• First, to the Tier I Buffer until such time as the value of the Tier I Buffer, in total, equals 35% of the total value of the EFP ("the target threshold")
• Second, to the Tier II Buffer

Once each year, the Trustee Committee on Finance will review the status of the EFP, including fund balances, asset allocation, investment returns, payout and buffer balances.