Key Takeaways
- • NEPC outlines three spending policy approaches for community foundations: current market value asset-based, rolling average, and inflation-linked or hybrid policies, each with distinct tradeoffs between simplicity, stability, and complexity.
- • The current market value approach is straightforward and lets spending participate in portfolio growth quickly, but it transmits market swings into grantmaking more directly.
- • Rolling average policies reduce the impact of single-year market values and support budget planning, though they may keep spending elevated after market declines and slow increases in strong markets.
- • The inflation-linked or hybrid illustration starts at a $12.5 million payout that rises 3% annually while staying within 4%-6% market-value bands, which demands strong board governance to avoid drift into discretionary decisions.
- • NEPC recommends reviewing spending policy after significant governance changes and at least every five to seven years, using scenario analysis to test policy resilience.
Summary
NEPC's analysis examines spending policy options for community foundations, using a hypothetical foundation referred to as XYZ to illustrate the tradeoffs. Because XYZ relies only moderately on portfolio distributions for baseline grantmaking, a current market value asset-based policy remains a viable choice. The approach is easy to calculate and communicate, and it allows spending to participate in portfolio growth relatively quickly. However, annual grantmaking becomes closely tied to market value, so under adverse market paths gains or losses flow into spending faster than under a multiyear average. NEPC suggests this approach fits best where grants are flexible, funding sources are diversified, and reserves are sufficient.
The rolling average approach reduces the influence of any single year's market value and produces a more measured distribution path, which can help XYZ plan its operating budget and give grantees greater visibility into future support. NEPC cautions, however, that smoothing does not eliminate risk. A trailing average may sustain spending after a market decline, adding pressure to the portfolio, and may cause spending to rise more slowly in strong markets. The averaging period should reflect how much stability the foundation requires and how quickly it wants spending to respond to sustained changes in asset values.
The inflation-linked or hybrid policy creates the most direct link between annual spending and the purchasing power of the prior year's distribution. In NEPC's illustration, a $12.5 million initial payout grows 3% annually and stays within 4%-6% market-value bands throughout the modeled period. Predetermined floors and ceilings can serve as decision rules when the inflation-adjusted payout would otherwise become unusually low or high. The tradeoff is complexity: boards must understand the inflation index, how market-value bands function, and when exceptions are permitted. Without that discipline, the policy can become inflation-adjusted in favorable markets and discretionary in difficult ones.
NEPC concludes there is no universal answer. Spending policy should be treated as a strategic governance tool that simplifies annual decisions, manages risk for the foundation and grantees, and strengthens donor and community relationships. The goal is a policy whose behavior the board understands and can sustain across environments, tested through scenario analysis covering market declines, elevated inflation, reduced fundraising, and temporary increases in community need. NEPC states that spending policies are often worth revisiting after leadership turnover or significant strategic shifts, and that even without major change, a review every five to seven years helps keep stakeholders aligned.
The rolling average approach reduces the influence of any single year's market value and produces a more measured distribution path, which can help XYZ plan its operating budget and give grantees greater visibility into future support. NEPC cautions, however, that smoothing does not eliminate risk. A trailing average may sustain spending after a market decline, adding pressure to the portfolio, and may cause spending to rise more slowly in strong markets. The averaging period should reflect how much stability the foundation requires and how quickly it wants spending to respond to sustained changes in asset values.
The inflation-linked or hybrid policy creates the most direct link between annual spending and the purchasing power of the prior year's distribution. In NEPC's illustration, a $12.5 million initial payout grows 3% annually and stays within 4%-6% market-value bands throughout the modeled period. Predetermined floors and ceilings can serve as decision rules when the inflation-adjusted payout would otherwise become unusually low or high. The tradeoff is complexity: boards must understand the inflation index, how market-value bands function, and when exceptions are permitted. Without that discipline, the policy can become inflation-adjusted in favorable markets and discretionary in difficult ones.
NEPC concludes there is no universal answer. Spending policy should be treated as a strategic governance tool that simplifies annual decisions, manages risk for the foundation and grantees, and strengthens donor and community relationships. The goal is a policy whose behavior the board understands and can sustain across environments, tested through scenario analysis covering market declines, elevated inflation, reduced fundraising, and temporary increases in community need. NEPC states that spending policies are often worth revisiting after leadership turnover or significant strategic shifts, and that even without major change, a review every five to seven years helps keep stakeholders aligned.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.