Getting Spending Policy Right: A Practical Guide for Foundation Investment Committees

Endowments & Foundations

By Sean McEvilly and Ryan Walter|August 19, 2026

Ask a foundation investment committee what their portfolio returned last year and most members can answer within a percentage point. Ask what their spending policy is (the actual formula, not the intent) and the room often goes quiet.

A spending policy is the rule that determines how much a foundation pays out of its endowment each year, and it is the single decision that connects everything else: the asset allocation, the liquidity plan, the grantmaking budget, and whether the institution's purchasing power survives the next thirty years. Getting it right means choosing a formula deliberately, writing it into the investment policy statement, and reviewing it annually against real numbers rather than intentions.

This guide is written for investment committees and boards of foundations and nonprofit pools in roughly the $25 million to $250 million range: large enough that spending policy meaningfully drives asset allocation, and typically without the internal investment staff of the mega-endowments. It covers what a spending policy is supposed to do, the four formulas in common use, what guidance exists, and the questions a committee should be able to answer at its next annual review.

What is a spending policy actually for?

A spending policy has three jobs, and they pull against each other:

1. Support the mission today. Grants, programs, and operating support need a predictable budget number.
2. Preserve purchasing power for tomorrow. In perpetuity, the portfolio must earn back everything it spends, plus inflation, plus all costs.
3. Insulate the budget from the market. Program officers cannot plan grants around a number that swings 20% with the S&P 500.

The arithmetic behind job two is unforgiving. Take a foundation spending 5% annually, with long-run inflation near 2.5% and total investment and administrative costs near 1%: it needs roughly an 8.5% nominal return just to stand still. Those are illustrative assumptions, and your own numbers will differ, but the structure holds. Every committee debating whether to spend 4.5% or 5.5% is really debating the required return of the portfolio, and therefore how much equity, illiquidity, and complexity the institution must carry. That is why spending policy belongs in the investment policy statement, not in a separate budget memo.

What are the four spending formulas in common use?

1. Simple percentage of a moving average. Spend a fixed rate, commonly 4% to 5%, of the portfolio's average market value over the trailing 12 to 20 quarters. This is the workhorse policy for community foundations and mid-sized private foundations. The moving average smooths market swings; a longer window smooths more but responds more slowly to genuine changes in the portfolio's size.

2. Inflation-adjusted (CPI-plus). Take last year's spending, increase it by inflation, and spend that dollar amount regardless of what markets did. This gives programs maximum budget stability, and transfers all of the market risk to the corpus. After a deep drawdown, an unbanded CPI-plus policy can quietly push the effective spending rate from 5% to 7% or more of a shrunken portfolio, exactly when recovery needs the capital most.

3. Hybrid (weighted) rules. Blend the two: for example, 70% weight on last year's inflation-adjusted spending and 30% weight on the percentage-of-market-value calculation. Popularized by large university endowments, hybrids buy budget stability while keeping a live link to portfolio reality. The cost is complexity: a committee should be able to explain its formula to a new board member in two minutes, and hybrids test that.

4. Banded (collared) rules. Any of the above, plus a floor and ceiling. For instance: spending may not fall more than 5% or rise more than 10% from the prior year, or the effective rate must stay between 3.5% and 5.5% of market value. Bands are the committee's circuit breaker. They let a simple rule behave sensibly at the extremes, which is where policies actually fail.

There is no universally right answer. A foundation whose grantees depend on multi-year commitments should weight stability. A foundation whose board treats the corpus as sacrosanct should weight the market-value link. What matters is that the choice is deliberate, written, and stress-tested, not inherited from a decades-old board minute no one can locate.

What guidance exists?

For most nonprofit and community foundations, the governing framework is UPMIFA (the Uniform Prudent Management of Institutional Funds Act, adopted in nearly every state), which requires spending decisions to be prudent in light of the fund's duration and purposes, general economic conditions, inflation, expected total return, and the institution's other resources. Several states add a rebuttable presumption of imprudence for spending above 7% of a fund's average value. That is not a cap, but a line that shifts the burden of justification onto the board.

Private foundations also carry federal tax considerations that nonprofit and community foundations do not. Recent tax legislation added a progressive excise-tax regime for larger private foundations that changes the after-tax arithmetic of returns, so for private foundations above $50 million, spending policy and tax posture now have to be modeled together, a subject covered in more depth in this earlier analysis of the new excise-tax rules.

The practical takeaway is that a spending policy is a fiduciary document. Minutes should show that the board considered the UPMIFA factors, understood the long-term sustainability math, and revisited the policy on a schedule, annually being the standard. Sound investment governance is largely the discipline of making those reviews ordinary rather than reactive.

What questions should your committee be able to answer?

A useful annual spending-policy review is not a re-derivation of the formula from first principles. It is a short list of concrete questions, answered with numbers:

• What is our effective spending rate right now (actual dollars out the door over current market value), and how far has it drifted from the policy rate?
• What does the policy tell us to spend after a 25% drawdown? Run the number. If the answer would force either a grantmaking cliff or a raid on the corpus, the policy needs a band before the drawdown, not after.
• What return does our spending assume, and does our current allocation credibly target it net of inflation, fees, and (for private foundations) excise tax?
• How many years of planned grants could we cover from liquid assets alone if markets closed the primary channels for a year?
• When did the board last affirmatively re-adopt the policy, and would a new committee member find the rationale written down anywhere?

The second and fourth questions deserve particular attention, because they are where spending policy meets the balance sheet. A policy that produces a defensible number in calm markets and an impossible one after a drawdown is not a policy; it is an assumption. The same logic applies to restricted funds: the spending rate, actual against policy, belongs on the standing fiduciary review agenda alongside inflows and outflows, not in an annual exercise.

Why does this matter most for mid-sized foundations?

Institutions in the $25MM–$250MM range live with a particular tension. They are large enough that the difference between a 4.5% and a 5.5% policy is real money (on $100 million, a million dollars of grants every year), but rarely staffed to run the modeling that decision deserves. The mega-endowments publish their hybrid formulas. The small family foundation can often operate informally. The mid-sized foundation is where governance discipline earns the most: a written policy, an annual review with actual scenario numbers, and a board that has seen the downside case before it happens.

Whoever advises your institution, insist on seeing the spending question and the allocation question answered together, with the downside exposure made explicit and the output translated into something the full board can act on. That expectation belongs in the selection process as much as the annual review; choosing the right investment advisor means asking how a firm models spending sustainability, not only how it reports returns. The test of good spending-policy work is not the sophistication of the simulation. It is whether the committee leaves the meeting with an actionable number and the reasons for it.

This material is for informational and educational purposes only and does not constitute legal, tax, or investment advice, or a recommendation of any security or strategy. Statutory and tax requirements governing endowment funds and private foundations vary by state and change over time; consult qualified legal and tax counsel regarding your institution's specific circumstances. Vistamark Investments LLC is an investment adviser; information about the firm is available in its Form ADV.