Distribution (or Spending) Policy
The Texas Constitution directs the UT Board to establish a distribution policy that provides stable, inflation-adjusted distributions to the AUF and preserves the real value of the PUF Investments over the long term. To achieve these goals, the UT Board has adopted a "percent of assets" spending policy for the PUF. Under this policy, the distribution rate is set, currently 4.75% of the prior twelve quarters' average net asset value of PUF assets, and therefore dollar distributions vary with the volatility inherent in financial markets. Although this policy exposes distribution recipients to relative high volatility and may result in the loss of nominal or real purchasing power in yearly distributions, it is effective in maintaining the purchasing power of the PUF corpus. This policy was chosen for the PUF because it best suits endowments in which current distributions are small relative to the total budget of the beneficiary and where long term growth of the endowment fund is the key objective as is the case with the PUF.
However, the UT Board does not have unlimited authority to set the PUF distribution rate. Distributions to the Available University Fund are subject to the following overriding Constitutional requirements:
1. Distributions must be at least equal to the amount needed to pay debt service on PUF Bonds;
2. Distributions may not increase from the preceding year (except as necessary to pay debt service on PUF Bonds) unless the purchasing power of PUF Investments for any rolling 10-year period has been preserved;
3. Distributions may not exceed 7 percent of the average net fair market value of PUF Investments in any fiscal year, except as necessary to pay debt service on PUF Bonds.
Distributions from the PUF to the AUF decreased by 4.1% from $363.0 million in fiscal year 2003 to $348.0 million in fiscal year 2004. This drop in the distribution was due primarily to poor investment returns early in the trailing three year history used to calculate the base endowment value which, multiplied by the 4.75% policy distribution rate, determines the distribution amount. As these earlier lower return years are replaced by the higher returns of the past two years in the calculation, distributions are likely to increase. Figure F shows the ten year history of PUF distributions.
As depicted in the Figure G, the PUF has achieved the objective of maintaining inflation adjusted value because purchasing power has increased over the ten year period by 3.77%. Fiscal year 2004 provided real growth in the PUF of 9.37%. This growth is retained in the PUF to offset years, such as fiscal years 2002 and 2001, when investment returns trailed the inflation rate and purchasing power was not maintained. The rate of investment return in Figure GFigure G is the gross total return. The net investment return reported in Figure E is net of investment management fees. The expense rate in Figure G includes both investment management fees and other fees.
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