Optimal Smoothing Rules for University Financial Planning

The determination of each year's endowment payout, total spending, and transfers to or from reserves is set up as an optimal smoothing rule problem. Stochastic laws of motion are formulated for total spending, operating income, changes in the balances for endowment and operating reserves, and the acquisition of new gifts to endowment. Parameters of the smoothing rules are obtained by making subjective tradeoffs among objectives such as the means and meansquare deviations of budget quantities and the probabilities that these quantities will exceed certain control limits. The model currently is being used to determine the endowment payout rate for Stanford University.