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05/03/94

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Special endowment payout will support infrastructure costs

STANFORD -- Stanford will increase the amount it pays out from its $2.4 billion endowment in 1994-95 to help cover the cost of borrowing money for investment in physical plant repairs and information systems.

University trustees in April approved a special 0.5 percentage point increase on the standard 4.75 percent payout rate, beginning Sept. 1. The increase is expected to generate $12 million, of which $6 million to $8 million will be earmarked for debt service in the operating budget. The rest will be reinvested.

Payout is the portion of endowment earnings and appreciation made available for current spending. It is set at a level that ensures the endowment's future purchasing power. Trustees, who are responsible for the university's long-term financial strength and stability, set the figure each year.

Provost Condoleezza Rice emphasized in an April 27 interview that the additional income would not be commingled with other funds for general support of the operating budget, as has been the case recently.

As part of a major deficit financing plan, trustees in 1992 approved a temporary increase in payout to 6.75 percent. The extra 2 points generated a total of about $56 million over two years to support the operating budget.

Rice credited President Gerhard Casper for his role in creating a "conceptual breakthrough" with the Board of Trustees, which agreed that the physical plant is an asset that must not be allowed to deteriorate.

"It's very easy to starve one to feed the other - to rob Peter to pay Paul," Rice said of the natural tendency to cut back on facility repairs while building up the endowment.

In exchange for the increased payout, trustees obtained from Casper and Rice a promise that university unrestricted expenses would increase no more than 1 percent above the consumer price index.

Rice said she hoped trustees would renew the program annually.

"I think if the endowment maintains its rate of return and we live within the 1 percent cost growth, we have a chance to think of this as a longer term structural solution to the infrastructure problem," she said.

Explaining the board's action to the Faculty Senate on Thursday, April 28, Casper said that much of the time, boards of trustees are preoccupied with preserving the value of endowment.

"In some instances," he said, "this has actually led to not paying sufficient attention to the physical plant and to vast buildups of deferred maintenance."

Some other research universities "now face bills that are in excess of $1 billion for deferred maintenance," he said.

Casper said that the most immediate use for the 0.5 point increase will be to help cover debt service on $150 million of non-tax-exempt bonds that Stanford sold in February.

By authorizing the extra payout, he said, the board "began to treat debt as an asset." The university was able to borrow at the "extremely favorable rate" of 7.08 percent in February. "Our timing was perfect," he said, "with the help of some trustees who understood these things."

Carrying costs on the debt are smaller than endowment earnings, "so we are able to leverage this debt, and that is a completely new approach to these kinds of problems," Casper said.

Roger Noll, economics, asked at the Senate if Casper were "convinced that the state attorney general is not going to put us all in jail" for diverting the extra payout from restricted funds for central uses.

Casper responded that restrictions would be honored. "I am not trying to do anything to stretch the law. We are trying to do what we think is responsible and will be acceptable," he said.

In cases where the extra payout cannot be diverted to debt service, it will be reinvested.

Casper told the senators that "special and restricted funds impose considerable costs on the university infrastructure, and these costs often have been added in the past without consideration of the burdens imposed."

Responding to a request for clarification from Gene Franklin, electrical engineering, on payout from funds functioning as endowment, Casper said, smiling, that the money would be used centrally but in ways that "will come to your benefit ultimately."

"I knew you had our best interest at heart," Franklin said to wide laughter.

Continuing the humor, John Bender, English, said that if Casper "could patent the process of turning debt into an asset, that would solve all of our problems."

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