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Monday, Dec. 22, 2014

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Strong investment returns provide additional funds for operating budget

Strong returns on Princeton's endowment will allow the University to allocate additional funds toward critical needs in its operating budget.

Princeton trustees have approved an increase in the University's spending of endowment income that will provide $24.8 million for several key areas, including energy and renovations, faculty recruitment and retention, information technology, library acquisitions and staffing. The increase is intended to ensure that the rate of endowment income spending remains in the University's target range of between 4 and 5 percent of the market value of the endowment.

The additional funds will be used primarily to provide permanent support for recurring expenditures in the University's operating budget that have been funded in recent years through capital reserves and to rebuild reserves for energy costs and renovation. But the funds also will permit program enhancements in information technology and an expansion of library acquisitions.

Here is a breakdown of how the funds will be designated:

• $9.2 million will go toward energy and construction costs, which have risen rapidly in recent years. The University's annual energy costs have risen from $18 million in the 2004 fiscal year to a projected $28 million in 2006. The increases to the energy budget have been covered by scaling back support for the University's renovations program. The allocation will allow the University to fully fund energy costs, begin to rebuild an energy reserve and restore cuts to its renovation budget.

• $3 million will enable the University to seed new research ventures and pay the costs of recruiting and retaining faculty members. The fund typically helps support start-up costs for new faculty in all divisions of the University, especially faculty who require sophisticated scientific equipment.

• $3.4 million will go to the Office of Information Technology, recognizing its status as "an essential backbone for research and education," according to Provost Christopher Eisgruber. The infusion will provide permanent funding for positions associated with a number of recent IT initiatives and will enable the office to implement a five-fold increase in bandwidth for the University's Internet and Internet2 service; eliminate charges to academic departments and administrative units for Internet connections; centralize funding for shared educational software applications; improve support for University and departmental Web sites; and accelerate the schedule for the completion of the campus wireless network.

• $1.1 million will be added to the library's acquisitions budget, which has lagged inflation rates and increases at peer institutions.

• $6.2 million will cover the costs of an expansion of the development office staff that has already taken place. This allocation will support positions that are currently financed through unrestricted gifts, term funds and capital reserves.

• $1.9 million will go toward permanently funding other term positions and initiatives. Until now, these have been funded through temporary allocations from the president's discretionary fund, capital reserves or other sources. These funds will support positions in the compliance program, human resources, the art museum, athletics and student life.

This is the seventh time the University has adjusted its endowment spending policy since it was adopted in 1979. The policy seeks to achieve a balance between present and future needs of the University. It is based on a spending rule that says the amount of spending per unit of endowment will increase each year by a stipulated percentage -- currently set at 5 percent.

Applying this rule determines the University's spending rate -- the amount of its endowment spending divided by the overall value of its endowment. While Princeton's policy does not establish an explicit spending rate -- it results from the application of the spending rule and fluctuations over time in the value of the endowment -- the University has long deemed it desirable and appropriate to achieve a spending rate between 4 and 5 percent. University trustees periodically have reviewed the spending rate to make sure it is falling within that range. The Princeton University Investment Co. (PRINCO) has achieved consistently strong returns on the endowment in each of the last three years, and the trustees accordingly determined that a review was needed. The adjustment approved by the trustees is effective for the University fiscal year that begins on July 1.

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