The James Childrens Hospital (JCH), based in Washington DC, has been operating has an operating budget of $15 million and has been operating at a budget surplus for the past two years. JCH has a $20 million endowment (JCHA) whose sole purpose is to provide capital equipment for the hospital. The endowments long-term expected total return is 8.6%, which includes a 3.3% income component. JCHE has no minimum payout requirement and expects no future contributions. Traditionally, the JCHE board of directors has determined the annual payout based on current needs. Payouts have been rising steadily to $1.375 million two years ago and to $1.4 million last year.

Michelle Parker, CFO of JCHE, has asked the boards guidance in determining a new long-term spending policy for JCHE. Remove the word knew. She has received $1.6 million in requests to buy equipment and is concerned about the inflation rate for medical equipment prices, which is 4%, versus 2.5% for the U.S. Consumer Price Index.

1 - Discuss the implications of the current pressure on JCHE to increase spending.

2 - Discuss how JCHEs time horizon affects its risk tolerance.

3 - Determine a long-term spelling policy for JCHE, including a spending rate as a percentage of assets, and justify the policy.