(intergenerational equity).

Endowment assets will be managed by the Board of Regents or its designated Committee in accordance with the provisions of the Kentucky Uniform Prudent Management of Institutional Funds Act (KRS 273.600 to 273.645).

A spending distribution policy has been established that is based on a rolling average of market values in order to reduce adverse budgetary impact due to market volatility of the endowment assets. The annual spending distribution will be calculated by a smoothing formula based on a rolling three-year average of the quarterly market values. Ending market values for the last 12 quarters are averaged, and the result is then multiplied by the 4% spending distribution rate (1% per quarter) to determine the total amount to be distributed from the prior December 31st value. This amount is then allocated to participating funds based on their pro-rata share of the total investment pool.

Note: the calculated annual spending distribution rate must fall between 3.5% and 5% of the current market value of the Endowment. Should the rolling three-year average be outside the range, it will be raised to the equivalent of 3.5% or lowered to the equivalent of 5%. The Board of Regents reserves the right to freeze, lower, or increase the annual spending distribution in an extraordinary financial situation.

Eligible Endowment funds will be assessed an annual management fee of no more than 1.00% (100 basis points) of the current market value to support administrative costs by the institution. Inclusive of all services, at no time shall more than 50% of the annual management fee go towards the investment manager or investment services.

The target annual spending distribution rate and management fee represent maximum amounts that can be withdrawn annually from individual Endowment funds. The administration, at their discretion, may reduce or suspend withdrawals from individual endowment funds that are underwater. The administration will define underwater endowment funds annually, and will advise the investment manager of the implementation or removal of reduced or suspended withdrawals from individual Endowment funds.

Spending distributions and management fee withdrawals will be suspended on all Endowment funds underwater by more than 20%. Endowment funds that are underwater more than 10% will undergo a formal review by the Office of the Controller and appropriate staff members to determine the appropriate level of spending distributions in accordance with the following factors set forth in the Kentucky Uniform Prudent Management of Institutional Funds Act: