Three considerations determine the Fund's annual spending policy: the aim of providing a reliable flow of funds for programs and planning; the objective of preserving the real (inflation-adjusted) value of the endowment and funds for programs; and the need to meet the Internal Revenue Service requirement of distributing at least 5 percent of the endowment for charitable purposes each year. Like most other institutions whose sole source of income is their endowment, the Fund found it necessary adjust spending plans to the realities of the severe bear equities market that began in early 2000—'reducing its budget by 10 percent in 2003-04 and allowing only very modest increases through 2005-06. Heartened by the continuing recovery of the market value of the endowment and a comparatively strong average annual return of 7.8 percent since the bear market began, the Fund's Board has approved a 5.6 percent increase in annual spending for the 2006-07 fiscal year, with the hope that comparable increases will be possible in coming years.

As a value-adding foundation, the Fund seeks to achieve an optimal balance between its grantmaking and intramural research and program management activities, while minimizing purely administrative costs. Recognizing that data on expenditures reported in the Internal Revenue Service 990PF annual tax return inadequately reflect the purpose of many expenditures, the analysis in the figure sorts out the foundation's 2005-06 expenditures according to four categories recommended by the Foundation Financial Officers Group: direct public benefit activities (extramural grants and intramurally conducted programs such as research, communications, and fellowships); grantmaking activities, including grants management; general and administrative activities; and intramural investment management. In 2005-06, the Fund's total direct public benefits activities accounted for 82 percent of its annual expenditures. Value-adding oversight of grants took up 10 percent of the Fund's budget, and the intramural costs of managing the endowment, 1 percent. Appropriately defined, the Fund's administrative costs amounted to 7 percent of its budget.

In a still-constrained fiscal environment, the Fund remained extraordinarily productive over the last year while achieving intramural cost savings that enabled staying well within the policy guideline set by the board of directors for the ratio of extramural to intramural spending. The Fund's earlier shift to electronic distribution of the results of its work and that of grantees, along with continuous upgrading of its Web site, accounted for much of the savings achieved on intramural costs. The foundation's ability to take on new initiatives while maintaining all grants programs and the intramural capacities that ensure their effectiveness will enable it to continue to fulfill a unique and highly productive role in American society.