Piece of the Puzzle

Solving the Puzzle of EndowmentsPresented by Treasury Services team members:

Jane Johansen, DirectorSonja Austin, Financial Reporting and Outreach AnalystTracee Karlsson, Endowment Accounting Manager

ObjectivesBy the end of this presentation you will be able to:Define an endowment fund and distinguish between true, term , and quasi

Understand how endowments are recorded in Banner

Have a cursory understanding of the regulatory environment and of reporting standards for endowments

Have an introductory understanding of the investment side of endowments, i.e., asset allocation, investment managers, and UNCCIF

Understand the importance of pledges, and also endowments in general to universities

Item 1Understand what the current endowment spending policy is, and what is meant by underwater endowment

Item 2Item 3Item 4Item 5Item 6When you think of endowments do you turn into one of these people?

Regulatory Environment of EndowmentsUPMIFA Uniform Prudent Management of Institutional Funds ActProvides better guidance on what is considered prudent use of endowments based on 7 criteria:Duration/preservation of the endowmentPurposes of the charity and of the endowmentGeneral economic conditionsEffects of inflation & deflationExpected total return from earnings & gainsCharitys other resourcesCharitys investment policies

What exactly is an endowment, and how does it differ from other funds?Can you name the elements that make up a typical endowment?Donor gift is received that meets or exceeds endowment levels as determined by University AdvancementDonor states (via the endowment document) that the gift is to be maintained in perpetuityDistribution of income is via the annual spending policy calculation

Types of EndowmentsTrue Endowment - a fund in which the donor has specified that the gift must be maintained in perpetuity and invested to produce income

Quasi Endowment - a fund set aside by the institutions governing board to be managed as if they carried external endowment stipulations

Term Endowment - a fund that a donor specifies must be held as an endowment until the passage of a specified period of time or the occurrence of an event

Original & subsequent gift(s) that were received to establish the endowment (aka corpus)

Historic dollar value fair value of the fund when received, plus subsequent gifts and other additions specified by the donor(s)

Fund numbering in Banner:H2xxxx for University H1xxxx for FoundationG6xxxx for Athletic Fdn.

Endowment Principal

Endowment EarningsCome from market gains and losses

Represents investment performance over the life of the endowment.

Funds the endowment spending.

Fund numbering in Banner:R2xxxx for UniversityR1xxxx for FoundationR6xxxx for Athletic Fdn.

Total Market Value Combination of :PrincipalEarnings and realized gains and lossesUnrealized gains and losses

Fund numbering in Banner:E2xxxx for UniversityE1xxxx for FoundationE6xxxx for Athletic FdnStart with H or G

Original and subsequent gifts,

Add the R values.

Investment performance less spending to date.Result is E

Fair market value, or FMVIn summary:

Spending Policy- Competing Objectives

New PolicyooWhy?Good business practice to review especially with the recent roller coaster returns of last few years. Ideally, the investments returns should, over the long term, equal or exceed the inflation rate + spending rate.Average returns over the next eight years estimated at 6.2%, and inflation is estimated at 2% per annum, with a 5% spending rate we need to at least earn 7% (2% + 5% = 7 % yet returns are estimated to only be 6.2%). Staff and finance committee do not believe 5% spending rate is sustainable over time.Historically there has been a high level of volatility to spending because our spending methodology is based solely on the market (i.e. 5% of market value).Staff and finance committee believe the Foundation can do a better job of meeting spending goals- budget stability and maintenance of purchasing power.

New Spending Policy:More dependent on changes in Consumer Price IndexEstimated to result in moderate increases over the next couple of years. Barring any deflation, there should not be any decreases

Maintain spending in FY 2013 at the same dollar amount as FY 2012 Thereafter annual spending will be calculated as follows:80% times prior years spending adjusted for inflation+20% times the 4.5% of the average of the prior three years market values as of December 31 each year

What Are Underwater Endowments?

How Does UNCC Manage Underwater Endowments?

How Are Endowment Funds Invested?

How Do We Manage Risk?

How are we doing?

Accounting standards require that endowment principal (original and subsequent gifts) be recorded separate from the earnings and market gains and losses

Pledges, although they are very important, are not tracked in Banner Finance, and an endowment fund at UNC Charlotte is not created when a pledge is received, but rather when payment is received on the pledge Financial Reporting StandardsThe Importance of EndowmentsIn an economic downturn the importance of endowments grows

Large endowments make a university more appealing because of the variety of programs, services, and opportunities they provide

Wisely invested endowments provide assurance for the continuity of programs and opportunities for students and faculties

Endowment ratios are used to compare universities to one another