Solving the Puzzle of Endowments Presented by Treasury Services team members: Jane Johansen, Director Sonja Austin, Financial Reporting and Outreach Analyst Tracee Karlsson, Endowment Accounting Manager
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Solving the Puzzle of Endowments Presented by Treasury Services team members: Jane Johansen, Director Sonja Austin, Financial Reporting and Outreach Analyst.
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Slide 1
Slide 2
Solving the Puzzle of Endowments Presented by Treasury Services
team members: Jane Johansen, Director Sonja Austin, Financial
Reporting and Outreach Analyst Tracee Karlsson, Endowment
Accounting Manager
Slide 3
Objectives By 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 1 Understand what the current endowment spending
policy is, and what is meant by underwater endowment Item 2 Item 3
Item 4 Item 5 Item 6
Slide 4
When you think of endowments do you turn into one of these
people?
Slide 5
Regulatory Environment of Endowments UPMIFA Uniform Prudent
Management of Institutional Funds Act Provides better guidance on
what is considered prudent use of endowments based on 7 criteria:
Duration/preservation of the endowment Purposes of the charity and
of the endowment General economic conditions Effects of inflation
& deflation Expected total return from earnings & gains
Charitys other resources Charitys investment policies
Slide 6
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 Advancement Donor states (via the
endowment document) that the gift is to be maintained in perpetuity
Distribution of income is via the annual spending policy
calculation
Slide 7
Types of Endowments True 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
Slide 8
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 Foundation G6xxxx for Athletic
Fdn. Endowment Principal
Slide 9
Endowment Earnings Come from market gains and losses Represents
investment performance over the life of the endowment. Funds the
endowment spending. Fund numbering in Banner: R2xxxx for University
R1xxxx for Foundation R6xxxx for Athletic Fdn.
Slide 10
Total Market Value Combination of : Principal Earnings and
realized gains and losses Unrealized gains and losses Fund
numbering in Banner: E2xxxx for University E1xxxx for Foundation
E6xxxx for Athletic Fdn
Slide 11
Start 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 FMV In summary:
Slide 12
Spending Policy- Competing Objectives
Slide 13
New Policy o o Why? 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.
Slide 14
New Spending Policy: More dependent on changes in Consumer
Price Index Estimated 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
Slide 15
What Are Underwater Endowments?
Slide 16
How Does UNCC Manage Underwater Endowments?
Slide 17
How Are Endowment Funds Invested?
Slide 18
How Do We Manage Risk?
Slide 19
Slide 20
How are we doing?
Slide 21
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
Standards
Slide 22
The Importance of Endowments In 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