Solving the Puzzle of Endowments

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
By the end of this presentation you will be able to:
Item 1
Define an endowment fund and distinguish between true, term ,
and quasi
Item 2
Understand how endowments are recorded in Banner
Item 3
Understand what the current endowment spending policy is, and
what is meant by “underwater endowment”
Item 4
Have a cursory understanding of the regulatory environment and
of reporting standards for endowments
Item 5
Have an introductory understanding of the investment side of endowments,
i.e., asset allocation, investment managers, and UNCCIF
Item 6
Understand the importance of pledges, and also endowments in
general to universities
When you think of endowments do you
turn into one of these people?
Regulatory Environment of Endowments
UPMIFA – Uniform Prudent Management of Institutional Funds
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
Charity’s other resources
Charity’s 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
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
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 institution’s
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
Endowment Principal
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 Earnings
Come from market gains and losses
Represents investment
performance over the life of the
Funds the endowment spending.
Fund numbering in Banner:
• R2xxxx for University
• R1xxxx for Foundation
• R6xxxx for Athletic Fdn.
Total Market Value
Combination of :
• Principal
• Earnings and realized gains and
• Unrealized gains and losses
Fund numbering in Banner:
• E2xxxx for University
• E1xxxx for Foundation
• E6xxxx for Athletic Fdn
In summary:
Start with “H” or “G”
Add the “R” values.
Result is “E”
Original and
subsequent gifts,
performance less
spending to date.
Fair market value, or
Spending Policy- Competing Objectives
New Policy
• o
– 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
o are estimated to only be 6.2%).
earn 7% (2% + 5% = 7 % yet returns
– 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
– Staff and finance committee believe the Foundation can do a better job of
meeting spending goals- budget stability and maintenance of purchasing
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
What Are Underwater Endowments?
How Does UNCC Manage Underwater
How Are Endowment Funds Invested?
How Do We Manage Risk?
Capital, 1.1%
Cash, 0.6%
Cash, 7.1%
Large Cap
Equity, 30.3%
Fixed Income,
Global Equity,
Equity and
Real Estate
and Natural
Large Cap
Value Equity,
Equity, 9.9%
Equity, 11.6%
Small Cap
Equity, 8.0%
Six managers (2002) to
eleven managers(2009)
$63.4M (2002) to $92M (2009)
Avg of last 3 year ( 2007-2009) -3.3%
Avg of last 5 year return(2005-2009) 6.6%
Fixed Income,
Equity, 16.4%
Equity, 12.3%
Close to 200 managers
$126.2 M( 12/31/2012)
Three year average return,8.9%
How are we doing?
Financial Reporting Standards
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
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

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