Solving the Puzzle of Endowments Presented by Treasury

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Solving the Puzzle of Endowments Presented by Treasury Services team members: Jane Johansen, Director

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

Objectives By the end of this presentation you will be able to: Item 1

Objectives 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?

When you think of endowments do you turn into one of these people?

Regulatory Environment of Endowments • • UPMIFA – Uniform Prudent Management of Institutional Funds

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 • Charity’s other resources • Charity’s investment policies

What exactly is an endowment, and how does it differ from other funds? Can

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

Types of Endowments • True Endowment - a fund in which the donor has

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

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: • H 2 xxxx for University • H 1 xxxx for Foundation • G 6 xxxx for Athletic Fdn.

Endowment Earnings • Come from market gains and losses • Represents investment performance over

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: • R 2 xxxx for University • R 1 xxxx for Foundation • R 6 xxxx for Athletic Fdn.

Total Market Value • • Combination of : • Principal • Earnings and realized

Total Market Value • • Combination of : • Principal • Earnings and realized gains and losses • Unrealized gains and losses Fund numbering in Banner: • E 2 xxxx for University • E 1 xxxx for Foundation • E 6 xxxx for Athletic Fdn

In summary: • Start with “H” or “G” • Add the “R” values. •

In summary: • Start with “H” or “G” • Add the “R” values. • Result is “E” • Original and subsequent gifts, • Investment performance less spending to date. Fair market value, or FMV

Spending Policy- Competing Objectives

Spending Policy- Competing Objectives

New Policy • o Why? – Good business practice to review especially with the

New Policy • 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 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 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

• 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?

What Are Underwater Endowments?

How Does UNCC Manage Underwater Endowments?

How Does UNCC Manage Underwater Endowments?

How Are Endowment Funds Invested?

How Are Endowment Funds Invested?

How Do We Manage Risk?

How Do We Manage Risk?

Venture Capital; 1. 1% Then Cash; 0. 6% Now Cash; 7. 1% Large Cap

Venture Capital; 1. 1% Then Cash; 0. 6% Now Cash; 7. 1% Large Cap Growth Equity; 30. 3% Fixed Income; 35. 8% Diversifying Strategies; 9. 8% Global Equity; 1. 3% International Equity and Emerging Markets; 14. 0% Real Estate and Natural Resources; 14. 4% Large Cap Value Equity; 14. 1% International Equity; 9. 9% Domestic Equity; 11. 6% Small Cap Equity; 8. 0% Six managers (2002) to eleven managers(2009) $63. 4 M (2002) to $92 M (2009) Avg of last 3 year ( 2007 -2009) -3. 3% Avg of last 5 year return(2005 -2009) 6. 6% Fixed Income; 13. 0% Hedged Equity; 16. 4% Private Equity; 12. 3% Close to 200 managers $126. 2 M( 12/31/2012) Three year average return, 8. 9%

How are we doing?

How are we doing?

Financial Reporting Standards • Accounting standards require that endowment principal (original and subsequent gifts)

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

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