Unit 5 Finance and Investments

1. Community Foundation Basics For Board Members Unit 5 Finance and Investments

2. Topics • Stewardship and Fiscal Responsibility • Investments • Budget, Audit and Reporting • Legal/Accounting Issues

3. Community Foundation Basics For Board Members Unit 5 Finance and Investments Stewardship and Fiscal Responsibility

4. Stewardship and Fiscal Responsibility Good stewardship involves the following: • Fiscal accountability • Managing risk • Operational sustainability • Protecting donors intentions

5. Stewardship and Fiscal Responsibility Board is responsible for reviewing and approving: • Investment and spending policies • Annual Budget • Approval of Auditor • Annual Audit • Annual Tax Return (Federal Form 990)

6. Stewardship and Fiscal Responsibility Investment Committee • Reports and processes dealing with the investment of endowment assets Finance Committee • Reports and processes dealing with budgets, interim financial statements, etc. Audit Committee • Oversees selection of auditor and annual audit One committee can handle these responsibilities!

7. Community Foundation Basics For Board Members Unit 5 Finance and Investments Investments

8. Definitions First Total Return – investment return that includes interest, dividends, realized (occurs when an asset is sold) and unrealized changes in market value Asset Allocation – distribution of investment assets among various asset classes including domestic and foreign stocks, bonds, cash, alternative investments, etc. Investment Policy – policy that guides all investment activity of the foundation Spending Policy – policy that determines the annual spending for grants, scholarships, and administrative fees to cover operating expenses

9. Common Investment Objectives ofCommunity Foundations • Maintain the purchasing power of all endowed assets and future contributions • Maximize total returnwithin prudent and reasonable levels of risk • Increase the predictability of spending patterns • Recognize and fulfill donor wishes

10. Role of Investment Committee • Recommend investment and spending policies for approval by the full board • Review asset allocation and the performance of individual investment managers on a regular basis • Interview and recommend new investment managers to the full board

11. UMIFA (UPMIFA) The Uniform Management of Institutional Funds Act (UMIFA), adopted in 1972, provided uniform and fundamental rules for the investment of funds held by charitable institutions and the expenditure of funds donated as “endowments” to those institutions. • In 2007, UMIFA was changed to include the word ‘prudent’ (UPMIFA). The UPMIFA (UMIFA in Indiana) now allowed the boards of institutions with endowment funds to spend principal of endowment funds when considering the following elements: • Duration and preservation of the endowment fund • Purposes of the foundation and the endowment fund • General economic conditions • Possible effects of inflation or deflation • Expected total return from income and appreciation of investments • Other resources of the foundation • Investment policy of the foundation UPMIFA

12. UMIFA (UPMIFA) But What about “historic gift value?” • When a donor makes a gift to an endowment fund he or she expects it to be permanent • Historic gift value = is the total of all gifts to an endowment fund • Historic gift value = principal = permanently restricted • Foundations have traditionally not spent the principal portion of an endowment fund • However, the 2007 change to UPMIFA, now allows the principal portion of an endowment fund to be spent to fulfill grant obligations • The decision to not invade the principal portion of the endowment fund is now the choice of the foundation, based upon its analysis of the economic conditions

13. Investment/Spending Policy The purpose of an investment/spending policy is to provide sufficient return to support the foundation’s cash needs, provide for inflation and to protect the historic gift value of the endowment funds. Items to include: • Describe duties of the Investment/Finance Committee • Clear investment goals and performance objectives • Clearly define asset allocation target and ranges • Determine investment benchmarks to measure asset performance • Monitoring and regular assessment of investment performance against benchmarks • Standard evaluation procedure for investment managers • Process for changing investment managers

14. Investment/Spending Policy The foundation makes payouts for grants and administrative fees from the earnings of the endowment funds each year. In order for the endowed assets to grow, the net total return must be enough for the annual payout needs plus inflation and real growth over time.

15. Investment/Spending Policy • Investment/spending policies use a trailing quarter average • Example 12 or 16 quarters • Levels out market fluctuations • Annual grant distributions are more consistent from year to year

16. Investment Professionals Custodian An agent, bank, trust company, or other organization which holds and safeguards the Foundation’s assets for them. Investment Advisor A person or organization employed by the Foundation to provide investment advice and evaluate the managers. (Example: FEG, Mason) Investment or Fund Manager The individual responsible for making decisions related to any portfolio of investments (often a mutual fund, pension fund, or insurance fund), in accordance with the stated goals of the fund.

17. Request for Proposal (RFP) The Foundation should periodically review its relationship with its investment advisors/managers to assure optimal investment performance. Process for selecting investment advisors or managers: • RFP reviewed by legal counsel prior to distribution • Criteria for evaluating RFPs – investment goals, fees, philosophy, client satisfaction • Communication in a timely manner with firms not chosen • Interview process – who is involved • Conflict of interest disclosed before final decision is made

18. Community Foundation Basics For Board Members Unit 5 Finance and Investments Budget, Audit and Reporting

19. Role of Finance Committee • Recommend annual Foundation budget to the full board for approval • Monitor Foundation expenditures in accordance with the annualbudget • Establish the audit process, select auditor, review annual audit, and present audit results to the full board Auditors work for you-understanding your policies and procedures are important.

20. Budgeting • Before a budget is completed the annual work plan of the foundation needs to be completed • Knowing what activities are planned for the coming year will allow for line items to be adjusted based upon the work plan • Reviewing the prior year’s budget is helpful to gain an idea of the various line item expenses based upon the past and current year activities

21. Budgeting Process • What is anticipated date of final approval? • Work backwards from this date and develop time-line for budgeting process • What is process? • Staff prepares draft for Finance Committee review • After approval by Finance Committee, presented to Board for final approval • It is important that Treasurer or Chair of Finance Committee presents budget to the Board • More meaningful when peer to peer • Staff can be available for detail questions • Important that budget be approved before beginning of new year • This prevents any delay in new year activity waiting for budget approval

22. Budgeting Revenue When it Comes to Sustainability, Not All Revenue Sources are the Same, Some are Much Better than Others • Best • Administrative Fees on Endowed Funds • Payout from Operating Endowment • Good • Administrative Fees from Pass-through Funds • Annual fundraising for Operating Funds • Not So Good • Grant from Unrestricted Fund • Draw on Operating Reserve

23. Budgeting Expenses Examples of operating expenses • Personnel • Occupancy and Administrative • Computer software • Staff and volunteer professional development • Donor Services • Marketing & Communications • Grants & Community Leadership • Professional Services – Audit, etc.

24. Budgeting Expenses Capital expenditures Office Furniture * Office Equipment Computers * Buildings • How do you budget for these? • How do you pay for these? • Do you have an operating reserve? • Capital expenditures • General operating

25. Annual Audit Why is this important? • Required by National Standards • Provides external stakeholders with an independent and objective opinion of the organization’s financial health • Provides Management Letter to the Board of Directors identifying any material weaknesses in internal controls

26. Annual Audit Who is responsible for the audit? • Audit Committee of the Board of Directors • Must be designated by the board • Can be same committee as Finance/Investment Committee • Should have an initial meeting with the auditor before the audit • At completion of the audit, external auditors are required to meet with the Audit Committee to present the audit. • Staff should be excused for a portion of this meeting so that auditors can speak freely with Audit Committee about any issues • After acceptance by the Audit Committee, the final audited financial statements and management letter are recommended for acceptance by the Board of Directors • Acceptance should be documented in the minutes

27. Interim Financial Statement Classifications do NOT equal Audit Classifications Unrestricted Net Assets Operating Funds Temporarily Restricted Assets Pass-Through Funds Permanently Restricted Net Assets Endowment Funds

28. Community Foundation Basics For Board Members Unit 5 Finance and Investments Legal/Accounting Issues

29. Audit vs. Legal Language AUDIT = FASB RULES LEGAL = UPMIFA, IRS 900 Financial Accounting Standards Board – FASB FASB standards, known as generally accepted accounting principles (GAAP), govern the preparation of corporate financial reports and are recognized as authoritative by the Securities and Exchange Commission. Audit On the Audit, some of your assets will be reported as liabilities. All of your assets may be reported as unrestricted. This is to comply with FASB standards. Federal Form 990 and Internal Reporting All gifts that are made to the community foundation are irrevocable gifts and the community foundation’s assets. Each fund has a fund agreement that is the legal document for the community foundation, which describes the donor’s intent, as well as how the fund will be administered. On the tax return, all gifts, investment activity, and grants will be included. These numbers will be different from the audit due to the FASB standards.

30. Audit vs. Legal Language (confused? Join the club) • FASB 136 – Agency Funds • Gifts from agencies into an agency endowment are liabilities on the Audit Balance Sheet (donor same as beneficiary) • No legal impact on the ownership of these assets; reported as assets on IRS Form 990 and internal statements • Materiality can be taken into account • FASB 116 – Donor Intent • Donor intent – endowment fund (permanent) • FASB 117 – Reporting Requirements • New reference FASB ASC 958-205 • Variance power allows for all assets to be classified as unrestricted • FASB 117-1 – Reporting Requirements – UPMIFA • UPMIFA allows for use of permanent portion in certain economic environments • Does not remove the fiduciary duty even though it removed the explicit requirement to maintain historic gift value (permanently restricted) • Three classifications of asset – permanently restricted, temporarily restricted, unrestricted (spendable)

31. Audit vs. Legal Language (confused? Join the club) • Board interpret the FASB rules to determine policy • Donor intent most important consideration • Fund agreements state, “principal portion may be committed, granted, or expended pursuant to distribution (or spending) policy” • Consult attorney • Be consistent with interpretation

32. Tax Compliance Federal Form 990 State Form NP-20 • Required to be filed 5 ½ months after year end • Information only return • No tax due unless Unrelated Business Income Tax (UBIT) • Most important part of Form 990 is Public Support Test • Must be at least 33 1/3% or more • Form 990 must be reviewed by Board of Directors prior to filing • Required to be filed 5 ½ months after year end • Information only return • No tax due unless Unrelated Business Income Tax (UBIT)

33. Sample Investment and Spending Policy • Sample RFP for Investment Managers • Guidance for Review of 990 • Dashboard Samples - 3

34. Does your board receive a report from the Investment/Finance committee on a regular basis? If so, what information is included? What do you think is important to be included? Does your board understand the total payout that is made each year? For grants? For administrative fees? What has been the investment return history of your foundation? Has it kept up with inflation after payouts are made? When was the last time the investment/spending policy was reviewed by the entire board?