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Information Session on Underwater Endowments

Information Session on Underwater Endowments. Overview Finance Advisory Council Meeting February 17 and 25, 2009. Description of Terms . Fund : An individual endowment account. Distribution : Annual amount approved for payout. The payment is accrued over the 12 month calculation period.

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Information Session on Underwater Endowments

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  1. Information Sessionon Underwater Endowments Overview Finance Advisory Council Meeting February 17 and 25, 2009

  2. Description of Terms Fund: An individual endowment account. Distribution: Annual amount approved for payout. The payment is accrued over the 12 month calculation period. Transfer: Portion of the Distribution that is authorized for transfer to income accounts for expenditure.

  3. Description of Terms(continued) Total Market Value: Value of Fund including contributions, realized and unrealized capital gains and losses, and income. UAS Market Value: Total Market less the accrued payout. Contribution Value: Amount of donor’s original contributions and any subsequent contributions. Also referred to as Historical Book Value.

  4. Total Return Concept • Provides for a stable level of expenditures • Protects endowment against inflation and investment performance • Total return includes income (interest, dividends) and capital gains (gains on sales, appreciation)

  5. Basis for UMIFA Consideration Foundations: Uniform Management of Institutional Funds Act (UMIFA). University Endowment: NC General Statutes 116-36(e) and 116-36(f). Rules prevent invasion of principal and protect donor-established endowments.

  6. Distribution of Earnings • Usually about 5% of market value. • Calculated based on dollars per share (currently $ 418 per share). • Unit Accounting System (UAS) tracks each Fund’s units, accrued payout amount, gross market value, and historical book value.

  7. Cause of UMIFA Concerns • Occurs when gifts added in a year with a declining market. • Calculated distribution may exceed Fund’s total return. • Fund’s gross market value may be less than historical book value if transfer occurs. • Transfer limited to avoid invasion of principal.

  8. UMIFA Considerations • Distribution of income component is always permitted. • Distribution of capital gain component permitted to extent principal is not invaded.

  9. Example A

  10. Example C

  11. Example B

  12. Example D

  13. UMIFA Procedure for UNC-CH Foundation and University Endowment 1. Review Endowments: Funds reviewed if the Total Market Value – Distribution < Contribution Value 2. Determine Income Component: Information on income and capital gain components of Distribution obtained from UNC Management Co. Inc.

  14. UMIFA Procedure for UNC-CH Foundation and University Endowment (continued) 3. Calculate Transfer: Schedule prepared by Accounting Services to calculate transfer amounts so principal invasion does not occur. 4. Record Transfer: Accounting Services posts appropriate transactions. Amount of Distribution that is not part of Transfer is separately identified.

  15. UMIFA Procedure for Other Affiliated Foundations 1. Review Endowments: A UAS variance report for UMIFA will be available in excel. 2. Determine Income Component: Information will be provided in late June 2009.

  16. UMIFA Procedure for Other Affiliated Foundations(continued) 3. Calculate Transfer: Using the available information, each foundation can calculate the appropriate transfer amounts. 4.Record Transfer: Foundations notify Accounting Services regarding the appropriate transfer amounts.

  17. UPMIFA Uniform Prudent Management of Institutional Funds Act (UPMIFA). • Enacted in 28 states, introduced in 9 others • Prudent investment management • Prudent endowment spending • Other elements

  18. UPMIFA (continued) Prudent Endowment Spending • In making a determination to distribute or accumulate, the institution is expected to act in good faith, with the care that an ordinarily prudent person in a like position would exercise under similar circumstances, and consider, if relevant, seven factors.

  19. UPMIFA (continued) Seven Factors • The duration and preservation of the endowment fund • The purposes of the institution and the endowment fund • General economic conditions • The possible effect of inflation and deflation • The expected total return from income and the appreciation of investments • Other resources of the institution • The investment policy of the institution

  20. Information Session on Underwater Endowments Questions and Discussion

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