The Foundation manages three types of endowments:
- Permanent (true) endowments: For these endowments, the principal/corpus must remain inviolate (not used) for perpetuity. A minimum of $25,000 is required to establish a permanent endowment.
- Temporary (term) endowments: For these endowments, all or part of the principal can be used after a period of time or occurrence of specified purpose, per donor’s wishes.
- Quasi-endowments: These are board-designated endowments and can only be established by the Foundation board. Quasi-endowments are treated like permanent endowments in that they are to remain inviolate until they are amended or dissolved by the board.
It is the Foundation’s policy that all gifts of $25,000 or more from wills, trusts, planned giving instruments are to be quasi-endowed unless donor specifies otherwise.
Donors who do not have the $25,000 minimum to establish a permanent endowment are allowed some flexibility in doing so. In such cases, the donor would make an initial minimum gift of $5,000 towards the establishment of the endowment. The donor would then make annual gifts of $1,000 for immediate use, while continuing to fund the endowment (the endowment must be fully funded within five (5) years).
If the donor forfeits the agreement, the existing funds may be: 1) merged with another endowment fund that best meets the intent of the donor or 2) deposited in the Foundation’s general endowment account or 3) placed in a spending account to be used for the original purpose of the former endowment.
When the endowment reaches the $25,000 threshold, the endowment is considered fully funded and the donor’s commitment is fulfilled.
The Foundation’s revenue comes from a fee that is assessed quarterly on the endowments. Also referred to as an Endowment Administration Fee, this fee covers the Foundation’s core operating costs, which include staffing support, finance and accounting, audit, insurance, legal, travel and hospitality, among other things. The Foundation is also required to have six (6) months of operating reserve, so whatever funds not used in a given year goes toward the reserve. The endowment administration fee is currently 1.25% of the endowment balance.
The Foundation assesses an annual endowment administration fee of 1.25% for its core operations. The endowment is also charged investment management fees, which is paid to investment managers. These two fees total approximately 2% annually. These are the only fees that are charged to an endowment. The fees are deducted on a quarterly basis.
Because endowments are intended to exist permanently, and because they are subject to market conditions, it is extremely important that the capital is preserved. Therefore, the Foundation has instituted a spending policy that allows up to a 4% maximum annual distribution from endowments.
The Foundation's current payout rate is 4% of a 12-quarter moving average market value of the endowment pool as of December 31st each year.
A spending policy must balance competing objectives: 1) to provide a relatively stable stream of distributions and 2) to preserve the real value of the principal. The new spending policy is consistent with what is used at the clear majority of educational institutions and will result in a more smoothed payout over time, which, in essence, will preserve the endowment principal.
The payout target rate remains 4%. With the new policy, 12 data points are used (12 quarters instead of 1 quarter). For example, a 12 quarter range would begin December 31, 2018 and reach back to the March 31, 2016 quarter.
Effective FY 2022-2023, endowment distributions/payouts will be transferred to the corresponding spending account without the use of a Request for Transfer of Funds form. Additionally, endowments established for less than one year will receive a distribution on a prorated basis. The Request for Transfer of Funds form will now only be required for making additional requests from temporary endowments (endowments beginning with 53).
Endowments are invested in a single pool. That is, we do not invest by fund. A number of factors can cause one endowment to have a distribution and another not to in a given year. First, an endowment that has been established for several years would have had enough time to build up enough earnings compared to one established for a couple of years. In other words, the one established for several years has enough built up in it to withstand losses in the market. So that, even with some market losses it would still have a balance that is more than its contribution. Second, an endowment invested in a really good year where it has earned a decent return may still have a balance that is more than the contribution even with market losses. Finally, because earnings are the difference between the contribution and the market balance, future contributions will decrease the rate of growth/change between the contribution and the balance, thereby impacting how much can be distributed from the endowment.
The Uniform Prudent Management of Institutional Funds Act (UPMIFA) allows the Foundation to make a distribution from an endowment that is underwater, when the Foundation deems it prudent, based on the circumstances. The legislation does not define “prudent” but leaves that interpretation up to the Foundation. The Foundation will look at the gift agreement, amount needed compared to the principal, and other factors, as needed.