The Advocacy Foundation Endowments Initiative Project by The Advocacy Foundation, Inc.

The e-Advocate Quarterly Magazine James 1:17-27

The Advocacy Foundation Endowments Initiative Project

“Helping Individuals, Organizations & Communities Achieve Their Full Potential”

Vol. VI, Issue XXIV – Q-2 April | May| June 2020

The Advocacy Foundation, Inc. Preparing Individuals, Organizations & Communities to Achieve Their Full Potential

The Advocacy Foundation Endowments Iniative Project

1735 Market Street, Suite 3750 Philadelphia, PA 19102

| 100 Edgewood Avenue, Suite 1690 Atlanta, GA 30303

John C Johnson III, Esq. Founder & CEO

(855) ADVOC8.0 (855) 238-6280 ยง (215) 486-2120 www.TheAdvocacyFoundation.org

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Biblical Authority James 1:17-27 Revised Standard Version (RSV) 17

Every good endowment and every perfect gift is from above, coming down from the Father of lights with whom there is no variation or shadow due to change. 18 Of his own will he brought us forth by the word of truth that we should be a kind of first fruits of his creatures. Hearing and Doing the Word 19

Know this, my beloved brethren. Let every man be quick to hear, slow to speak, slow to anger, 20 for the anger of man does not work the righteousness of God. 21 Therefore put away all filthiness and rank growth of wickedness and receive with meekness the implanted word, which is able to save your souls. 22

But be doers of the word, and not hearers only, deceiving yourselves. 23 For if anyone is a hearer of the word and not a doer, he is like a man who observes his natural face in a mirror; 24 for he observes himself and goes away and at once forgets what he was like. 25 But he who looks into the perfect law, the law of liberty, and perseveres, being no hearer that forgets but a doer that acts, he shall be blessed in his doing. 26

If anyone thinks he is religious, and does not bridle his tongue but deceives his heart, this manâ&#x20AC;&#x2122;s religion is vain. 27 Religion that is pure and undefiled before God and the Father is this: to visit orphans and widows in their affliction, and to keep oneself unstained from the world.

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Table of Contents ______ Biblical Authority I.

Introduction

II.

Types of Endowment Funds

III. Quasi-Endowments IV. How Endowment Funds Work V.

The Uniform Prudent Management of Institutional Funds Act

VI. Endowment Fund FAQâ&#x20AC;&#x2122;s VII. Criticisms VIII. The Wealthiest Charitable Foundations ______ Attachment A: Endowment Fund Disclosure Requirements Attachment B: Spending and Management of Endowments Under the UPMIFA Attachment C: Budget

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Introduction A Financial Endowment is a donation of money or property to a notfor-profit organization for the ongoing support of that organization. Usually the endowment is structured so that the principal amount is kept intact while the investment income is available for use, or part of the principal is released each year, which allows for the donation to have an impact over a longer period than if it were spent all at once. An endowment may come with stipulations regarding its usage. The total value of an institution's investments is often referred to as the institution's endowment and is typically organized as a public charity, private foundation, or trust. Among the institutions that commonly manage endowments are academic institutions (e.g., colleges, universities, and private schools), cultural institutions (e.g., museums, libraries, theaters, and hospitals), and religious organizations. The earliest "endowed chairs" were those established by the Roman emperor and Stoic philosopher Marcus Aurelius in Athens in AD 176. Aurelius created one endowed chair for each of the major schools of philosophy: Platonism, Aristotelianism, Stoicism, and Epicureanism. Later, similar endowments were set up in some other major cities of the Empire.

The practice was adapted to the modern university system beginning in England in 1502, when Lady Margaret Beaufort, Countess of Richmond and grandmother to the future king Henry VIII, created the first endowed chairs in divinity at the universities of Oxford (Lady Margaret Professor of Divinity) and Cambridge (Lady Margaret's Professor of Divinity). Nearly 50 years later, Henry VIII established the Regius Professorships at both universities, this time in five subjects: Divinity, Civil Law, Hebrew, Greek, and Physicâ&#x20AC;&#x201D;the last of those corresponding to what we now know as medicine and basic sciences. Today, the University of Glasgow has fifteen Regius Professorships. Private individuals soon adopted the practice of endowing professorships. Isaac Newton held the Lucasian Chair of Mathematics at Cambridge beginning in 1669, more recently held by the celebrated physicist Stephen Hawking. A financial endowment is typically overseen by a board of trustees and managed by a trustee or team of professional managers. The financial operation of the endowment is typically designed to achieve the stated objectives of the endowment. At universities, typically 4-6% of the endowment's assets are spent every Page 8 of 43

year to fund operations or capital spending. Any excess earnings are typically reinvested to augment the endowment and to compensate for inflation and recessions in future years. This spending figure represents the proportion that historically could be spent without diminishing the principal amount of the endowment fund. However, the financial crisis of 2007â&#x20AC;&#x201C; 2010 had a major impact on the entire range of endowments globally. Most notably, large U.S.-based college and university endowments, which had posted large, highly publicized gains in the 1990s and 2000s faced significant losses of principal across a range of investments. The Harvard University endowment fund, which held $37 billion on June 30, 2008, was reduced to $26 billion during the following year. Yale University, the pioneer of an approach that involved investing heavily in alternative investments such as real estate and private equity, reported an endowment of $16 billion as of September 2009, a 30% annualized loss that was more than predicted in December 2008. At Stanford University, the endowment was reduced from about $17 billion to $12 billion as of September 2009. Brown University's endowment fell 27 percent

to $2.04 billion in the fiscal year that ended June 30, 2009. George Washington University lost 18% in that same fiscal year, down to $1.08 billion. In Canada, after the financial crisis in 2008, University of Toronto reported a loss of 31% ($545 million) of its previous year-end value in 2009. The loss is attributed to over investment in hedge funds. Financial endowments range in size depending on the size of the institution and the level of community support. At the large end of the spectrum, the total endowment can be over one billion dollars at many leading private universities. As an example, Harvard University has the largest endowment in the world with $32.7 billion in assets as of June 30, 2013. However, each university typically has numerous endowments, each of which are frequently restricted to funding very specific areas of the university. The most common examples are endowed professorships (also known as named chairs), and endowed scholarships or fellowships. For instance, Harvard has 10,800 separate endowments.

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Types of Endowment Funds (also known as named chairs), and endowed scholarships or fellowships.

True Endowment Funds are received from external donors with restriction that the principal or gift amount is to be retained in perpetuity and cannot be spent. Term Endowment Funds stipulate that all or part of the principal may be expended only after the expiration of a stated period of time or occurrence of a specified event, depending on donor wishes. Quasi Endowment Funds must retain the purpose and intent as specified by the donor or source of the original funds and earnings may be expended only for the specified purpose.

College and University Endowments

In the United States, the endowment is often integral to the financial health of educational institutions. Alumni or friends of institutions sometimes contribute capital to the endowment. The endowment funding culture is strong in the United States and Canada but less pronounced overseas, with the exceptions of Cambridge and Oxford universities. Endowment funds have also been created to support secondary and elementary school districts in several states in the United States.

Restricted Endowments Endowment revenue can be restricted by donors in numerous ways. Professorships and endowed scholarship/fellowships are the most common restriction on large donations to an endowment. The restricted/unrestricted distinction focuses on the use of the funds; see quasi-endowment below for a distinction about whether principal can be spent.

Endowed Professorships Academic institutions, such as colleges and universities, will frequently control an endowment fund that finances a portion of the operating or capital requirements of the institution. In addition to a general endowment fund, each university may also control a number of restricted endowments that are intended to fund specific areas within the institution. The most common examples are endowed professorships

An endowed professorship (or endowed chair) is a position permanently paid for with the revenue from an endowment fund specifically set up for that purpose. Typically, the position is designated to be in a certain department. The donor might be allowed to name the position. Endowed professorships aid the university by providing a faculty member who does not have to be paid entirely out of the operating budget, allowing the Page 11 of 43

university to either reduce its student-tofaculty ratio, a statistic used for college rankings and other institutional evaluations, and/or direct money that would otherwise have been spent on salaries toward other university needs. In addition, holding such a professorship is considered to be an honor in the academic world, and the university can use them to reward its best faculty or to recruit top professors from other institutions. Reserve Officer Training Corps professors of military science, naval science and aerospace studies funded by programs like the Holloway Plan are not considered endowed chairs.

Endowed Scholarship/ Fellowship An endowed scholarship is tuition (and possibly other cost) assistance that is

permanently paid for with the revenue of an endowment fund specifically set up for that purpose. It can be either meritbased or need-based (which is only awarded to those students for whom the college expense would cause their family financial hardship) depending on university policy or donor preferences. Some universities will facilitate donors' meeting the students they are helping. The amount that must be donated to start an endowed scholarship can vary greatly. Fellowships are similar, although they are most commonly associated with graduate students. In addition to helping with tuition, they may also include a stipend. Fellowships with a stipend may encourage students to work on a doctorate. Frequently, teaching or working on research is a mandatory part of a fellowship.

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Quasi-Endowments Quasi-endowment funds are funds functioning as an endowment that are typically established by the institution from either donor or institutional funds, and will be retained and invested rather than expended. The quasi-endowment must retain the purpose and intent as specified by the donor or source of the original funds, and earnings may be expended only for those purposes. Since quasi-endowments are generally established by the institution rather than by an external source, the principal may be expended as stipulated by the donor provided the quasi-fund was not created as a permanent match. A quasi-endowment, or fund functioning as an endowment, are funds merely earmarked by an organizationâ&#x20AC;&#x2122;s governing board, rather than restricted by a donor or other outside agency, to be invested to provide income for a long but unspecified period, and the governing board has the right to decide at any time to expend the principal of such funds. Separately from the endowment versus quasi-endowment distinction, there's another two-way categorization of restricted and unrestricted, which focuses on the use of the funds. As an example, a quasi-endowment might be restricted by the donor to supporting the tennis team; the use is restricted to one purpose, but the governing board could "invade principal" to support the tennis team.

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How Endowment Funds Work Endowments & Divestment An endowment is a fund that holds its principal in perpetuity and only pays out a small portion, about 4 to 5 percent per year, that goes to campus operations and programs. Endowment investments have dual goals: to grow the principal and to generate income. Institutions invest in funds and companies that they feel will be successful and turn a profit, investments that are intended to contribute to both the growth of the principal and the income generated by the endowment. Colleges and universities are substantial investors, with combined endowment assets estimated at more than $400 billion in the United States alone. Traditionally, endowments seek investments that are are considered highly profitable as means to grow their endowment, even if some of those investments may be unethical or morally ambiguous. These investments, known as ―sin stocks,‖ include investments in companies that are related to alcohol, weapons, tobacco, and pornography. But considering the damage that fossil fuel extraction, transportation, combustion, and disposal wreaks on human health and the environment, there are few things more sinful than fossil fuels. Divestment campaigns focus on the endowment, as that is where majority of the university’s funds are invested. However, finding out just what an endowment is actually invested in is not an easy job. Most institutions keep such information, like what companies they are invested in and what guiding policies are in place to select future investments, a secret. The endowment’s fund managers (and the universities that oversee them) often insist that their investments are highly sensitive financial decisions and valuable ―trade secrets.‖ They claim that such information cannot and should not be shared with the greater public, and even sometimes the direct campus community. For the majority of these campuses, the only people who know what exactly the endowment is invested in are high-ranking university officials and their financial professionals. As institutions of higher learning, universities have a responsibility not only to their own campus, but to the greater community around them. Should growing the value of a school’s endowment be more important than the health of the hundreds of thousands of people who suffer from fossil fuel-related illnesses? More important than curbing runaway climate change, the biggest threat to our generation's futures? Where Page 16 of 43

endowments are concerned, it is time for universities, and the endowments that they represent, to practice what they preach.

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The Uniform Prudent Management of Institutional Funds Act of 2006 The Uniform Prudent Management of Institutional Funds Act (abbreviated UPMIFA) is a uniform act that provides guidance on investment decisions and endowment expenditures for nonprofit and charitable organizations. As of 2012 UPMIFA is the law in 49 states, the District of Columbia and the U.S. Virgin Islands. Neither Pennsylvania nor Puerto Rico has adopted UPMIFA. The major change in UPMIFA compared to the previous model law (the Uniform Management of Institutional Funds Act) is that it replaces a requirement that nonprofits cannot spend below the original value of contributions or ―historic dollar value‖ (HDV) with a new requirement that their investing and spending will be at a rate that will preserve the purchasing power of the principal over the long term.

Predecessor The predecessor to UPMIFA, called the Uniform Management of Institutional Funds Act (UMIFA), was approved by the National Conference of Commissioners on Uniform State Laws (NCCUSL) in 1972 and was enacted by 47 states. Under UMIFA a charity could spend from an endowment fund up to the amount of appreciation above the historic dollar value (HDV), but could never spend below HDV. As of March 2009, the North Carolina Symphony had $6.9 million in its endowment but was unable to touch a penny because North Carolina law, at that time based on the UMIFA model, said that money could not be touched because the market value of the endowment was below HDV because of the slump on Wall Street. North Carolina has since adopted UPMIFA.

Enactment The NCCUSL on July 13, 2006 approved UPMIFA as a replacement to UMIFA, adding the P for ―prudence‖, which emphasizes the perpetuation of the original purchasing power of the fund, not just the original dollars contributed to the fund. A key provision of UPMIFA states that: ―Subject to the intent of a donor expressed in the gift instrument an institution may appropriate for expenditure or accumulate so much of an endowment fund as the institution determines is prudent for the uses, benefits, purposes, and duration for which the endowment fund is established. This uniform law is adopted state by state, and therefore the law may be slightly different in each state. For example, on September 20, 2010, Gov. David Paterson

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signed into law the New York version of UPMIFA called the New York Prudent Management of Institutional Funds Act or NYPMIFA.

Impact on nonprofits The major impact of UPMIFA on nonprofits is that they are now allowed to spend from an underwater endowment if the governing board determines it is prudent to do so based on seven specific factors. Many states have adopted an optional provision to limit the spending to 7%. This board-approved spending policy must be based on the average market value of the endowment investments over the 12 quarters (or more) immediately preceding the calculation. UPMIFA applies only to permanent restricted endowments, which are restricted by the donor or law. In addition, UPMIFA contains several standards of prudence regarding investing decisions and delegation of investment management. In March and April 2009, the Association of Governing Boards of Universities and Colleges (AGB) conducted a survey of colleges, universities and affiliated foundations in states in which UPMIFA has been enacted to learn how institutions have been managing endowment spending under UPMIFA. The survey found that:     

On average, 38 percent of the dollar value of participants total endowment pool was underwater as of December 31, 2008. 31.3 percent are continuing distributions in keeping with their normal spending rule 26.8 percent are suspending distributions from funds at or below HDV 15.6 percent are making distributions from underwater funds at some rate less than their normal spending rule by yielding more than interest and dividends 9.5 percent are distributing only interest and dividends

Harvey Dale, director of the National Center on Philanthropy Law at New York University, said changing the law is long overdue. ―There are a lot of more recent funds that have gone underwater because of the current financial tsunami,‖ Dale said. ―So what do you do? If you’re in a state that still has UMIFA, you’re screwed.‖ Rebeka Mazzone, CPA, recommends: ―[Today’s boards] ... need to consider what spending rules would be reasonable and appropriate in relation to the assets available, the wishes of the donor, the role that each investment or course of action plays within the overall investment portfolio, and the needs of the institution and the fund to make distributions and to preserve capital.‖

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Endowment Fund FAQâ&#x20AC;&#x2122;s ______ Q1:

What is an Endowment Fund?

An endowment fund is a fund held by a charitable organization in which the donor has imposed a restriction that prohibits some or all of the fund from being spent currently. This would include, for example, a gift that is to be held "in perpetuity," or one that must be held for 25 years before it can be spent. Q2: How is an endowment fund created? An endowment fund may be created by virtually any means that indicates that the donor intended to create an endowment fund. Such means include a direct instruction from the donor, a donor's gift designated for an existing endowment fund, or an otherwise undesignated gift that is received in response to a request for an endowment gift. Q3: How must an endowment fund be invested? In general, the board members of a foundation must perform their duties, including their investment duties, with the care an ordinarily prudent person in a like position would exercise under similar circumstances. Various laws governing the investment of charitable assets "â&#x20AC;&#x2013; including the Uniform Prudent Management of Institutional Funds Act (UPMIFA), the Uniform Prudent Investor Act (UPIA), and the Third Restatement of Trusts "â&#x20AC;&#x2013; all embrace the concept of modern portfolio theory. Under modern portfolio theory, prudent investment policy is based on diversification of assets, long-term performance benchmarks and the importance of a portfolio's total return on investment. Q4: How much may be spent from an endowment? Unless the donor specifies a particular percentage or dollar amount that is to be spent periodically from the endowment, the governing body of the foundation is responsible for determining the amount that may be spent currently from an endowment. In doing so, the board must act reasonably, and must take into account 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 or deflation, the expected total return from income and the appreciation of investments, other resources of the institution and the investment policy of the institution.

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Q5: What happens if the current value of an endowment is below its original value? Unless expressly provided for by the donor, there is no absolute requirement that the value of an endowment fund must never fall below its original value. The board is given considerable discretion in determining spending from an endowment, but it must always act prudently, taking into account the considerations listed in Q4 above. Over the long term, it is generally expected that a perpetual endowment fund should maintain its value, adjusted for inflation, but short-term deviations from this objective may sometimes be justified as "prudent,"â&#x20AC;˘ depending on the particular circumstances. It is important to keep in mind that private foundations must always comply with the 5percent payout requirement imposed by federal tax law, even if distributions at that level would cause the endowment fund to fall below its target level. Q6: How does the endowment spending policy relate to the 5-percent payout requirement for private foundations? A private foundation must meet the 5-percent payout requirement that is imposed by federal tax law even if distributions at that level would cause the endowment fund to lose value or not meet its target value. Note: The 5-percent payout requirement applies only to organizations that are private foundations. Q7: How do "board-restricted" endowment funds differ from "donor-restricted" endowment funds? If, at the time a contribution is made to a foundation, the donor restricts the type or manner of investing the assets of the gift, or restricts the time or manner of making distributions of earnings from the gift, such restrictions normally can be modified or eliminated only with the written consent of a living donor or pursuant to a court proceeding. This includes restrictions establishing the contribution as part of the permanent endowment funds of the foundation. Restrictions placed on assets of the foundation by its governing board, however, such as designating a portion of the foundation's assets as permanent or endowment funds, may usually be released or modified by resolution of the board acting alone. Q8: Can the amount available for spending be determined by looking at the "unrestricted funds" column on a foundation's financial statement? Generally, no. In most cases, financial accounting standards treat as unrestricted assets any portion of an endowment fund that exceeds the fund's historic dollar value. For legal purposes, this entire amount may or may not be available for current expenditure, depending on the board's determination of what is prudent.

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Q9: Can endowment principal be used as a last resort if the foundation becomes insolvent? Generally, no. Insolvency does not excuse a foundation from its obligation to maintain an endowment fund as such. As a general rule, the portion of an endowment fund that is not available for current spending is not available to creditors unless a court authorizes the expenditure based on certain extraordinary circumstances. Q10: What responsibilities does the board have with respect to the endowment? The governing board of a foundation is ultimately responsible for all aspects of the administration of an endowment fund, including its investment and determination of how much can be spent from year to year. In making these decisions, each board member must act in a manner he or she reasonably believes to be in the best interests of the foundation, and with the care of an ordinarily prudent person in a similar position under similar circumstances. - See more at: http://www.mcf.org/publictrust/faq_endow#sthash.mcIdOuRq.dpuf

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Criticisms Officials in charge of the endowments of some universities have been criticized for "hoarding" and reinvesting too much of the endowment’s income. Given a historical endowment performance of 10–11%, and a payout rate of 5%, around half of the endowment’s income is reinvested. Roughly 3% of the reinvestment is used to keep pace with inflation, leaving an inflation-adjusted 2% annual growth of the endowment. Of course, many endowments fail to earn 10-11%. Two arguments against inflation-adjusted endowment growth are: 

The future needs the money claim that the future the present due to specialization. In Memorial Prize in laureate James Tobin intergenerational



A constantly growing endowment shields universities from competitive forces - As the endowment’s reinvestment starts becoming a larger part of its growth, the need for happy students and alumni to donate funds to the university’s budget and endowment is reduced. Therefore, traditional market forces that provide incentives to run a university efficiently may be greatly reduced and at least theoretically lead to university administration not being held accountable for its actions. (However, this might also be considered a worthy goal, as it would mean the freedom of academia from financial concerns, which could cause a wider range of research topics to be available to students and faculty.)

Hoarding money Large endowments have been criticized for "hoarding" money. Most philanthropies are required by federal law to distribute 5% of their assets per year, but university endowments are not required to spend anything. Many universities with very large endowments would require less than 5% to pay full tuition for all their students. For example, it has been estimated that if in 2006 all the Harvard students had paid the maximum in tuition and fees, it would have amounted to less than $300

less than the present - Some will be much richer materially than technological innovation and counterpoint, Nobel Economic Sciences makes a case for equity.

million. In 2007, if Harvard had spent 5% of its $34.6 billion endowment, all Harvard undergraduate and graduate students could have attended for free and the university would still have had $1.3 billion left over. It would require less than 1% of the endowments of Harvard and Yale to allow all students to attend tuition-free; Stanford, MIT, Princeton and Rice would require less than 2% of their endowments and 29 other schools would require less than 3% for all their students to attend tuitionfree. Despite the decreasing values of endowments, congressmen, including Page 26 of 43

Charles Grassley, have questioned whether the endowments are contributing enough to maintain their tax-exempt status. After reviewing work in developing nations by 50 higher education institutions with endowments over $1 billion, Peter Hotez of George Washington University has stated that "pharmaceutical companies are doing more for the poorest people [in the world] than most of our wealthiest universities."

Socially and Environmentally Responsible Investing Many college and university endowments have come under fire in recent years for practices such as investing in fossil fuels, "land grabs" in poor countries and high-risk, high-return investment practices that led to the financial crisis.

Endowment Invasion Endowment invasion is when an institution draws on its financial endowment to pay off debts and cover the yearly operating expenses. In New York the practice requires approval from the state attorney generalâ&#x20AC;&#x2122;s office and the New York State Supreme Court. By 2009 most states had adopted Uniform Prudent Management of Institutional Funds Act, a law which allows "invading principal". It is considered a last resort for any institution to stave off closure. Examples ď&#x201A;ˇ

From 2003 to 2009 New York City Opera drew down their endowment from $57 million to $16 million to pay off debts and cover annual operating expenses.

ď&#x201A;ˇ

In the 1980s the New-York Historical Society began using money from the their endowment to pay their annual operating costs and cover their salaries to the point where by 1988 they had only enough money in their endowment to pay for another 18 months of operating expenses.

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The Wealthiest Charitable Foundations This is a list of wealthiest charitable foundations worldwide. It consists of the 30 largest charitable foundations, private foundations engaged in philanthropy, and other charitable organizations. Only nonprofit foundations are included in this list. Organizations that are part of a larger company are excluded, such as holding companies. The entries are ordered by the size of the organization's total financial endowment (that is, the total value of invested donations). The endowment value is an estimate measured in United States dollars, based on the exchange rates on June 24, 2012. Due to fluctuations in holdings, currency exchange and asset values, this list only represents the valuation of each foundation on a single day.

Wealthiest Foundations Ran Organization k

Country

Headquarter Endowmen s t (USD)

Endowmen Founde Reference t d s (home currency)

2 3

5 6

Stichting INGKA Foundation Bill & Melinda Gates Foundation Wellcome Trust Howard Hughes Medical Institute Ford Foundation

Netherland Leiden, Netherlands s

$36.0 billio n

1982

[1]

United Seattle, States Washington

$34.6 billio n

1994

[2]

United London Kingdom

$28.3 billio ÂŁ16.6 billio n n (GBP)

1936

[3]

1953

[4]

$11.0 billion

1936

[2]

$10.5 billio n

1982

[2]

$10.0 billio $36.7 billio n n (AED)

2007

[5]

$9.0 billion

1972

[2]

United Chevy Chase, $16.1 billio States Maryland n New York United City, New States York United Los Angeles, States California

J. Paul Getty Trust Mohammed United bin Rashid Al Arab Dubai Maktoum Emirates Foundation Robert Wood United Princeton, Johnson States New Jersey

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Ran Organization k

Country

Headquarter Endowmen s t (USD)

Endowmen Founde Reference t d s (home currency)

9 10

11 12 13 14 15 16

Foundation Li Ka Shing Hong Foundation Kong The Church United Commissioner Kingdom s for England William and United Flora Hewlett States Foundation Kamehameha United Schools States Lilly United Endowment States W.K. Kellogg United Foundation States Robert Bosch Germany Foundation Garfield United Weston Kingdom Foundation David and United Lucile Packard States Foundation John D. and Catherine T. United MacArthur States Foundation The Pew United Charitable States Trusts Gordon and United Betty Moore States Foundation Knut and Alice Sweden Wallenberg Foundation Andrew W. United Mellon States

Hong Kong

$8.3 billion

$64.4 billio n (HKD)

1980

[6]

London

$8.1 billion

£5.2 billion (GBP)

1948

[7]

Menlo Park, California

$7.4 billion

1967

[2]

$7.3 billion

1887

[8]

1937

[2]

1930

[2]

Honolulu, Hawaii Indianapolis, Indiana Battle Creek, Michigan

$7.28 billio n $7.26 billio n

Stuttgart

$6.9 billion

€4.5 billion (EUR)

1964

[9]

London

$6.5 billion

£4.2 billion (GBP)

1958

[10]

Los Altos, California

$5.8 billion

1964

[2]

Chicago, Illinois

$5.7 billion

1975

[2]

Philadelphia, Pennsylvania

$5.6 billion

1948

[11]

Palo Alto, California

$5.4 billion

2000

[2]

Stockholm

kr $5.3 billion 32.7 billion (SEK)

1917

[12]

New York City, New

$5.26 billio n

1969

[2]

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Ran Organization k

Country

Headquarter Endowmen s t (USD)

Endowmen Founde Reference t d s (home currency)

23 24

26 27 28

Foundation The MasterCard Foundation William Penn Foundation The Leona M. and Harry B. Helmsley Charitable Trust Tulsa Community Foundation The California Endowment Rockefeller Foundation

29 Realdania Calouste 30 Gulbenkian Foundation The Kresge 31 Foundation

York Toronto, Canada

$8.2 billion

2006

[13]

United Philadelphia, States Pennsylvania

$4.4 billion

1945

[2]

New York United City, New States York

$4.1 billion

1999

[2]

United Tulsa, States Oklahoma

$3.8 billion

1998

[2]

$3.7 billion

1996

[2]

$3.51 billio n

1913

[2]

Canada

United Los Angeles States New York United City, New States York Copenhagen

$3.5 billion

â&#x201A;Ź2.8 billion (EUR)

2000

[14]

Denmark

Lisbon

$3.5 billion

â&#x201A;Ź2.8 billion (EUR)

1956

[15]

Portugal

1924

[2]

United Troy, States Michigan

$3.0 billion

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References ______ 1. http://en.wikipedia.org/wiki/Financial_endowment 2. http://en.wikipedia.org/wiki/Endowment_invasion 3. http://en.wikipedia.org/wiki/List_of_wealthiest_charitable_foundations 4. http://www.mcf.org/publictrust/faq_endow 5. http://www.finance.umich.edu/finops/accounting/gifts/endowments/quasi 6. http://en.wikipedia.org/wiki/Uniform_Prudent_Management_of_Institutional_Fund s_Act 7. http://www.wearepowershift.org/campaigns/divest/endowments

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Attachment A Endowment Fund Disclosure Requirements

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Endowment Fund Disclosure Requirements Not-for-Profit Services Group May 2012

www.KahnLitwin.com Boston ♦ Newport ♦ Providence ♦ Waltham 888-KLR-8557 ♦TrustedAdvisors@KahnLitwin.com

Updated May 2012 In July 2006, the Uniform Law Commission (ULC; formerly known as the National Conference of Commissioners on Uniform State Laws) that serves as a guideline for states to use in enacting legislation, passed a modernized version of the Uniform Management of Institutional Funds Act of 1972 (UMIFA). UMIFA was the model act on which 46 states and the District of Columbia have based their primary laws governing the investment and management of donor-restricted endowment funds by not-for-profit organizations. The new act is known as the Uniform Prudent Management of Institutional Funds Act (UPMIFA). In August 2008, the Financial Accounting Standards Board (FASB) issued an FASB Staff Position (FSP) that provides guidance on the net asset classification of donor-restricted endowment funds for a not-for-profit organization that is subject to an enacted version of the Uniform Prudent Management of Institutional Funds Act of 2006. The FSP staff position is known as FSP FAS117-1— Endowments of Not-for-Profit Organizations. In addition to providing guidance on the net asset classification of donor-restricted funds that are subject to an UPMIFA law, the FSP also imposes new disclosure requirements aimed at improving disclosures about an organization's endowment funds (both donor-restricted endowment funds and board-designated endowment funds), whether or not the organization is subject to UPMIFA. This whitepaper discusses only the new endowment fund disclosure requirements since neither RI nor Massachusetts have enacted a version of UPMIFIA. The provisions of this FSP are effective for fiscal years ending after December 15, 2008. Disclosure Requirements: (note: an example of the implementation of these requirements is presented at the end of this whitepaper.) The theory behind these new disclosure requirements is to provide the readers of an organization’s financial statements with a holistic picture of the endowment and its component pieces as well as insight into how an organization is approaching its stewardship and management responsibilities. While this is especially important in the more flexible UPMIFA environment, the disclosure requirements apply to all donor-restricted endowments as well as board designated funds-functioning as endowment. Here are the disclosure requirements: •

A description of the governing board's interpretation of the law(s) that underlies the organization's net asset classification of donor-restricted endowment funds. i.e. what organization classifies as permanently restricted net assets.

•

A description of the organization's policy(ies) for the appropriation of endowment assets for expenditure (i.e. its endowment spending policy(ies)).

•

A description of the organization's endowment investment policy or policies. The description must include the organization's return objectives and risk parameters; how those objectives relate to the organization's endowment spending policy(ies); and the strategies employed for

Updated May 2012 achieving those objectives. (It is interesting to note that since the FASB used the plural here, they must believe that it is acceptable for an organization to have multiple endowment funds and different expenditure policies among them. This is not a concept that received much exposure prior to this writing.) •

The composition of the organization's endowment by net asset class at the end of the period, in total and by type of endowment fund. This disclosure should show donor restricted endowment funds separately from board-designated endowment funds.

•

A reconciliation of the beginning and ending balance of the organization's endowment, in total and by net asset class, including, at a minimum, the following line items (as applicable): o investment return, separated into investment income (for example, interest, dividends, rents) and net appreciation or depreciation of investments; o contributions; o amounts appropriated for expenditure; o reclassifications; and o other changes

In accordance with the requirements of FAS Statements 117 and 124, an organization also shall provide information about the net assets of its endowment funds, including: •

The nature and types of permanent restrictions or temporary restrictions (as required by paragraphs 14 and 15 of FAS Statement 117)

•

The aggregate amount of the deficiencies for all donor-restricted endowment funds for which the fair value of the assets at the reporting date is less than the level required by donor stipulations or law (required by paragraph 15(d) of FAS Statement 124).

Example of the Required Disclosures Footnote X: Endowment Organization A's endowment consists of approximately 100 individual funds established for a variety of purposes. Its endowment includes both donor-restricted endowment funds and funds designated by the Board of Trustees to function as endowments. As required by generally accepted accounting principles, net assets associated with endowment funds, including funds designated by the Board of Trustees to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions.

Updated May 2012 Interpretation of Relevant Law The Board of Trustees of Organization A has interpreted the State Management of Institutional Funds Act (SMIFA) as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, Organization A classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the organization in a manner consistent with the standard of prudence prescribed by SMIFA. In accordance with SMIFA, the organization considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: (1) (2) (3) (4) (5) (6) (7)

The duration and preservation of the fund The purposes of the organization and the donor-restricted 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 organization The investment policies of the organization.

200Y Endowment Net Asset Composition by Type of Fund as of June 30, 200Y

Unrestricted Donor-restricted endowment funds Board-designated endowment funds Total Endowment Funds

$(200) 6,084 $5,884

Temporarily Restricted $38,789 0 $38,789

Permanently Restricted $99,759 0 $99,759

Total $138,348 6,084 $144,432

Updated May 2012 Changes in Endowment Net Assets for the Fiscal Year Ended June 30, 200Y

Unrestricted Endowment net assets, beginning of year Investment income Net realized and unrealized gains and (losses) Total Investment Return Contributions Appropriation of Endowment assets for expenditure

Temporarily Restricted

Permanently Restricted

Total

$6,947

$46,380

$95,673

$149,000

298

2,396

286

2,980

(413)

(2,185)

(115) 0

211 0

286 2,000

382 2,000

(448)

(7,002)

(7,450)

(1,000)

(800)

1,800

(2,598)

Other changes: Transfer to comply with the RI MIFA requirement for permanently restricted assets to keep pace with inflation. Transfers to create boarddesignated Endowment funds Endowment net assets, end of year

500 $5,884

0 $38,789

0 $99,759

500 $144,432

Updated May 2012 Permanently and Temporarily Restricted Net Assets (Endowment Only) (Disclosure required by paragraphs 14 and 15 of Statement 117) 200Y Permanently Restricted Net Assets (1) The portion of perpetual endowment funds that is required to be retained permanently either by explicit donor stipulation or by SPMIFA Total endowment funds classified as permanently restricted net assets Temporarily Restricted Net Assets (1) Term endowment funds

$99,759 $99,759

$4,388

(2) The portion of perpetual endowment funds subject to a time restriction under SPMIFA: Without purpose restrictions With purpose restrictions Total endowment funds classified as temporarily restricted net assets

19,302 15,099 $38,789

Funds with Deficiencies (Disclosure required by paragraph 15(d) of Statement 124) From time to time, the fair value of assets associated with individual donor restricted endowment funds may fall below the level that the donor or SMIFA requires the Organization to retain as a fund of perpetual duration. In accordance with GAAP, deficiencies of this nature that are reported in unrestricted net assets were $200 as of June 30, 200Y. These deficiencies resulted from unfavorable market fluctuations that occurred shortly after the investment of new permanently restricted contributions and continued appropriation for certain programs that was deemed prudent by the Board of Trustees.

Updated May 2012 Return Objectives and Risk Parameters Organization A has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of the endowment assets. Endowment assets include those assets of donor-restricted funds that the organization must hold in perpetuity or for a donor-specified period(s) as well as board-designated funds. Under this policy, as approved by the Board of Trustees, the endowment assets are invested in a manner that is intended to produce results that exceed the price and yield results of the S&P 500 index while assuming a moderate level of investment risk. Organization A expects its endowment funds, over time, to provide an average rate of return of approximately 9 percent annually. Actual returns in any given year may vary from this amount. Strategies Employed for Achieving Objectives To satisfy its long-term rate-of-return objectives, Organization A relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The Organization targets a diversified asset allocation that places a greater emphasis on equity-based investments to achieve its long-term return objectives within prudent risk constraints. Spending Policy and How the Investment Objectives Relate to Spending Policy Organization A has a policy of appropriating for distribution each year 5 percent of its endowment fund's average fair value over the prior 12 quarters through the calendar year-end preceding the fiscal year in which the distribution is planned. In establishing this policy, the Organization considered the long-term expected return on its endowment. Accordingly, over the long term, the Organization expects the current spending policy to allow its endowment to grow at an average of 4 percent annually. This is consistent with the organization's objective to maintain the purchasing power of the endowment assets held in perpetuity or for a specified term as well as to provide additional real growth through new gifts and investment return.

Updated May 2012

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Attachment B Spending and Management of Endowments Under the UPMIFA

Page 36 of 43

Spending and Management of Endowments under UPMIFA Findings of a 2010 Survey of Colleges, Universities, and Institutionally Related Foundations Conducted by AGB in partnership with Commonfund Institute

Report Author: David Bass, Director of Foundation Programs and Research Contact: David Bass, davidb@agb.org, 202.776.0850 Copyright ÂŠ 2010 by the Association of Governing Boards of Universities and Colleges, 1133 20th Street, NW, Suite 300, Washington, D.C. 20036.

Spending and Management of Endowments under UPMIFA

ver the past two years, adoption of the Uniform Prudent Management of Institutional Funds Act (UPMIFA) has fundamentally changed the regulatory context in which boards make decisions regarding spending from underwater endowments. This survey of 207 colleges, universities, and affiliated foundations provides the only national data on the ways higher education boards are managing spending under the new law and provides college and university boards and executives with important insights into the ways spending and governance practices are evolving. The value of higher education endowments declined by approximately 19 percent on average between June 2008 and June 2009 and may have rebounded by 20 percent between June 2009 and 2010. On average, the value of higher education endowments is, however, still below their value two years ago, and the purchasing power of many higher education endowments is significantly eroded from June 2008 levels. This survey demonstrates that UPMIFA has enabled institutions to provide ongoing support for endowed purposes during a period of unprecedented financial hardship. It also suggests that UPMIFA has encouraged governing boards of colleges, universities, and affiliated foundations to devote increased attention to endowment spending and develop increasingly sophisticated and supple decision-making practices. The Uniform Law Commission promulgated the Uniform Prudent Management of Institutional Funds Act (UPMIFA) in August 2006 after four years of drafting and study. UPMIFA represents a substantial modernization of the law of nonprofit endowment investment governance, which had remained largely unchanged since the 1972 Uniform Management of Institutional Funds Act (UMIFA). UPMIFA has been enacted in 46 states, the District of Columbia, and the U.S. Virgin Islands, and introduced in New York and Mississippi; Florida and Pennsylvania are the only states in which UPMIFA has not been introduced or enacted. Perhaps the main change made by UPMIFA is the elimination of the concept of “historic dollar value” or HDV as the default amount of an endowment fund that must be preserved in perpetuity in the absence of specific donor stipulations as to spending or accumulation. UPMIFA replaces this rule with a more carefully articulated standard of prudence and enumerates seven factors boards should take into account when making spending decisions. This has provided boards with greater flexibility to distribute funds from “underwater” endowments (accounts that have fallen below HDV) but has also forced them to develop new processes for making decisions regarding spending and accumulation. Although UPMIFA does not specify an amount that must be set aside as principal, it emphasizes the perpetuation of the purchasing power of the fund, and new accounting standards (addressed herein) require boards to define amounts of funds to be classified as permanently restricted. The Association of Governing Boards of Universities and Colleges (AGB), Commonfund Institute, and the National Association of College and University Business Officers (NACUBO) have worked closely with the Uniform Law Commission throughout the drafting of UPMIFA and jointly funded educational materials to help inform lawmakers and charities about the new statute. This survey, conducted in partnership with Commonfund Institute and building on similar research conducted by AGB in 2009, documents significant changes in spending practices following enactment of UPMIFA as well as changes in the way boards have adapted to the new law since AGB’s 2009 survey on the same subject. It is hoped that findings and related governance recommendations in this report will help boards address the challenge of balancing the need for current spending with their obligation to rebuild and sustain the purchasing power of their endowments in coming years.

Key Findings

n average, underwater funds accounted for 22.4 percent of the total value of endowment funds held by colleges and universities at the end of the 2009 fiscal year ending June 30, 2009 (NCSE data). 1

Under UPMIFA, institutions and affiliated foundations have adopted new spending practices yielding greater ongoing distributions from underwater endowments as well as adopting a variety of more flexible methods for determining distributions from underwater endowments. AGB’s survey findings include (as seen in Table 4): • 46.9 percent are continuing distributions in keeping with their normal spending rule, an increase of 8.7 percentage points over practice prior to the enactment of UPMIFA; • 25.1 percent are discontinuing all distributions from underwater funds, a decrease of 16.4 percentage points from practice prior to UPMIFA; • 9.7 percent are distributing only interest and dividends, a decrease of 7.2 percentage points from practice prior to UPMIFA; • 12.5 percent employ a threshold or tiered approach to spending or some other flexible methodology; and

• 6.8 percent of institutions described a flexible process for determining distributions from underwater funds that was used in lieu of or in conjunction with the spending practices listed above. After the enactment of UPMIFA, 47.1 percent of institutions and foundations which previously discontinued all distributions or distributed only interest and dividends from underwater endowments adopted a new spending approach likely to yield grater ongoing distributions supporting endowment purposes. College, university, and affiliated foundation boards are actively involved in making decisions about spending from underwater funds. Survey findings include: • 75.8 percent of boards approve decisions regarding spending from underwater funds;

• 68.2 percent of institutions have some formal policy addressing spending from underwater funds; and • 48.3 percent of boards document decisions regarding underwater funds in their minutes.

Only 14.5 percent of institutions and foundations have made use of provisions in UPMIFA allowing charities to modify restrictions on smaller and older funds that have become impracticable or wasteful. Institutions and foundations have also made changes to endowment-management practices not immediately related to spending from underwater funds but in keeping with UPMIFA’s updated prudence standard for investment and management of charitable funds. Nearly one-third (28.5 percent) of institutions have changed their approach to portfolio construction to focus on factors such as risk reduction, inflation protection, and liquidity; 11.6 percent have made changes in their due diligence and risk management procedures; and 19.3 percent have made changes in investment management staffing and support. AGB’s recent Statement on Conflict of Interest has advocated heightened conflict-of-interest standards for board members involved in investment decision making. While 97 percent of boards have some type of conflict-of-interest policy, only 60.9 percent of institutions and foundations have conflict-of-interest policies that apply to all volunteers responsible for investment decision making; 15.9 percent have policies which include especially rigorous provisions applicable to investment decision makers; and 13.5 percent have policies addressing board members’ parallel or “side-by-side” investments.

1. NACUBO-Commonfund Study of Endowments

Survey Participants

nvitations to participate in the online survey were sent to chief financial officers of public and private institutions and CEOs and finance officers of foundations affiliated with public institutions in the 46 states (and the District of Columbia) that had enacted UPMIFA as of April 8, 2010. The survey was open between April 8 and May 18, 2010. Two-hundred and seven institutions and affiliated foundations submitted usable data, including 110 private institutions, 77 institutionally related foundations, and 20 public institutions. Unlike private grant-making foundations, the institutionally related foundations (IRFs or “affiliated foundations”) included in this survey are 501(c)(3) charities that raise and manage private resources in support of an affiliated public institution or system. Public institution endowment may be held and managed by the institution itself but is more commonly held by a separate institutionally related foundation. For reporting purposes, some public institutions combine endowment held directly by the institution along with endowment held by its affiliated foundation(s). Asset sizes used throughout this report refer to total investable assets, excluding pension fund assets and operating cash, which may include donor-restricted endowment as well as “quasi” or board-designated endowment. The spending provisions of UMIFA and UPMIFA apply only to donor-restricted endowment, but institutional endowment sizes reported in the NACUBOCommonfund Study of Endowments (NCSE) generally refer to the larger pool of total investable assets.

Table 1: Endowment cohorts and institution types Aggregate

$0-24 m

$25-49m

$50-149m $150-499m

$500m+

Aggregate 207 (100%)

48 (23%)

32 (15%)

54 (26%)

48 (23%)

25 (12%)

28 (58.3%)

9 (36%)

4 (8.3%)

0 (0%)

16 (33.3%)

16 (64%)

Private

110 (53.6%)

24 (50%)

Public

20 (9.7%)

6 (12.5%)

18 (56.25%) 31 (57.4%)

IRF

77 (37.2%)

18 (37.5%) 10 (31.25%) 17 (32.1%)

4 (12.5%)

Chart1: Participants by institution type

6 (11.1%)

Chart 2: Participants by endowment size IRF

$0-24m

Public 23%

Private

37.2%

$25-49m

12%

$50-149m 23%

53.6% 15%

$500+m 26%

9.7%

$150-499m

The 207 institutions and foundations included in the current survey represent a similar distribution in terms of endowment size to the 842 institutions included in the 2009 NCSE data. The current AGB data include a higher proportion of public institutions and foundations than the NCSE sample.

Graph 1: Comparison of current AGB sample with 2009 NCSE sample Percentage of Total Respondents

30% 25% 20%

AGB 15%

NCSE

10% 5% 0% $0-24m

$25-49m

$51-100m

$150-499m

Total Investable Assets

$500m+

Spending from Underwater Endowments

MIFA defined historic dollar value (HDV) as the value of contributions made to an endowment fund, without increases or decreases from investment results, inflation, or other factors. “Underwater funds” refers to donorrestricted endowment accounts for which the market value has fallen below historic dollar value. According to NCSE 2009 data, underwater funds accounted for an average of 22.4 percent of the total value of true endowment funds held by colleges, universities, and affiliated foundations in fiscal year 2009. The proportion of underwater funds correlates closely to endowment size. Underwater funds accounted for 26 percent of assets at institutions with endowments of $25 million or less and just 11.5 percent of endowments held by institutions with investable assets of $1 billion or more. Public institutions and foundations also had higher percentages of underwater endowment (26 and 36 percent, respectively) compared with private institutions, which had 16.9 percent of endowment value underwater. This reflects the fact that many public institutions have more recently established endowment funds that have had less time to appreciate in value.

Spending Practices Prior to the Enactment of UPMIFA Under UMIFA, a charity could generally spend from an endowment fund any amount of the appreciation above HDV that it deemed prudent. In the absence of specific donor stipulations regarding spending or accumulation of funds, charities were, in most UMIFA states, obliged to suspend distributions from underwater accounts or limit distributions to amounts equal to interest and dividends generated by the account. In practice, most charities sought not only to preserve the original dollar value of the fund but to grow the fund and sustain its long-term purchasing power. It should be emphasized that both UMIFA and UPMIFA are default statutes which apply only to donor-restricted endowments for which no gift instrument exists or for which gift instruments do not include stipulations regarding spending or accumulation. UMIFA posed several serious challenges for institutions. Following the market decline of 2001 and 2002, many institutions systematically reviewed all their gift agreements to determine if they specified spending practices and, in some cases, contacted donors to amend agreements and/or make supplementary gifts to provide ongoing support for the endowment purpose while the fund recovered. Many institutions also tapped operating reserves and other unrestricted funds to supplement decreased distributions from underwater accounts. Survey participants reported the following spending practices prior to the enactment of UPMIFA (Table 2): • 41.5 percent of all institutions and foundations surveyed suspended all distributions from funds at or below HDV; • 38.2 percent continued distributions in accordance with their normal spending rule; • 16.9 percent distributed only interest and dividends for underwater funds; and • 3.4 percent made distributions at some other reduced rate.

This is generally in keeping with findings of AGB’s 2009 survey and, once again, the high proportion of institutions (38.2 percent) that reported that they had “continued distributions in keeping with (their) normal spending rule” prior to the enactment of UPMIFA is surprising. In most states, UMIFA was interpreted as requiring charities to suspend distributions from donor-restricted underwater funds or distribute only interest and dividends unless the gift instrument specified some other spending approach. Comments made by some institutions reporting that they continued making distributions in keeping with their normal rate indicate that they in fact suspended distributions from underwater funds and tapped quasi-endowment or operating reserves or solicited new gifts to continue funding endowment purposes at expected levels. Others commented that gift agreements specifically allowed for spending below HDV and, although the question explicitly asked about spending from accounts without donor direction as concerns spending or accumulation, this suggests that some respondents who reported continued distributions were likely referring to distributions from funds that would not have been subject to UMIFA’s spending rule. Public institutions and foundations, which typically have a larger proportion of recently established endowment funds, were more likely to suspend distributions than were private institutions. The likelihood that an institution would continue

to spend from underwater funds correlates directly with endowment size and may reflect the fact that underwater funds account for a significantly smaller proportion of larger, and presumably older, endowments.

Table 2: Spending practices prior to the enactment of UPMIFA Aggregate $0-24 m $25-49m $50-149m $150-499m $500m+ Private

IRF

Public

Number

207

110

Discontinued all distributions for funds at/below HDV

41.5%

56.3%

53.1%

42.6%

29.2%

20.0%

35.5%

42.9% 80.0%

Distributed only interest and dividends for funds at/below HDV

16.9%

12.5%

16.7%

22.9%

20.0%

15.5%

20.8% 10.0%

Continued distributions in keeping with normal spending rule

38.2%

29.2%

31.3%

38.9%

45.8%

48.0%

47.3%

35.1%

5.0%

Continued distributions at a reduced rate other than interest and dividends

3.4%

6.3%

3.1%

1.9%

2.1%

4.0%

0.9%

6.5%

5.0%

Spending Practices under UPMIFA As mentioned above, UPMIFA eliminates the concept of HDV and requires institutions to consider a range of factors, including the duration and preservation of the fund, the purposes of the institution and the fund, general economic conditions, the possible effects of inflation and deflation, the expected total return from income and appreciation of investments, other resources of the institution, and the investment policy of the institution when making decisions about spending or accumulation of endowments. Thirteen states and the U.S. Virgin Islands included an optional provision which creates a rebuttable presumption of imprudence for spending at rates over 7 percent. Institutions and foundations reported (Table 4) that they currently follow or plan to follow the practices listed below for spending from underwater endowments (for which gift agreements do not dictate particular practices): • 46.9 percent are continuing distributions in keeping with their normal spending rule; • 25.1 percent are suspending distributions from funds at or below HDV; • 9.7 percent are distributing only interest and dividends;

• 8.2 percent have established a threshold at which they will suspend distributions from underwater accounts. The average and most common threshold is 80 percent of HDV: o 3 institutions reported thresholds of 90 percent o 5 institutions reported thresholds of 80 percent o 3 institutions reported thresholds of 75 percent o 1 institution reported a threshold of 70 percent o 1 institution reported a threshold of 65 percent

o Others were in the process of determining the threshold; and

• 4.3 percent have established a tiered system in which the distribution rate for underwater funds decreases incrementally and is eventually suspended when the fund value drops to a designated percentage of HDV.

Table Set 3: Examples of tiered formulas for spending from underwater funds Fund Value as a Percent of HDV

Spend Rate

Fund Value as a Percent of HDV

Spend Rate

90-99%

50% of normal spending rate

95-99%

4.5%

75-90%

25% of normal spending rate

90-95%

3.5%

85-90%

2.5%

<75%

Suspend distributions

80-85%

1.5%

75-80%

0.5%

Fund Value as a Percent of HDV

Spend Rate

<75%

Suspend distributions

75%-99%

75% of previous year’s distribution

Fund Value as a Percent of HDV

Spend Rate

<75%

Suspend distributions

80-100%

Normal spending rate

75-80%

Fund Value as a Percent of HDV

Spend Rate

75% of normal spending rate

>95%

Normal spending rate

70-75%

50% of normal spending rate

95%

50% of normal spending rate

60-70%

25% of normal spending rate

90%

Suspend distributions

<60%

Suspend distributions

Fund Value as a Percent of HDV

Spend Rate

Fund Value as a Percent of HDV

Spend Rate

90-99%

75% of normal spending rate

>90%

Normal spending rate

80-90%

50% of normal spending rate

75-90%

50% of normal spending rate

70-80%

25% of normal spending rate

<75%

Suspend distributions

<70%

Suspend distributions

In comments, 14 institutions (6.8 percent) described a flexible decision-making process whereby decisions about spending from underwater funds are made on a case-by-case basis; typically require input from administrators, board members, or donors; and take the purpose of the fund, current needs, and the degree to which the purchasing power of the fund has been compromised into account. Such approaches include: • Requiring all fund administrators to actively opt in to receive distributions from underwater funds; distributions from underwater funds are no longer automatic.

• Allowing spending below HDV, but if management deems the valuation slide as something other than temporary, the distributions would be reduced or suspended.

• Reviewing spending on all funds on a case-by-case basis. Exceptions may be approved by the board to allow additional spending if existing commitments warrant, or spending may be reduced for funds that have decreased in value significantly. • Continuing spending from underwater funds only with special request and appropriate justification.

• Discontinuing distributions from funds at or below HDV unless approved by executive management through a petition process. • Every underwater fund is individually assessed as to the most prudent draw that should be taken. The recommended draws for each underwater fund must be approved by the board of trustees.

• Discontinuing distributions from underwater funds with an exception for 12 months for urgent needs if approved by donor and the endowment-review committee.

• The administration is authorized to reset the value of certain endowments for the purposes of applying the spending rule (1) if approved by the donor, (2) the endowment is the primary source of funding for a particular school or program, and (3) a determination is made that spending at a lower value can achieve the original purpose of the gift. • Continue spending from underwater funds, but a board committee may determine an alternate spending rate appropriate to the circumstance.

• Underwater endowments are brought back to HDV at fiscal-year end from unrestricted endowments. As the market value returns, the unrestricted funds are reimbursed.

• No specific threshold at which distributions are suspended; a board committee reviews the current status of fund values compared to HDV and then evaluates the planned spending in the context of what is prudent for the institution overall.

Changes in Spending Practice after the Enactment of UPMIFA The 2010 survey data allow us to compare spending practice before (Table 2) and after (Table 4) the enactment of UPMIFA. Following the enactment of UPMIFA: • The number of institutions discontinuing all distributions from underwater funds decreased by 16.4 percentage points, from 41.5 percent to 25.1 percent;

• The number of institutions distributing only interest and dividends decreased by 7.2 percentage points, from 16.9 percent to 9.7 percent;

• The number of institutions that made distributions from underwater funds in keeping with their normal spending rate increased by 8.7 percentage points, from 38.2 percent to 46.9 percent; and

• 12.5 percent of institutions employed a threshold or tiered approach compared with 3.4 percent of institutions that continued distributions at some rate (other than interest and dividends) prior to the enactment of UPMIFA. In addition to this, 6.8 percent of institutions described some flexible decision-making process (that may be employed in lieu of or in conjunction with other standard methods).

Table 4: Spending from underwater funds under UPMIFA Aggregate

$0-24 m $25-49m $50-149m $150-499m $500m+

Private

IRF

Public

Number

207

110

Discontinue all distributions for funds at/below HDV

25.1%

43.8%

37.5%

25.9%

8.3%

4.0%

22.7%

24.7%

40.0%

Distribute only interest and dividends for funds at/below HDV

9.7%

4.2%

9.4%

7.4%

18.8%

8.0%

10.0%

9.1%

10.0%

Continue distributions in keeping with normal spending rule

46.9%

41.7%

37.5%

51.9%

47.9%

56.0%

52.7%

42.9%

30.0%

Spend down to a certain threshold % of HDV

8.2%

6.3%

3.1%

9.3%

10.4%

12.0%

4.5%

11.7%

15.0%

Tiered approach

4.3%

2.1%

3.1%

5.6%

4.2%

8.0%

3.6%

6.5%

0.0%

Other

6.8%

0.0%

9.4%

5.6%

10.4%

12.0%

6.4%

6.5%

10.0%

Prior to the enactment of UPMIFA, 121 institutions (58.4 percent of survey participants) discontinued all distributions or only distributed interest and dividends from underwater funds. After the enactment of UPMIFA, 57 (or 47.1 percent) of the 121 institutions which previously discontinued all distributions or distributed only interest and dividends adopted a new spending approach likely to yield greater ongoing distributions from underwater endowments than distribution of interest and dividends or complete cessation of distributions would have yielded. The number of institutions that continued making distributions from underwater funds increased by 8.7 percentage points, from 38.2 percent to 46.9 percent after the enactment of UPMIFA. These changes reflect a variety of factors including evolving fiscal circumstances, institutional needs, investment returns, and future return expectations, but UPMIFA has also clearly enabled boards to adapt their spending in response to changed contexts.

Graph 2: Comparison of spending practices before and after enactment of UPMIFA (2010)

50% 45%

47% 42% 38%

40%

Prior to the enactment of UPMIFA % of all participants

35% 30%

10%

8% 3%

ld n to % a of cer HD ta V in Ti er ed ap pr oa ch

Di l d sco ist nti rib nu Di ut ed st rib io ns an ute d do di n vi ly de in nd te Co s res so ntin t m u e o ed th di er str re ibu du t ce ion Co d sa ra t n in ti te ke nu ep ed sp ing di en w str Sp ding ith ibut e r no io th nd ate rm ns al re do s w

7% 4%

15%

After the enactment of UPMIFA % of all participants

17%

20%

25%

Comparison of 2009 and 2010 Spending Practices The current AGB research highlights a number of changes in the way institutions are managing spending from underwater funds under UPMIFA as well as the ways institutions are adapting to the change from UMIFA to UPMIFA. UPMIFA was enacted in 16 additional states in the period between the 2009 and 2010 surveys. A comparison of the spending practices reported in the two surveys suggests that boards have made enormous progress in adapting their policies and practices in response to the changed regulatory context. The most striking change from practices reported in the 2009 survey is the 15.6 percentage point increase (from 31.3 percent in 2009 to 46.9 percent in 2010) in the proportion of institutions and foundations that reported that they were continuing spending from underwater funds in keeping with their normal spending rule under UPMIFA. The proportion of institutions/foundations that discontinued all spending or distributed only interest and dividends from underwater funds remained about the same as it was in 2009.

The proportion of institutions that, following the enactment of UPMIFA, employed a tiered or threshold approach increased 5.8 percentage points, from 6.7 percent in 2009 to 12.5 percent in 2010. Along with the various flexible approaches to spending outlined above, this suggests that institutions are developing increasingly sophisticated ways of managing underwater funds. Given the high percentage of endowment funds that remain underwater and the widely held assumption that market returns will not soon match those to which investors became accustomed in recent decades, it might have been expected that institutions and foundations would have ratcheted back on spending from underwater funds in the past year. Both the 2009 and 2010 surveys, however, suggest just the opposite. As noted above, almost 60 percent of institutions in the 2010 survey that suspended distributions or distributed only interest and dividends under UMIFA adopted a new spending practice under UPMIFA yielding greater funding for endowment purposes. In 2009, almost three-quarters of institutions that suspended distributions or distributed only interest and dividends under UMIFA adopted a new spending practice yielding great support for endowment purposes under UPMIFA. For more detailed information on 2009 spending practices, see Management of Underwater Endowments Under UPMIFA: Findings of the 2009 AGB Survey, referenced at the end of this report.

Chart 4: Practices under UPMIFA in 2009

Chart 3: Practices under UPMIFA in 2010 4% 7% 8%

25%

Discontinue all distributions for funds at/below HDV

Disco

Distribute only interest and dividends for funds at/below HDV 16%

Distrib

27% with normal spending ruel 5% Continue distributions in keeping 8%

Conti

Spend down to a certain % of HDV

Spend

10% 47%

Tiered approach

10%

31% Discontinue all distributions for funds at/below HDV

Other

Tiered

Other

Distribute only interest and dividends for funds at/below HDV 5% 8%

Discontinue all distributions for funds at/below HDV

Continue distributions in keeping with normal spending rule Spend down to a certain threshold % of HDV

Distribute only interest and dividends for funds at/below HDV

Tiered approach

Continue distributions in keeping with normal spending rule

Other

Spend down to a certain % of HDV

Variation of Spending Practice According to Purpose of Fund Tiered approach

Only 7.7Other percent of institutions reported that they varied their spending practice for underwater funds according to the purpose of the fund. This is down 2.9 percentage points from 10.6 percent in 2009, but this may reflect the adoption of flexible spending decision-making processes like the ones described above. Among institutions that do vary spending practice according to the purpose of the fund, 82.4 percent do so to provide continued funding for student financial aid, and 17.6 percent continue distributions for faculty support.

Use of the Provision Allowing for Release or Modification of Funds UPMIFA includes a provision that allows a charity to modify a restriction on a small (less than $25,000) and mature (over 20-years old) fund without going to court. If a restriction has become impracticable or wasteful, the charity may notify the state charitable regulator, wait 60 days, and then, unless the regulator objects, modify the restriction in a manner consistent with the charitable purposes expressed in any documents that were part of the original gift. Note that the specifics of the provision may vary from state to state, and many legislatures modified the provision to increase the threshold value below which institutions can modify restrictions that may have become illegal, impracticable, or wasteful. • $25,000: Arkansas, Delaware, Idaho, Indiana, Louisiana, Michigan, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Texas, Utah, U.S. Virgin Islands, West Virginia, Wisconsin, and Wyoming

• $50,000: Alabama, Alaska, Arizona, D.C., Hawaii, Illinois, Iowa, Kansas, Kentucky, Maryland, Minnesota, Missouri, Vermont, Virginia • $75,000: Washington (indexed)

• $100,000: California, Colorado (indexed), Georgia, Maine (indexed), North Carolina • $150,000: Tennessee

• $250,000: New Jersey and Ohio (Hawaii and Virginia allow up to $250,000 with attorney general’s consent) Only 14.5 percent of institutions and foundations reported having made use of this provision.

Table 5: Use of the provision allowing for release or modification of restrictions on older and smaller endowments Aggregate $0-24 m $25-49m $50-149m $150-499m $500m+ Private

IRF

Public

Number

207

110

Yes

14.5%

8.3%

21.9%

20.4%

6.3%

20.0%

11.8%

15.6%

25.0%

85.0%

91.7%

75.0%

79.6%

93.8%

80.0%

87.3%

84.4%

75.0%

Determination of Amounts to Be Classified as Permanently Restricted In August 2008, the Financial Accounting Standards Board (FASB) promulgated a staff position (FAS 117-1) providing guidance on the net asset classification of donor-restricted endowment funds. According to FAS 117-1, the amount of a permanent endowment fund classified as “permanently restricted” must either be explicitly stipulated by the donor or, absent donor stipulations, must be determined by the governing board consistent with relevant law. FASB rules are not generally applicable to state entities that are under the purview of the Government Accounting and Standards Board (GASB), but some institutionally related foundations do report under FASB. Among survey participants, 60 percent of foundations and 55 percent of private institution boards have made a determination about the amount of funds (of those lacking specific donor stipulations concerning accumulation or spending) that must be permanently retained. The majority of respondents that described how they define amounts classified as permanently restricted in keeping with FASB’s guidance use some equivalent of HDV. Others referenced donor stipulations/gift agreements, but it should be underscored that FASB 117-1 only applies to endowments that lack specific donor stipulations concerning the accumulation or spending of funds. Comments describing how boards have defined amounts to be classified as permanently restricted suggest that boards are not yet well informed about FASB 117-1.

Table 6: Has the board made a determination about the amount of endowment funds (lacking specific donor stipulations concerning accumulation or spending) that must be permanently restricted? Aggregate $0-24 m $25-49m $50-149m $150-499m $500m+ Private

IRF

Public

Number

207

110

Yes

57.5%

56.3%

43.8%

61.1%

56.3%

72.0%

54.5%

59.7%

60.0%

42.5%

43.8%

56.3%

38.9%

43.8%

28.0%

45.5%

40.3%

40.0%

Endowment Fees Assessed by Institutionally Related Foundations UPMIFA requires institutions to take a broad range of factors into consideration when making endowment spending decisions and to balance current needs with the obligation to maintain the long-term purchasing power of the endowment. The vast majority of institutionally related foundations assess a management or administrative fee, typically calculated as a percentage of the market value of the endowment, to support foundation operations and/or fund-raising functions. Given the long-term return on investments in fund raising, many institutions believe it makes sense to consider such a use of endowment revenue as a contributor to rather than an impediment to endowment growth. There are at present several conflicting factors that may lead institutions and foundations to change their practice regarding endowment fees. The market losses of recent years combined with diminished return expectations may lead some boards to reduce both fees and spending rates to forestall further erosion of fund values. At the same time, public institution foundations have faced severe revenue shortfalls as a result of decreased support from their affiliated institutions, decreased revenue from unrestricted investments, and decreased gift flows; many have tapped operating reserves and other unrestricted funds to supplement decreased distributions from underwater endowments. These factors have led many foundations to change their funding model and, in many cases, to increase their reliance on gift and endowment fees. • 87 percent of the foundations participating in this survey assess an endowment management fee. The average assessment among participating foundations is 1.3 percent and the median assessment is 1 percent. • 11.7 percent of those foundations with endowment fees suspend them for underwater funds.

• In the past 18 months, 13 percent of foundations surveyed increased their endowment management fees while 10.4 percent decreased them.

Table 7: Use of endowment management fees by institutionally related foundations All IRFs

$0-24 m $25-49m $50-149m $150-499m $500m+

Number

Yes

87.0%

72.2%

90.0%

77.8%

100.0%

10.4%

27.8%

0.0%

16.7%

0.0%

Fee

1.3%

0.9%

1.5%

1.4%

1.2%

Other Changes in the Management and Investment of Endowments This survey was primarily intended to assess the ways institutions are adapting to UPMIFA’s new standards regarding spending from underwater funds, but the legislation also enumerates a more exact set of rules for investing in a prudent manner than prior legislation (UMIFA). In light of this, and given the unprecedented investment challenges that boards have faced in the past two years, the current survey included several questions asking about other significant changes boards may have made in the past 18 months in the way they manage and invest endowment. Changes in Allocation and Portfolio Construction Fifty-nine survey participants (28.5 percent) changed their approach to portfolio construction to focus allocations less on traditional “buckets,” such as domestic equity, international equity, fixed income, and other asset classes, to an approach

that classifies assets and strategies based on their role in risk reduction, inflation protections, growth, liquidity, and similar factors informing portfolio performance. In comments, 10 respondents indicated that they had increased their allocation to hedge funds, commodities, or other alternatives. Two respondents indicated that they had developed allocations adapted to the purpose/time horizon of funds. Two respondents specifically indicated that they had changed allocations to focus on growth, risk reduction, and inflation protection. This is in keeping with findings of the 2009 NCSE report, which found that one-third of institutions and foundations had made or were considering such changes. Changes to Due-Diligence and Risk-Management Procedures Twenty-four survey participants (11.6 percent) have made changes to due-diligence or risk-management procedures. Comments included the following: • Under no condition will we spend more than actual return on investment;

• Increased the frequency of investment committee meetings, included a representative from a securities firm on the committee, and reported to the executive committee and full board; • Updated investment policy statement;

• Increased frequency of communication and meetings with managers; • Added hedge fund asset class and commodity asset class;

• Increased committee involvement with investment managers and tightened investment policy;

• Began using ad hoc committees to study areas that might have potential for creating problems so that they are prevented before they happen; • Increased liquidity stress testing;

• Adopted a crisis-management plan;

• Enhanced our ability to assess portfolio risk and thereby manage it proactively; • Asset allocations much more sensitive to risk;

• More direct contact with investment managers;

• Created a password-protected investment committee Web site as a central location for committee members to access all investment-related documentation; • Purchased risk-assessment and monitoring software;

• Increased onsite visits with managers prior to investing with them, and increased frequency with which investments are monitored. Changes in the Composition of Investment Committees Fifteen (7.2 percent) survey participants have changed the composition of their investment committee. Five respondents commented that they had increased the number of committee members and/or increased the number of committee members with investment expertise. Two institutions replaced joint investment and finance committees with separate investment committees. Changes in Staffing and Use of Consultants: • 9.2 percent (19) retained a new consultant;

• 4.3 percent (nine) outsourced endowment management;

• 3.9 percent (eight) increased the number of investment staff; and • 1.9 percent (four) hired a chief investment officer.

Governance Practice Board Involvement in Spending Decisions Institution and foundation boards in UPMIFA states are actively involved in making decisions about spending from underwater funds. Three-quarters (75.8 percent) of survey participants reported that the institution or foundation board approves decisions regarding spending from underwater accounts. Interestingly, boards of institutions with the largest endowments are somewhat less likely than average to approve spending decisions, and those at institutions with the smallest endowments are more likely to do so. Public institution and foundation boards consistently report higher levels of board engagement and oversight concerning spending from underwater endowments. This is in keeping with findings in our 2009 survey. Although 75.8 percent of institutions reported that the board approves decisions regarding spending from underwater endowments, only 60.4 percent reported that the board or a board committee had discussed spending from underwater funds since the enactment of UPMIFA. This represents an increase of 3.9 percentage points over 2009. Recommendation: While decisions regarding spending from underwater endowments may have limited impact on the overall financial circumstances of an institution, they represent a fundamental fiduciary responsibility. As the ultimate stewards of endowments, boards should be involved in decisions that could significantly undermine the long-term purchasing power of funds contributed with the intention that their ability to provide ongoing support for designated charitable purposes be preserved.

Table 8: Does institution or foundation board approve decisions regarding spending from underwater accounts? Aggregate $0-24 m $25-49m $50-149m $150-499m $500m+ Private

IRF

Public

Number

207

110

Yes

75.8%

83.3%

65.6%

81.5%

70.8%

72.0%

63.6%

90.9% 100.0%

22.2%

14.6%

31.3%

18.5%

27.1%

24.0%

35.5%

9.1%

0.0%

A majority of boards rely on recommendations from staff regarding spending from underwater endowments. Finance and investment committees also commonly make spending recommendations. Public institutions seem to engage the broadest range of parties in making spending recommendations.

Table 9: Parties making recommendations regarding spending from underwater endowments Aggregate $0-24 m $25-49m $50-149m $150-499m $500m+ Private

IRF

Public

Number

207

110

Institution/foundation staff

51.7%

39.6%

62.5%

55.6%

50.0%

56.0%

49.1%

50.6%

70.0%

Investment committee

39.1%

43.8%

28.1%

46.3%

39.6%

28.0%

32.7%

44.2%

55.0%

Finance committee

35.7%

52.1%

31.3%

38.9%

18.8%

36.0%

36.4%

35.1%

35.0%

Whole board

25.6%

29.2%

15.6%

29.6%

27.1%

20.0%

19.1%

28.6%

45.0%

Executive committee

16.9%

8.3%

28.1%

14.8%

12.5%

32.0%

7.3%

23.4%

45.0%

We specifically asked institutionally related foundations about parties other than foundation staff and board members who participate in making decisions regarding endowment spending. Nearly half of affiliated foundations (48 percent) also include institution staff (typically the institution president, chief financial officer, or governing board members) in decisions about endowment spending.

Review of Gift Instruments A majority (83.1 percent) of institutions and foundations have reviewed all gift instruments to determine which permanent endowment funds are subject to donor restrictions concerning the amount of the fund that must be permanently retained or other donor restrictions concerning accumulation or distributions from the fund since the passage of UPMIFA. This represents an increase of 10.8 percentage points over the 72.3 percent reporting the practice in 2009. It should be noted that the question asked specifically whether gift instruments had been reviewed since the enactment of UPMIFA, and many institutions and foundations conducted such reviews in 2001-02, prior to the enactment of UPMIFA. Recommendation: UPMIFA is a default statue applying to donor-restricted endowments for which gift instruments do not provide specific guidance concerning appropriation or accumulation of funds. Boards have an obligation to honor the terms of gift instruments and should ensure that the institutionâ&#x20AC;&#x2122;s policies and practices support documentation of its compliance with donor intent as to both purpose and appropriation/accumulation of endowments.

Board Policies Nearly half (44 percent) of boards have formally approved a policy addressing distributions from underwater funds, 8.7 percent are currently considering such a policy, 15.5 percent of institutions have policies adopted by staff, and 12.1 percent have no plans to adopt such a policy (Table 10). In total, 68.2 percent of institutions and foundations either have some type of policy addressing spending from underwater funds or are developing such a policy. This represents an increase of 6.5 percentage points in the proportion of institution that have policies addressing spending from underwater funds since 2009. Recommendation: UPMIFAâ&#x20AC;&#x2122;s prudence rule encourages institutions to take a broad range of factors into account in making decisions regarding distributions from underwater endowments. Given that economic circumstances, institutional needs and resources, investment return expectations, and other factors will all vary from year to year, boards may decide not to adopt a policy dictating particular spending practices for underwater funds. Boards should, however, adopt a policy specifying how decisions regarding prudent appropriation or accumulation of underwater endowments will be made.

Test of Prudence Only 11.6 percent of boards have established a test or definition of prudence to use in determinations about spending from underwater funds. This represents an increase of 4.5 percentage points over the 7.1 percent that had done so in 2009. As noted previously, 6.8 percent of institutions have developed flexible decision-making processes to determine prudent spending. Recommendation: Unlike UMIFA, in which HDV serves as a clearly defined point at which spending from endowments should be suspended or reduced, UPMIFA requires institutions to consider a range of factors, including the duration and preservation of the fund, the purposes of the institution and the fund, general economic conditions, the possible effects of inflation and deflation, the expected total return from income and appreciation of investments, other resources of the institution, and the investment policy of the institution. Variations in these factors could dictate a range of approaches from institution to institution, year to year, and even fund to fund. Boards may, accordingly, opt not to identify fixed limits above or below which they deem it imprudent to spend. They should, however, have policies in place addressing how they will determine prudent appropriations for expenditure from endowment funds. An optional provision, adopted by 13 states and the U.S. Virgin Islands, creates a rebuttable presumption of imprudence for spending over 7 percent (or some other specified amount) in any given year for all endowments (including funds that are not underwater) and boards should bear this in mind in their decision making.

Documentation of Board Decision Making Of survey participants, 48.3 percent document board-level decisions regarding underwater funds in their minutes. In the absence of a bright-line test of prudence, boards must be able to demonstrate the factors they have taken into consideration and the basis of their decisions. This represents an increase of 12.4 percentage points over the 35.9 percent that reported the practice in 2009. Recommendation: Sound board process, including documentation of boardsâ&#x20AC;&#x2122; decision making, is of critical importance in demonstrating prudence. Staff recommendations for spending from underwater funds, factors considered, and decisions taken should all be documented in minutes.

Table 10: Governance practice under UPMIFA Aggregate $0-24 m $25-49m $50-149m $150-499m $500m+ Private Number

207

110

IRF

Public

The institution has reviewed all gifts

83.1%

83.3%

87.5%

83.3%

79.2%

84.0%

80.0%

85.7% 90.0%

The board or a committee thereof has discussed spending from underwater funds

60.4%

37.5%

75.9%

64.6%

48.0%

54.5%

63.6% 80.0%

The board or a committee thereof has formally approved a policy addressing distributions from underwater funds

44.0%

41.7%

40.6%

42.6%

52.1%

40.0%

44.5%

46.8% 30.0%

The board is currently considering such a policy

8.7%

8.3%

12.5%

9.3%

4.2%

12.0%

5.5%

11.7% 15.0%

The board has no plans to adopt such a policy

12.1%

12.5%

6.3%

14.8%

16.7%

4.0%

10.0%

10.4% 30.0%

Institution staff members have adopted a policy addressing distributions from underwater funds (not formally approved or adopted by the board)

15.5%

20.8%

25.0%

13.0%

8.3%

12.0%

17.3%

11.7% 20.0%

The institution has no formal policy addressing distributions from underwater funds

16.4%

18.8%

12.5%

14.8%

20.8%

12.0%

19.1%

15.6%

Board- or committee-level decisions regarding underwater funds have been documented in minutes

48.3%

47.9%

40.6%

50.0%

47.9%

56.0%

36.4%

61.0% 65.0%

The board (or a committee thereof, or the staff ) has established a test or definition of prudence to use in determinations about spending from underwater funds

11.6%

8.3%

0.0%

14.8%

18.8%

12.0%

10.9%

14.3%

5.0%

The institution has no formal policy addressing distributions from underwater funds

16.4%

18.8%

12.5%

14.8%

20.8%

12.0%

19.1%

15.6%

5.0%

Institution staff members have adopted a policy addressing distributions from underwater funds (not formally approved or adopted by the board)

15.5%

20.8%

25.0%

13.0%

8.3%

12.0%

17.3%

11.7% 20.0%

The institution has reviewed all gift instruments to determine which permanent endowment funds are subject to donor restrictions concerning the amount of the fund that must be permanently retained or other donor restrictions concerning accumulation or distributions from the fund

83.1%

83.3%

87.5%

83.3%

79.2%

84.0%

80.0%

85.7% 90.0%

The board (or a committee thereof, or the staff ) has established a test or definition of prudence to use in determinations about spending from underwater funds

11.6%

8.3%

0.0%

14.8%

18.8%

12.0%

10.9%

14.3%

5.0%

Conflict of Interest Policies In November 2009, the AGB Board of Directors adopted a statement on conflict of interest recommending that institutional policy on board member conflicts of interest should extend to the activities of board committees and apply to all committee members, including those who are not board members. The statement also recommended that boards should consider whether to adopt conflict-of-interest policies that specifically address board members’ parallel or “side-by-side” investments and whether to adopt especially rigorous conflict of interest provisions applicable to members of the board investment committee. The AGB Board of Directors’ Statement on Conflict of Interest is available online at www.agb.org/ conflict-interest. • 60.9 percent of institutions and foundations in this study have conflict-of-interest policies that apply to all volunteers responsible for investment decision making, including those who are not governing board members. • 15.9 percent of survey participants have conflict-of-interest policies that include especially rigorous provisions applicable to investment committee members and other investment decision makers.

• 13.5 percent have policies that specifically address board members’ parallel or “side-by-side” investments in which the institution has a financial interest. Not surprisingly, institutions and foundations with larger endowments are more likely to have more comprehensive and rigorous policies (Table 11). Public institutions and foundations are also significantly more likely to have conflict-of-interest polices applicable to all volunteers responsible for investment decisions and addressing side-by-side investments by board members.

Table 11: Conflict of interest polices related to investment decision makers Aggregate $0-24 m $25-49m $50-149m $150-499m $500m+ Private

IRF

Public

Number

207

110

Applies to all volunteers responsible for investment decision making

60.9%

58.3%

50.0%

61.1%

64.6%

72.0%

47.3%

74.0%

85.0%

Includes especially rigorous provisions applicable to members of the investment committee

15.9%

10.4%

12.5%

11.1%

14.6%

44.0%

15.5%

16.9%

15.0%

Addresses side-by-side investments

13.5%

12.5%

9.4%

11.1%

16.7%

20.0%

8.2%

15.6%

35.0%

Additional Resources Related information on endowment spending and governance practices under UPMIFA can be found on AGB’s Website at: http://agb.org/uniform-prudent-management-institutional-funds-act Management of Underwater Endowments under UPMIFA: Findings of the 2009 AGB Survey. http://agb.org/ reports/2009/management-underwater-endowments-under-upmifa “What’s a Prudent Payout from an ‘Underwater’ Endowment?,” David Bass, Trusteeship, May/June 2009. http://agb.org/ trusteeship/2009/mayjune/whats-prudent-payout-underwater-endowment “Freedom Isn’t Free,” John Griswold and William Jarvis, Mission Matters, Spring/Summer 2009. http://agb.org//sites/agb. org/files/u16/GRISWOLD.pdf “Asking about Asset Allocation,” Viewpoint by William Jarvis, 2009 NACUBO-Commonfund Study of Endowments http://agb.org/sites/agb.org/files/u16/NCSE2009_Viewpoint.pdf Financial Accounting Standards Board (FASB Staff Position 117-1): Endowments of Not-for-Profit Organizations: Net Asset Classification of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act, and Enhanced Disclosures for All Endowment Funds. http://www.fasb.org/pdf/fsp_fas117-1.pdf Other educational materials on UPMIFA and links to state statutes can be found at www.upmifa.org

Association of Governing Boards of Universities and Colleges (AGB) For 90 years, the Association of Governing Boards of Universities and Colleges (AGB) has had one mission: to strengthen and protect this countryâ&#x20AC;&#x2122;s unique form of institutional governance through its research, services, and advocacy. Serving more than 1,200 member boards and 35,000 individuals, AGB is the only national organization providing university and college presidents, board chairs, trustees, and board professionals of both public and private institutions with resources that enhance their effectiveness. In accordance with its mission, AGB has developed programs and services that strengthen the partnership between the president and governing board; provide guidance to regents and trustees; identify issues that affect tomorrowâ&#x20AC;&#x2122;s decision making; and foster cooperation among all constituencies in higher education. www.agb.org.

Commonfund Institute Commonfund Institute houses the education and research activities of Commonfund and provides the entire nonprofit community with investment information and professional-development programs. Commonfund Institute is dedicated to the advancement of investment knowledge and the promotion of best practices in financial management. In addition to producing the annual Foundations and Operating Charities Studies, Commonfund Institute produces a companion Study of nonprofit healthcare organizations. In addition, it teams with the National Association of College and University Business Officers (NACUBO) to produce the NACUBO-Commonfund Study of Endowments (NCSE). NCSE is the most comprehensive annual survey on higher education endowments and finance; the Study for FY2009 was based on a sample of 842 institutions of higher learning, including public and private colleges and universities, their supporting public and private foundations, and community colleges. Commonfund Institute also provides a wide variety of resources, including conferences, seminars and roundtables on topics such as endowments and treasury management; proprietary and third-party research and publications, including the Higher Education Price Index (HEPI); and events such as the annual Commonfund Forum and Commonfund Endowment Institute. www.commonfund.org/CommonfundInstitute.

Attachment C Budget

Page 37 of 43

The Advocacy Foundation, Inc. Endowments Initiative Budget Personnel and Non-Personnel

Position

Positions Monthly Salary

Time (%)

Months 12 Month Budget

Investments Group Initial Investment Amount Lead Investor Associate Investors Commissions Discretionary

$50,000.00 1 f-t 2 p-t n/a n/a

25% 25% n/a n/a

12 12

$25,000.00 $2,500.00 $2,500.00 $6,400

TOTAL

$86,400 Operating Costs

Office Equipment & Furniture Description Computers Printers Copier(s) Office Furniture

Period (Month) Allowance 3 2 1 n/a

$500.00 $250.00 $500.00 $1,500.00

TOTAL

12 Mo. Budget by Line Item $1,500.00 $500.00 $500.00 $1,500.00 $4,000.00

Facilities Costs Description Telephone Utilities (Water, Gas, & Electricity) Rent/Lease of Training Site TOTAL

Period (Month) Allowance 12 N/A 12

$100.00 N/A $500.00

12 Mo. Budget by Line Item $1,200.00 N/A $6,000.00 $7,200.00

Page 38 of 43

Consumable Supplies Description Office Supplies Other TOTAL

TOTAL COSTS (Personnel + Operating)

Target

Period (Month) Allowance 12 N/A

$200.00 N/A

12 Mo. Budget by Line Item $2,400.00 N/A $2,400.00

$100,000.00

$140M

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Notes ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ Page 41 of 43

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