Topics Covered:
1. What is an Endowment?
2. UMPIFA and UPMIFA
3. Types of Endowments
a. True
b. Term
c. Quasi
4. Investment Pools
5. Distributions/Spending
6. Understanding Historical Gift (Corpus, Principal)
7. Due to/Due from
8. Expendable Account
9. Unitization
1. What is an Endowment?
A financial endowment is a donation of money or property to a nonprofit 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.
Among the institutions that commonly manage endowments are academic institutions (e.g. colleges, universities, and private schools), cultural institutions (e.g. museums, libraries, and theaters), service organizations (e.g. hospitals, retirement homes, the Red Cross, the SPCA), and religious organizations (e.g. churches, synagogues, mosques).
2. UMIFA and UPMIFA
Rules and regulations are in place to govern endowment spending (UMIFA and UPMIFA) so that the investment is not abused. 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.
If spending or investment performance deceases the fund so that it is less than original gift amount, the fund is said to be "underwater". Organizations typically apply additional spending rules above what is governed by UPMIFA. New York has their own version of UPMIFA called NYPMIFA that will apply to clients located in New York.
3. Endowment Definitions
a. True Endowment: An outside donor gives a restricted gift with the intention that only the earnings/income from that gift will be used to fund programs, operations, or scholarships, etc. (Net Asset Classification: Permanently restricted)
b. Term Endowment: A gift is invested with endowments because it will not be spent in the near term, but will ultimately be spent in its entirety (i.e. to fund a future capital project). (Net Asset Classification: Temporarily Restricted)
c. Quasi Endowment: Board designated or set aside by institution from an institution's own funds. Invested with endowment funds. Sometimes used for matching donor’s gifts. (Net Asset Classification: Unrestricted. An organization cannot permanently restrict its own funds.)
4. Investment Pools
Endowment funds are typically invested together in one or several "pools" that are managed by outside institutions. The managers send the organization that owns the endowment monthly or quarterly statements about the performance of the pool. Fundriver is set up to handle a single or multiple investment pools for a client. Clients may separate annuities or other investments in a different investment pool. Investment managers within the pool may invest the funds at different levels--but they roll up to the pool level.
5. Distributions/Spending
An endowment spending policy determines the annual flow of funds from an endowment to the operating budget. A well designed spending policy takes for its conceptual framework the two principal goals of endowment management: providing a significant and stable flow of funds to the operating budget over the short-term to provide resources to this generation of scholars, while at the same time maintaining the purchasing power of the endowment over the long term, ensuring the organization will be able to provide adequate resources for the future.
Percent Average is the most common type of spending rule. See the Fundriver knowledgebase section on spending for more information. Whatever the method chosen, Fundriver can allocate spending across funds in the database.
6. Understanding Historical Gift (Corpus, Principal)
The HISTORICAL GIFT is the original philanthropic contribution given by a donor to establish an endowment fund. It is also commonly referred to as the Corpus or Principal. The balance of a gift's corpus can be increased through additional gifts to the endowment. A donor may also stipulate that they want a certain amount of a fund's income to be reinvested in the corpus, which also increases the historical gift value. Additional gifts and reinvestments are the only two ways to increase historical gift values.
Under FAS 117-1 rules, the earnings from permanently restricted historical gifts increase the unrestricted or temporarily restricted portion of a fund. If a fund is underwater, it impacts the unrestricted portion.
The Financial Accounting Standards Board (FASB) issued new rules in 2016, referred to as ASU 2016-14. Under ASU 2016-14, the earnings from donor restricted historical gifts increase the with donor restricted portion of a fund. If a fund is underwater, earnings remain with the donor restriction net asset class. More information on ASU 2016-14 guidelines can be found in our knowledge base.
7. Due To/Due From
A common example of a due to/due from transaction is when a gift is recorded but money may not have been transferred to the investment pool in the same period. A due to/due from is recorded to show that money is owed to the investment pool from operations.
Similarly, distributions may be recorded to each endowment, but the funds may not be pulled out of the investment pool the same period it's recorded. A due to/due from is recorded to show that money is due to operations from the pool.
8. Expendable Accounts
Fundriver has a Non-Pooled Module which tracks Expendable Funds (aka Temporarily Restricted). Temporarily restricted funds are typically not invested with long term endowment funds, although in some cases they may be a part of a pool and need to be tracked in Fundriver.
Endowments distribute spendable money, which is typically tracked elsewhere once it comes out of pool. Distributions are typically tracked in separate GLID/expendable funds once they are distributed from an endowment and leave the pool. The funds sit in an accessible account (similar to a "checking account") where money is readily available and able to be spent by designees of the organization.
9. Unitization
Unitization is a form of endowment investing that has mechanics similar to that of a mutual fund. A unitized endowment pool allows multiple endowments to invest in the same pool of assets.
Each endowment owns individual units in the unitized investment pool, and the units are generally valued monthly. New endowments entering the pool can buy in by receiving units in the pool that are valued as of the buy-in date.
Gifts buy shares of in an investment pool. If client isn't unitized, then they will become so when implementing Fundriver. Fundriver uses units to adjust fund values when allocating investment earnings, making distributions, etc. For more information on unitization see this article!