The University and Foundation Endowments are overseen by the University’s Investment Committee. The following frequently asked questions – and answers – may provide some insight as to how the endowment is managed, and how scholarships and other endowments receive their funding.
1. What is an endowment?
An endowment is a long-term investment in the University that provides benefits to students, faculty or programs year after year, generation after generation.
For endowed funds, the donor stipulates that the principal (endowment corpus) must be invested and that only a portion of the income may be expended to carry out the donor’s purpose. To guard against the eroding consequences of inflation, the remaining portion of investment return is then added to the principal. The goal is to ensure that the principal maintains its purchasing power over time to support future generations.
2. Why are endowments important to UNCP?
An endowment creates financial stability, allowing UNCP to be less dependent on unpredictable sources of revenue, such as state appropriations and research sponsorship. The base of resources endowments represent allow for a rich variety of activities such as scholarships and fellowships for talented students, support for distinguished and dedicated faculty members through professorships and chairs, support for research or support for other programs.
3. What legal requirements regulate endowments in North Carolina?
In 1985, North Carolina adopted the Uniform Management of Institutional Funds Act (UMIFA). (See Chapter 36B of the NC General Statutes.) This act prohibits invasion of the endowment corpus. Total return on the endowment investment (i.e. capital appreciation as well as income) can be spent. The amount available to award for spending is limited to the accumulated net earnings in the endowment fund. If no net earnings exist, regardless of the size of the endowment, no awards for spending can be made.
4. Do other states have the same legal requirements for endowments?
With various modifications, UMIFA has been adopted by 46 states and the District of Columbia. As a result of the state-by-state modifications to UMIFA, legal requirements for endowments in other states may differ from North Carolina.
5. How are endowment investments managed at UNCP?
Most of the endowments are invested with investment managers collectively chosen by the UNCP Foundation, Inc. and the UNCP Endowment Boards.. The University strives to preserve both the corpus and the spending power of the endowments. Asset allocation is the cornerstone of the endowment’s investment policy and a key responsibility of UNCP’s Investment Committee Members. The strategic asset allocation policy should set the course for endowment investing for many years to come. The overall investment objective is to earn a total net return at least equal to the sum of inflation plus the spending rate.
6. What is asset allocation?
Asset allocation is the manner in which endowment funds are distributed among the various long-term investment options. Asset allocation is a major factor in maximizing portfolio return and should take into consideration an acceptable risk level. The objective of an endowment, and thus the allocation decision, is to provide “generational neutrality”. In other words, endowment management seeks to provide at least the same level of support to future generations as the current beneficiaries receive.
7. How is spending determined? What is the relationship between overall investment return and the “spending” on an endowment?
Spending policies are set by the two boards and managed by the Investment Committee. A sustainable spending rule is total net investment return minus inflation. Programmatic endowment spending is generally computed as a percentage of the average market value of the previous three years of the fund as long as adequate reserves are available. The Investment Committee uses this averaging method in order to smooth out changes in market volatility.
8. How soon will new endowments start to spend for programmatic purposes?
New endowments may begin spending after accumulated investment earnings are sufficient to fund a spending budget.
9. What happens to any “excess returns” in the endowment?
Any earnings beyond the amount needed for (programmatic) spending are added back to principal to promote growth and protect against inflation for future programs. These excess returns may also provide available dollars in down periods.
10. What happens when investment returns are negative?
An endowment can spend from prior years’ excess returns (also referred to as spending reserves). However, if there are no spending reserves available, there can be no spending.
11. What is an “underwater” endowment?
Such endowment is in an endowment that, through declining market performance, has used all accumulated earnings and appreciation and is now eating into or eroding the original gift value, or corpus. We also refer to “underwater” endowments as endowments with eroded corpus. Donors may elect to contribute to the endowment’s income (spending) account for current use until the corpus value returns to its designated endowment level.
12. How will spending occur if an endowment is “underwater”?
Spending will not occur in “underwater” endowments, as required under UMIFA (NCGS 36B). See question #3 above regarding legal requirements for endowments.
13. What is the minimum amount for establishment of an endowment?
The University’s minimum to endow a scholarship fund is $10,000.00. .
14. What is a BTE?
A BTE is a fund that is Building To (the minimum) Endowment level. Minimum endowment levels have been established for certain types of endowments. Also, donors may specify an endowment level above the minimum set by the University in their endowment agreement.
BTE’s are allowed a five-year period to achieve the minimum required level. If the BTE does not reach the required minimum within 5 years, it will be reclassified to a regular restricted fund and the balance in the fund may be spent in accordance with the stated purpose.
15. How are BTE’s invested?
Gifts to foundation funds that are building to endowment level are invested in short-term to intermediate investments to reduce market risk in the event the fund does not reach endowment level. While building to endowment level, investment earnings are reinvested in the BTE fund and become part of the endowment corpus. Reinvested earnings will help the BTE fund reach the required minimum faster.
16. How do I know when a BTE fund has reached the required minimum?
For BTE funds in the foundations, staff reviews BTE’s monthly to identify those that have achieved the required minimum balance. Then we notify the foundation development officer by memo of the funds that have reached endowment level and advise them we will be investing those funds in the foundation’s long-term investment pool. We allow time for the development officer to respond in case the donor has requested a portion of the funds not be endowed and left for spending. If there is no response from the development officer, staff will endow 100% of the balance in the BTE fund.
Distinguished professorship BTE’s in the University Endowment Fund are reviewed at least quarterly to determine if the minimum level specified for a matching grant from UNC-GA has been achieved. The Chancellor’s Office then sends a letter to the Office of the President notifying them of the fund balance and requesting the matching funds. When those matching funds will be disbursed by UNC-GA is dependent upon the number of requests for matching funds and the level of state funding provided for the program each year.
Other BTE’s in the University Endowment Fund are reviewed annually to determine if the minimum endowment level has been achieved.
17. When can I spend from a BTE?
Spending is not permitted from funds building to endowment level, unless there is a specific donation earmarked for current year spending. After a BTE fund has been endowed, the endowment follows the approved spending policy.
18. Can an Endowment be designated for a specific purpose?
Absolutely! As with any gift to UNCP an endowed gift offers alumni and friends the opportunity to have their names, or the name of a loved one, linked to an area of the University in which they have a special interest.
Updated: Thursday, November 1, 2012
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