1 Information Session on Underwater Endowments Overview Finance Advisory Council Meeting February 17 and 25, 2009

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

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

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

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

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

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

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

9 Example A

10 Example C

11 Example B

12 Example D

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

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

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

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

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

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

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

20 Information Session on Underwater Endowments Questions and Discussion