Endowment Account Administration Finance Division Information Exchange May 28, 2015

Endowment Overview 700+ true and quasi-endowment accounts comprise over 90% of a $600 million long-term investment pool Investment Pool (Assets by Type) Endowment Accounts (Assets by Use) Each fund (AU) receives a pro rata share of pool earnings and is accounted for separately (akin to individual shareholders in a mutual fund)

Investment Objectives Preservation of contributed capital Long-term growth in excess of spending + inflation Intergenerational equity Stable program support Spending Objectives Endowment Management

Endowment Account Characteristics True Endowment Donor-restricted gift meant to be invested in perpetuity or, for a “term endowment,” for a specified length of time Contributed gifts are recorded in permanently restricted net assets (unless donor stipulates principal to be expendable); outstanding pledges may also be part of this balance. Fund earnings are recorded in temporarily restricted net assets. Spending from a fund is deducted from this balance. Quasi-Endowment Funds the University elects to designate for a specific use, invest and administer in the same manner as a true endowment Unrestricted operating funds or expendable gifts may be used to establish these accounts; earnings remain in unrestricted net assets.

Endowment Account Characteristics Total Assets = Net Pledge Receivable + Invested Asset Balance - / + Due To/Due From University 1240/ / This will equate to total net assets, so be sure to adjust for pledges if your reporting uses net assets to determine a fund’s balance A fund’s invested asset balance will be the sum of its actual gifts received and accumulated earnings, net of all prior spending Activity from the previous month (gifts less spending) generates a net “Due to/Due from” figure Investment earnings are allocated each month based on this total for each fund as a proportion of the total investment pool’s assets and dt/df

Endowed funds are budgeted according to BoT guidelines –Budgets are capped at 5% in absence of donor stipulations directing otherwise –Current base budget calculation results in effective budget rates that float in a 3-5% band Funds budgeted for an endowment account remain invested until drawn (effectively, until one month after spending occurs) Endowment Budgeting Rule of thumb: Most fund budgets can be estimated at 4% of asset value

Endowment Budgeting Objective: mitigate year-to-year fluctuation while maintaining responsiveness to changes in asset values Budgets are calculated as an equal-weighted average of: –(1) Prior-year budget, adjusted for inflation –(2) A base spending rate applied to measurement-date asset value –Results are subject to a 3% floor in addition to the 5% cap Inflation increment and rate applied to market value can each be adjusted annually in response to costs, market conditions

Endowment Budgeting Example: ABC Endowed Fund Measurement Value: 66,000 Prior-year Budget: 2,100 Inflation Factor: 2.0% Inflated PY Budget: 2,142 Spending Rate: 4.0% MV Component Calc: 2,640 Calculated Budget: 2,391 (Effective Budget Rate: 3.6%)

Endowment Budgeting Initial calculations are made in the Fall (for the following FY) to allow for evaluation and adjustment to inputs as necessary Calculations are finalized and loaded as BAS budgeting system “control totals” in February Administrators allocate budget dollars up to the control total across applicable expense codes in BAS BAS output is transferred to Lawson in advance of the new FY Budget calculation timeline and mechanics: Ideally, BAS output and a fund’s Lawson budget matches the budget calculation/ control total, easing expense tracking and subsequent years’ planning

Usage Criteria Fund documentation is maintained on the DocFinity enterprise content management platform: docfinity10.luc.edu

Eric Jones Erik Grimshaw Treasurer’s Office