Trust Funds
Practices for Underwater Endowments
Practices
The practices outlined here will apply only to donor-designated endowments and not to Board or otherwise internally designated endowments.
§ All endowment funds/accounts are participants in the Long Term Fund (where the original gift principal is always invested). The Long Term Fund is valued and allows transactions (buys and sells) on a quarterly basis, and makes an annual distribution of 4.0% of its three-year moving average market value in quarterly installments of 1.0%. Therefore, all participants in the Fund must either receive this distribution level in cash as of a given quarter end, or, if cash distributions for spending are not permitted, receive the distribution in the form of a reinvestment into additional shares of the Fund; no other levels of distribution and no "natural income" (e.g., dividend or interest income) distributions will be considered. (It should also be noted that under current practice, new participants in the Long Term Fund receive their first quarterly spending distribution in cash, if eligible, one quarter after first investing in the Fund.)
§ Although the Fund is valued and distributions are made on a quarterly basis, the comparison of MV to HDV will be made only once per year as of the end of each fiscal year (June 30). If the MV of a donor-designated endowment's Long Term Fund holdings is at or below the account's HDV as of any June 30, the endowment will not receive cash distributions from the Long Term Fund for spending purposes over the next four quarters; rather, distributions will be reinvested into the Fund for this period. (The determination to either distribute cash or reinvest for the next four quarters will be made without regard to the level of disparity between MV and HDV; e.g., if MV is greater than HDV by only $1 or by 0.5% at June 30, the endowment will receive a distribution of 1.0% for the quarter.) These practices are designed to allow for practical implementation and monitoring and to facilitate fiscal year planning by the campuses.
§ In the event that the MV of the Long Term Fund falls significantly (e.g., a 10% decline) during an intra-evaluation period, UW System staff and the Business and Finance Committee of the Board of Regents may reconsider the timing of the next determination date.
§ Unspent income distributions residing in the Income and Intermediate Term Funds, if any, will continue to be available for spending purposes and will be disregarded in comparing an endowment's MV to its HDV.
§ However, for donor-designated endowments which are presently "underwater," or become so during the intra-evaluation period of one fiscal year, campuses may voluntarily opt to partially or fully restore the MV of the Long Term Fund balances to equal or exceed the account's HDV, to the extent that unspent income is available for this. Cash distributions from the Long Term Fund may then be restarted.
§ Campuses (Chancellors, Chief Business Officers, etc.) will be made aware of these intended practices and will be informed as and when cash distributions from an endowment are to be suspended.
Recognizing that there are various accounting and recordkeeping procedures already in place for the operation of the Trust Funds, the practices outlined above are designed to be practical to implement and monitor, as well as ensure reasonable and prudent compliance with the language and spirit of UMIFA as it stands today.