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Endowment ManagementCSU Financial Officers

Associationwww.calstate.edu

Lori RedfearnAssistant Vice Chancellor, Advancement Services

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CSU Endowment Market Value

2010/11 2011/12 2012/13

New Gifts to Endowment $55 $46 $62Annual Investment Return $197 -$12 $130Corpus & PY Inv't Return $805 $1,035 $1,027Distribution -$32 -$42 -$37

$1,024 $1.18 B$1.02 B $1.03 B

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Endowment Asset Range Profile

$192

$1.18 B

>$100 M

>$50 M to $100 M

>$25 M to $50 M

<$25 M

$192 M$157 M

$347 M

$485 M3 $142 M - $184 M

5 $50.5 M - $99 M

4 $29 M - $48 M

12 $5 M - $24 M

Campus Count

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Uniform Prudent Management of Institutional Funds Act (UPMIFA)

Effective January 1, 2009Applies prudence standard to investing and

spendingEliminates concept of historic dollar valueRules for releasing or modifying endowment

terms

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Considerations of Prudent InvestingEffects of inflationInvestment decisions must be made in relation to

overall resources of the institution and its charitable purposes.

No investment decision may be made in isolation, but in light of the fund’s entire portfolio.

Investment should be part of a strategy “having risk and return objectives reasonably suited to the fund and the institution.”

Diversify assets as an affirmative obligation unless “special circumstances” dictate otherwise.

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2013 Endowment Asset Allocation

36.01%27.12%

17.13%16.47%

3.27%

Domestic Equities

Fixed Income

Int'l Equities

Alt. Strategies

Cash/Other

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Endowment PerformanceDollar Weighted Average Investment Return

Endowment Assets 2010/11 2011/12 2012/13

> $100 M 16.02% -0.67% 10.9%

> $50 M to ≤ $100 M 20.73% -0.94% 11.3%

> $25 M to ≤ $50 M 20.45% -2.45% 7.3%

Less than or = $25 M 19.38% -1.65% 11.3%

Total Market Value $1,024 M $1,026 M $1,181 M• Net of Management Fees and Expenses• CSU Median Return =10.93%• 2012/13 Industry Benchmark: Russell 3000 65% and Barclay's Aggregate Bond Index 35% = 12.44%

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Peer ComparisonEndowment Assets CSU NACUBO Variance

> $101 M to ≤ $500 M 10.9% 11.9% -1.0%

> $51 M to ≤ $100 M 11.3% 11.6% -0.3%

> $25 M to ≤ $50 M 7.3% 11.4% -4.1%

Less than or = $25 M 11.3% 11.6% -0.3%

• Net of Management Fees and Expenses• CSU Average Return = 10.99%; Median Return = 10.93%• NACUBO Average Return = 11.7%; Median Return = 11.7%

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Seven criteria guide board spending decisions:1. Duration and preservation of the

endowment fund2. Purposes of the institution and the

endowment fund3. General economic conditions4. Effect of inflation or deflation5. Expected total return from income and the

appreciation of investments6. Other resources of the institution7. Investment policy of the institution

Considerations of Prudent Spending

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Spending PoliciesMoving Average Over

Rate Flat 12 Qtrs 16 Qtrs 20 Qtrs 3 Yrs Mix

3.00% 1 1

3.50%

4.00% 2 4 1 3 1

4.25% 1

4.50% 2

5.00% 1 1 1

Other:• (3) Decide on an appropriate rate or amount each year• (1) Spend all current income• (1) Weighted average or hybrid method

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Spending Compared to Investment Returns

0%

2%

4%

6%

8%

10%

12%

14%

3 Yr Ave Inv't Return 2012/13 Spending Rate

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Modification RulesA donor may release or amend a restriction.A court may modify a restriction in

accordance with the donor’s probable intention. The Attorney General must be notified.

A charity may modify a restriction on a small (<$100,000) and old (>20 years old) fund without going to court. If the restriction becomes unlawful, wasteful, or impracticable to achieve. Use must be consistent with donor intent. The Attorney General must be notified.

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Questions?

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Endowment AccountingSheralin Klinthong

Associate Director, Financial Reporting and Review

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Endowment - OverviewAn endowment is a transfer of money and/or property

donated with the intention to support the University and its auxiliary organizations in perpetuity or during a stipulated term.

Based on Ed code 89721, endowment funds received by the university should be deposited in California State University Trust fund (0948-466).

CSU Fund 921 is available for auxiliary organizations to record endowment funds.

Endowments may come with stipulations regarding its use (by donor or governing board).

Endowment funds can be unrestricted or restricted.

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Endowment Investment as June 30, 2013

CSU Aux Org

$1.1 billion

Endowment

Investment

Endowment

Investment

$20.6 million

Most endowment in the CSU are held by the auxiliaries (usually foundations) to maximize the return on endowment investments and for other considerations.

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Sources of Endowment BalanceOriginal Gift

Net Appreciation (realized and unrealized)

Interest/Dividends

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Types of Endowment FundsSource of

Funds

External Donor

Governing Board (quasi endowment)

Time Requireme

nt

Permanent

Term

Use of Funds

Unrestricted

Restricted

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True EndowmentDefinition

Established when the donor states that the gift is to be held permanently as an endowment as identified in a written gift agreement or the organization restricts it for specific use as solicited from donors. The original funds and any additional principal cannot be withdrawn, expended, or otherwise exhausted.

FASBFund is classified as Permanently restricted net assets

GASBAlso referred to as Permanent Endowment. Fund is classified as Restricted nonexpendable net position

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Term EndowmentDefinition

Funds set aside for a specific period of time or until occurrence of a certain event. These funds can be established by a donor or the organization.

FASBFund is classified as Temporarily restricted net assets

GASBFund is classified as Restricted expendable net position

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Quasi EndowmentDefinition

Funds set aside by an organization’s governing board, which maintains the power to release the restriction on principal spending. Additional reserve funds, and other unrestricted gifts are often used to set up this fund type. The Funds are held by board resolution and therefore can have policies and procedures that allow withdrawal of principal. Also referred as Board-Designated Funds.

FASBFund is classified as Unrestricted net assets

GASBFund is classified as Unrestricted net position

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GASB Example: Permanent EndowmentFacts: A corporation gives $5 million to a state university (recipient) with the stipulation that the university establish an endowment, invest the gift, and maintain the principal intact in perpetuity. The investment income is to be used for scholarships for underprivileged students majoring in business or public administration.

Type: Permanent endowment (permanently nonexpendable addition to net

position). Restrictions:

Purpose restriction - the requirement to invest the gift and use of investment income for specified purposes

Time restriction - the stipulation that the principal be maintained intact in perpetuity (can never be expended)

Accounting: recognize assets and revenues when the gift is received because at that time the university begins to comply with the time requirement (to maintain the principal intact). The university should always report resulting net position or fund balance (principal) as restricted because of the purpose restriction and the time requirement (investment in perpetuity).

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GASB Example: Term EndowmentFacts: An alumnus promises to donate $500,000 to his alma mater with the stipulation that the university invest the principal and use the income to provide summer research grants for accounting faculty members. The terms of the agreement specify that, after the donor’s death, the university should withdraw the principal of the gift and use (expend) it, also for summer research grants for accounting faculty members.

Type: Term endowment Restrictions:

Purpose restriction - requirements to invest the principal until the donor’s death and then to expend it for summer grants

Time restriction - requirement to maintain the principal intact until after the donor’s death

Accounting: The university should recognize assets and revenues when the gift is received. It should not recognize a receivable when the promise is made because it cannot begin to comply with the time requirement until the gift is received. When the gift is recognized, the university should report resulting net position or fund balance as restricted because of the purpose restrictions and the time requirement. However, it should continue to report net position or fund balance as restricted after the donor’s death, until the principal is expended in accordance with the donor’s stipulations.

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Investment in Land and other Real Estate Held by Endowments (GASB)

GASB 52 requires that land and other real estate held by endowments (except federal land grants) be reported at fair value at the reporting date. Any changes in fair value during the period should be reported as endowment income. Significant assumptions used to determine fair value should be disclosed as required by GASB 31.

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Underwater EndowmentDefinition

Underwater endowment occurs when the value of donor-restricted endowment funds decline below the corpus. Consideration of various accounting issues is required.

GASB Reduction of Restricted net position is ALLOWED. If liabilities that relate to specific restricted assets exceed those assets,

no restricted component net position should be reported – the net negative amount should reduce unrestricted net position.

FASB Permanently restricted net assets is NOT reduced by losses. Losses on donor restricted endowment fund shall reduce temporary

restricted net assets to the extent that donor-imposed temporary restrictions on net appreciation of the fund have not been met before loss occurs. Remainder shall reduce unrestricted net assets.

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Endowment Accounting (FASB)

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IMPORTANT REMINDERAssess the relevant facts and

circumstances of the endowment gifts and relevant laws to determine

appropriate accounting treatment.

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Relevant PronouncementsFASB:

FASB ASC 958-205 (pre-codification: FAS 117)

GASB:GASB Statement No. 34, Basic Financial Statements and MD&A for State and Local GovernmentsGASB Statement No. 52, Land and Other Real Estate Held as Investment by EndowmentGASB Statement No. 63, Financial Reporting for Deferred Outflows of Resources, Deferred Inflows of Resources and Net Position

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Contact UsLori RedfearnAssistant Vice Chancellor, Advancement Serviceslredfearn@calstate.edu Sheralin KlinthongAssociate Director, Financial Reporting & Reviewsklinthong@calstate.edu

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Any Questions?