The Advocacy Foundation Endowments Initiative Project

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The Advocacy Foundation Endowments Initiative Project

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The Advocacy Foundation, Inc. The Advocacy Foundation Endowments Initiative Project “Helping Individuals, Organizations & Communities Achieve Their Full Potential”   1735 Market Street, Suite 3750 100 Edgewood Avenue, Suite 1690 Philadelphia, PA 19102 Atlanta, GA 30303 (855) ADVOC8.O ( 855) 238-6280 www.TheAdvocacyFoundation.org © The Advocacy Foundation, Inc. 2014 (All Rights Reserved)

Biblical authority:

Biblical authority James 1:17-27 (RSV) 17  Every good endowment and every perfect gift is from above, coming down from the Father of lights with whom there is no variation or shadow due to change. 18  Of his own will he brought us forth by the word of truth that we should be a kind of first fruits of his creatures. Hearing and Doing the Word 19  Know this, my beloved brethren. Let every man be quick to hear, slow to speak, slow to anger, 20  for the anger of man does not work the righteousness of God. 21  Therefore put away all filthiness and rank growth of wickedness and receive with meekness the implanted word, which is able to save your souls. 22  But be doers of the word, and not hearers only, deceiving yourselves. 23  For if anyone is a hearer of the word and not a doer, he is like a man who observes his natural face in a mirror; 24  for he observes himself and goes away and at once forgets what he was like. 25  But he who looks into the perfect law, the law of liberty, and perseveres, being no hearer that forgets but a doer that acts, he shall be blessed in his doing. 26  If anyone thinks he is religious, and does not bridle his tongue but deceives his heart, this man’s religion is vain. 27  Religion that is pure and undefiled before God and the Father is this: to visit orphans and widows in their affliction, and to keep oneself unstained from the world. James 1:17-27   2

Introduction:

Introduction A Financial Endowment is a donation of money or property to a not-for-profit organization for the ongoing support of that organization. Usually the endowment is structured so that the principal amount is kept intact while the investment income is available for use, or part of the principal is released each year, which allows for the donation to have an impact over a longer period than if it were spent all at once. An endowment may come with stipulations regarding its usage. typically 4-6% of the endowment's assets are spent every year to fund operations or capital spending.   3

Types of Endowment Funds:

Types of Endowment Funds True Endowment Funds are received from external donors with restriction that the principal or gift amount is to be retained in perpetuity and cannot be spent. Term Endowment Funds stipulate that all or part of the principal may be expended only after the expiration of a stated period of time or occurrence of a specified event, depending on donor wishes. Quasi Endowment Funds must retain the purpose and intent as specified by the donor or source of the original funds and earnings may be expended only for the specified purpose.   4

Types of Endowment Funds:

College and University Endowments Academic institutions, such as colleges and universities, will frequently control an endowment fund that finances a portion of the operating or capital requirements of the institution. In addition to a general endowment fund, each university may also control a number of restricted endowments that are intended to fund specific areas within the institution. Alumni or friends of institutions sometimes contribute capital to the endowment. The endowment funding culture is strong in the United States and Canada but less pronounced overseas, with the exceptions of Cambridge and Oxford universities. Endowment funds have also been created to support secondary and elementary school districts in several states in the United States.   5 Types of Endowment Funds

Types of Endowment Funds:

College And University Endowments Restricted Endowments Endowed Professorships Endowed Scholarship/ Fellowship   6 Types of Endowment Funds

Quasi-Endowments:

Quasi-Endowments Quasi-endowment funds are funds functioning as an endowment that are typically established by the institution from either donor or institutional funds, and will be retained and invested rather than expended. The quasi-endowment must retain the purpose and intent as specified by the donor or source of the original funds, and earnings may be expended only for those purposes. Since quasi-endowments are generally established by the institution rather than by an external source, the principal may be expended as stipulated by the donor provided the quasi-fund was not created as a permanent match.   7

Quasi-Endowments:

Separately from the endowment versus quasi-endowment distinction, there's another two-way categorization of restricted and unrestricted, which focuses on the use of the funds.   As an example, a quasi-endowment might be restricted by the donor to supporting the tennis team; the use is restricted to one purpose, but the governing board could "invade principal" to support the tennis team.   8 Quasi-Endowments

How endowment funds work…:

How endowment funds work… Endowments & Divestment An endowment is a fund that holds its principal in perpetuity and only pays out a small portion, about 4 to 5 percent per year, that goes to organizational operations and programs. Endowment investments have dual goals : to grow the principal and to generate income . Institutions invest in funds and companies that they feel will be successful and turn a profit, investments that are intended to contribute to both the growth of the principal and the income generated by the endowment. Colleges and universities are substantial investors, with combined endowment assets estimated at more than $400 billion in the United States alone.   9

How endowment funds work…:

Traditionally, endowments seek investments that are considered highly profitable as means to grow their endowment, even if some of those investments may be unethical or morally ambiguous. These investments, known as “sin stocks,” include investments in companies that are related to alcohol, weapons, tobacco, and pornography.   10 How endowment funds work…

How endowment funds work…:

Divestment campaigns focus on the endowment, as that is where majority of the university’s funds are invested. However, finding out just what an endowment is actually invested in is not an easy job. Most institutions keep such information, like what companies they are invested in and what guiding policies are in place to select future investments, a secret. The endowment’s fund managers (and the universities that oversee them) often insist that their investments are highly sensitive financial decisions and valuable “trade secrets.”   11 How endowment funds work… The Hierarchy of the “Trade Secret” Investments -but see the 990’s!!!

The uniform prudent management of institutional funds act:

The uniform prudent management of institutional funds act The Uniform Prudent Management of Institutional Funds Act (abbreviated UPMIFA ) is a uniform act that provides guidance on investment decisions and endowment expenditures for nonprofit and charitable organizations. As of 2012 UPMIFA is the law in 49 states, the District of Columbia and the U.S. Virgin Islands. Neither Pennsylvania nor Puerto Rico has adopted UPMIFA. The major change in UPMIFA compared to the previous model law (the Uniform Management of Institutional Funds Act) is that it replaces a requirement that nonprofits cannot spend below the original value of contributions or “historic dollar value” (HDV) with a new requirement that their investing and spending will be at a rate that will preserve the purchasing power of the principal over the long term.   12

The uniform prudent management of institutional funds act:

Impact on Nonprofits The major impact of UPMIFA on nonprofits is that they are now allowed to spend from an underwater endowment if the governing board determines it is prudent to do so based on seven specific factors. Many states have adopted an optional provision to limit the spending to 7%. This board-approved spending policy must be based on the average market value of the endowment investments over the 12 quarters (or more) immediately preceding the calculation. UPMIFA applies only to permanent restricted endowments, which are restricted by the donor or law.   13 The uniform prudent management of institutional funds act

The uniform prudent management of institutional funds act:

In March and April 2009, the Association of Governing Boards of Universities and Colleges (AGB) conducted a survey of colleges, universities and affiliated foundations in states in which UPMIFA has been enacted to learn how institutions have been managing endowment spending under UPMIFA. The survey found that: On average, 38 percent of the dollar value of participants total endowment pool was underwater as of December 31, 2008. 31.3 percent are continuing distributions in keeping with their normal spending rule; 26.8 percent are suspending distributions from funds at or below HDV; 15.6 percent are making distributions from underwater funds at some rate less than their normal spending rule by yielding more than interest and dividends; 9.5 percent are distributing only interest and dividends.   14 The uniform prudent management of institutional funds act

Endowment fund faq’s:

Endowment fund faq’s Q1: What is an Endowment Fund? Q2: How is an endowment fund created? Q3: How must an endowment fund be invested? Q4: How much may be spent from an endowment? Q5: What happens if the current value of an endowment is below its original value?   15

Endowment fund faq’s:

Q6: How does the endowment spending policy relate to the 5-percent payout requirement for private foundations? Q7: How do "board-restricted" endowment funds differ from "donor-restricted" endowment funds? Q8: Can the amount available for spending be determined by looking at the "unrestricted funds" column on a foundation's financial statement? Q9: Can endowment principal be used as a last resort if the foundation becomes insolvent? Q10: What responsibilities does the board have with respect to the endowment?   16 Endowment fund faq’s

criticisms:

criticisms Officials in charge of the endowments of some universities have been criticized for "hoarding" and reinvesting too much of the endowment’s income. Given a historical endowment performance of 10–11%, and a payout rate of 5%, around half of the endowment’s income is reinvested. Roughly 3% of the reinvestment is used to keep pace with inflation, leaving an inflation-adjusted 2% annual growth of the endowment. Of course, many endowments do not earn 10-11%.   17

criticisms:

Large endowments have been criticized for "hoarding" money. Most philanthropies are required by federal law to distribute 5% of their assets per year, but university endowments are not required to spend anything. Many universities with very large endowments would require less than 5% to pay full tuition for all their students. For example, it has been estimated that if in 2006 all the Harvard students had paid the maximum in tuition and fees, it would have amounted to less than $300 million. In 2007, if Harvard had spent 5% of its $34.6 billion endowment, all Harvard undergraduate and graduate students could have attended for free and the university would still have had $1.3 billion left over.   18 criticisms

Endowment Invasion:

Endowment Invasion is when an institution draws on its financial endowment to pay off debts and cover the yearly operating expenses. By 2009 most states had adopted Uniform Prudent Management of Institutional Funds Act, a law which allows "invading principal". It is considered a last resort for any institution to stave off closure. From 2003 to 2009 New York City Opera drew down their endowment from $57 million to $16 million to pay off debts and cover annual operating expenses. In the 1980s the New-York Historical Society began using money from the their endowment to pay their annual operating costs and cover their salaries to the point where by 1988 they had only enough money in their endowment to pay for another 18 months of operating expenses.   19 Endowment Invasion

The Wealthiest Foundations:

  20 The Wealthiest Foundations Rank Organization Country Headquarters Endowment ( USD ) Endowment (home currency) Founded 1 Stichting INGKA Foundation   Netherlands Leiden, Netherlands $36.0 billion 1982 2 Bill & Melinda Gates Foundation   United States Seattle, Washington $34.6 billion 1994 3 Wellcome Trust   United Kingdom London $28.3 billion £16.6 billion ( GBP ) 1936 4 Howard Hughes Medical Institute   United States Chevy Chase, Maryland $16.1 billion 1953 5 Ford Foundation   United States New York City, New York $11.0 billion 1936 6 J. Paul Getty Trust   United States Los Angeles, California $10.5 billion 1982 7 Mohammed bin Rashid Al Maktoum Foundation   United Arab Emirates Dubai $10.0 billion $36.7 billion ( AED ) 2007 8 Robert Wood Johnson Foundation   United States Princeton, New Jersey $9.0 billion 1972 9 Li Ka Shing Foundation   Hong Kong Hong Kong $8.3 billion $64.4 billion ( HKD ) 1980 10 The Church Commissioners for England   United Kingdom London $8.1 billion £5.2 billion ( GBP ) 1948

Sample distribution:

  21 Sample distribution

Questions & answers:

Questions & answers   22

PowerPoint Presentation:

  23 Thank You! The Advocacy Foundation 1735 Market Street, Suite 3750 Philadelphia, PA 19102 100 Edgewood Avenue, Suite 1690 Atlanta, GA 30303 (855) ADVOC8.0 (855) 238-6280 www.TheAdvocacyFoundation.org

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