8.13 Endowment and Investment Policies

Types of Endowments| Establishing Endowments |Investing Endowments|

  Spending Endowments/Pay Out Rate| Management Fee

1.   Simply stated, an endowment is a special fund whereby the principal is held for investment and the interest earned on the principal is spent as directed by the donor. There are only two authorized repositories for endowment gifts: the University of Arizona and the University of Arizona Foundation. Endowment gifts are subject to the provisions of the University Development Fund and 8.12, Gifts.

2.   With the acceptance of endowment funds from an outside donor, the University assumes certain fiduciary responsibilities. These responsibilities include making sure the funds are held and expended in compliance with the donor's wishes. For this reason, when a department receives funds, either directly or indirectly through a foundation, the department should have the donor’s wishes in writing to insure compliance over the years. Since permanent, or true, endowments continue in perpetuity, it is very important that the University maintain in all permanent records, a clear understanding of any donor restrictions.

Generally, when there are donor restrictions, a separate account to track the expenses is established. If a donor deposits restricted funds at the University of Arizona Foundation and these funds are later transferred to the University, fiduciary responsibilities follow the funds. Special care must be taken to insure that the donor’s wishes are followed; this includes establishing a separate account, if needed, to comply with donor restrictions.

Types of Endowments

3.   Endowments are classified as permanent, quasi, or term endowments.  Funds can be either restricted or unrestricted within each of these classifications.  Restricted endowment funds are funds for which the donor specifies how the endowed income will be used.  Unrestricted endowment funds are funds for which the annual earnings are used at the discretion of the President of the University.  

a.      Permanent (True) Endowments: Donor specifies principal is to be invested and maintained in perpetuity; only the income distributions may be expended.

b.      Quasi Endowments: Quasi endowment funds are funds functioning as an endowment that are 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 established by the institution rather than by an external source, the principal may be expended as stipulated by the donor.

c.       Term Endowments: Similar to permanent endowment funds except after the expiration of a stated period of time or occurrence of a specified event, all or part of the principal may be expended depending on donor wishes.

Establishing Endowments

Establishing Permanent (True) Endowments

4.     A minimum of $10,000 is required to establish a permanent (that is, "named") endowed fund, the structure of which is limited only by the interests and creativity of the donor and University policies. Complete information on establishing and administering endowments is available from the University of Arizona Financial Services Office or the University of Arizona Foundation.

Establishing Quasi Endowments

5.      Establishment of quasi endowments from donor gifts or institutional funds will be considered under the following circumstances:

1. If the gift is to fund a continuing scholarship, the gift must be $10,000 or greater.
2. If the gift is to fund any other university purpose, the gift must be at least $750,000 and the intent of establishing the quasi endowment should be to spend the income and less than 10% of the corpus in any given fiscal year.  A pledge agreement to donate a minimum of $750,000 within 10 years may be used to establish a quasi endowment.
3. Donor gifts for amounts between $250,000 and $750,000 may, at the request of the donor, be considered for establishment as a quasi endowment if the gift provides the opportunity to ultimately establish a quasi endowment above the $750,000 minimum. This requires written approval by the President.

Investing Endowments

6.      University endowment funds can be invested in one or both of the following:

a.       Growth Income Pool: This pool invests for both growth and income with a primary objective of a high, long-term total return (from income and capital appreciation). Since most endowments continue in perpetuity, this pool is the primary investment choice for UA endowments. All permanent endowments will be invested in the Growth Income Pool, unless otherwise restricted by the donor. Quasi endowments may be invested in the Growth Income Pool, depending on the spending plans for each specific endowment.

b.      Separately Held: Quasi endowments and term endowments which invest in individual securities are called Separately Held. Endowments which invest in individual securities bear all the gain or loss from such securities. The manner in which these funds are invested depends on the spending plans for the funds. The appropriate investment strategy for each endowment will be developed in consultation with the appropriate University beneficiary. Quasi and term endowments may be invested in both the Growth Income Pool and as Separately Held funds.    

c.      Separately Held Quasi Endowments:   To minimize the possibility of a capital loss, departments with quasi endowments  should periodically contact the Investment Office, Financial Services Office, telephone 520-621-9207 or fax 520-621-3048, concerning fund-raising efforts and spending plans.

Spending Endowments/Pay Out Rate

7.      In order to preserve the real value of the University's endowed assets, a spending rate will be selected that strikes a reasonable balance between current spending outlays and reinvestment of the remainder to support spending in the future.

An appropriate percentage of market value will be set annually based on a three-year average at December 31, with consideration for the rate of inflation of Higher Education Price Index and the total investment return over the same period of time. A proposed payout rate, with appropriate justification, will be presented by the Assistant Vice President-Financial Services to the Senior Vice Presidents and the University's Investment Committee for consideration and approval. Notification regarding the new payout rate will be given to the campus community prior to the upcoming fiscal year for planning purposes.The payout will be distributed as revenue is earned.

8.     For separately held quasi endowments, the actual earnings of the investments, minus the management fee, will be distributed.

Management Fee 

9. All permanent, term and quasi endowments will be assessed an annual management fee of no more than 1.5% of the market value of the assets held in the endowment. The fee will be collected in monthly payments from income or gains in the Growth/Income Pool after distribution of the pre-established payout rate.

10. For separately held investments, the management fee will be assessed to the endowment annually.

11. Endowments that restrict the collection of an annual management fee will be assessed the fee out of other discretionary or departmental funds.

12. Permanent or quasi endowments funded with:

1. Non-cash, non-income producing assets will not be subject to the management fee until the assets are sold and reinvested.
2. Non-cash, income producing assets will be assessed a management fee based upon the book value rather than the market value.

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maintained by: Mike Treiber
last reviewed: 4/22/06