The Catholic University of America

Endowment Management Policy 

Approved by: Board of Trustees
History: Issued             -- December 28, 1999  
  Revised           -- June 4, 2019  
  Last Reviewed -- June 4, 2019
Related Policies: Gift Acceptance PolicyInvestment Policy
Additional References:  
Responsible Official: Vice President for Finance and Treasurer, tel. 202-319-5606
_______________________________________________________________________________
I.         Purpose

The University’s endowment exists to support the institutional mission and operations of the University over the long-term and to support University programs and activities such as financial aid and faculty chairs.

This policy establishes the requirements for the University’s accounting and administration of endowment funds, including the spending policy.  This policy describes the University’s interpretation of relevant accounting standards and applicability to the organization. Departments should refer to the Gift Acceptance Policy before accepting any endowment to ensure that it meets all applicable requirements.

II.         Definitions

A.   Donor-restricted endowment is a fund established in accordance with donor restrictions to exist and maintain its value in perpetuity. Under the District of Columbia Uniform Prudent Management of Institutional Funds Act, the original value of the gift can be invaded, subject to certain rules, principally prudent spending. Donor-restricted endowments are subject to the University’s gift acceptance, endowment investment and endowment management policies unless otherwise documented in a valid gift agreement. These funds are classified as net assets with donor restrictions.

B.   Quasi-endowment (sometimes called “board designated funds functioning as endowment”) is a fund that is voluntarily created by the Board of Trustees from unrestricted funds that functions like an endowment, but without any legal or donor restriction to hold the fund in perpetuity. Thus, the principal and any accumulated earnings may be used at the direction of the Board of Trustees.  Board of Trustees approval is required to both establish funds as quasi-endowment and to remove such designation. Quasi-endowments follow the University’s endowment spending policy.  Quasi-endowments are classified as part of net assets without donor restrictions.

C.   Donor-restricted spend-down gift represents a gift provided to the University for a specific purpose, typically but not necessarily, to be spent within a defined period of time. The cash is invested with the University’s working capital in short-term investments in accordance with the cash management strategy. These funds are not allocated earnings or losses, because the intent is to expend the gifted funds in the near term in accordance with donor intent. Any exceptions must be approved by the Vice President for Finance & Treasurer, and it is expected that such approval will be granted only rarely.  Donor-restricted spend-down gifts are not subject to the endowment spending policy and shall be subject to applicable operating or capital budget policy. Donor-restricted spend-down gifts are classified as part of net assets with donor restrictions.

D.   Other University fund balances are invested along with donor-restricted endowments and quasi-endowments in the investment pool until the funds are needed for operations or capital requirements of the University.  These funds are not subject to the endowment spending policy. Instead, they are managed via the operating budget or capital budget approval process. From time to time, and upon approval by the Board of Trustees, the University may elect to make special distributions using these funds.  These funds are classified as part of net assets without donor restrictions.

E.   Investment pool is the collective investment of donor-restricted endowments, quasi-endowments and other University funds in accordance with investment guidelines established by the Board of Trustees. Funds included in the investment pool carry no donor constraint on how monies may be invested, unless otherwise imposed by the respective donor as to how such gift proceeds should be invested.  Each fund balance invested in the investment pool receives its proportional share of the pool’s earnings, similar to the mechanics of a unitized mutual fund. Please refer to the University’s Investment Policy for related information.

F.   Separately invested endowment fund is a fund that the donor requires be invested in a specific type of investment and/or is prohibited to be pooled with other funds.  Intended to be a rare exception and generally discouraged due to added expense, a separately invested endowment fund may be established when a donor requires use of a particular investment manager or asset allocation.  Since a separately invested endowment fund is more expensive to administer, its establishment requires approval from the Vice President for Finance & Treasurer.

G.  The Uniform Prudent Management of Institutional Funds Act (“UPMIFA”) provides guidelines for endowment investment management, spending rules and financial reporting.  The Board of Trustees interprets UPMIFA as requiring the University to manage and invest donor-restricted endowment funds in good faith and with prudence.  Consequently, the University classifies as net assets with donor restrictions (a) the original value of gifts donated to the endowment, (b) the original value of subsequent gifts to the endowment, and (c) accumulations to the endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. Appreciation on the historical value of endowment funds is subject to appropriation for expenditure by the University in a manner consistent with the standard of prudence prescribed by UPMIFA.  

III.         Gift Acceptance

Prior to soliciting or accepting any gift that establishes an endowment fund, the responsible parties within each school or department must understand the proposed terms of the endowment fund and the restrictions on spending and must have confidence that the school or department will be able to administer and spend in accordance with those terms and restrictions.

University Advancement requires use of the standard endowed gift agreement for new gifts other than bequests. Such agreements, executed by the donor and University Advancement on behalf of the University, include provisions that facilitate the proper management and administration of the endowed funds.  Proposed significant deviations from the standard gift agreement, as vetted and recommended by Advancement Services, require prior approval of both the Vice President for University Advancement, or her/his designee, and the Vice President for Finance & Treasurer, or her/his designee.  

Prior to acceptance, all gift agreements must be approved by the Vice President for University Advancement, or designee.

See the Gift Acceptance Policy for further requirements.

IV.         Minimum Dollar Thresholds and Investment of Gifts

Due to the investment management and administrative costs related to managing an endowed fund, the minimum level of cash on hand required to create an endowed fund is $100,000.  Other minimum endowment levels exist for naming opportunities as further described in Appendix A of the Gift Acceptance Policy. In the instance that a donor-restricted endowment is received over time, the following requirements apply:

1.             Once the donor-restricted endowment gift reaches $50,000, the funds will be invested into the Investment Pool to assist in reaching the $100,000 minimum threshold.  All allocated earnings/losses will be added to/deducted from the principal gift balance until the minimum threshold is met. Once the gift balance reaches $100,000, it will be subject to the University’s standard spending policy.

2.             If the gift does not reach the $100,000 minimum threshold within five (5) years of the date of the initial gift, the funds shall convert to a donor-restricted spend-down gift available for immediate spending and for the purpose identified by the donor, or as closely aligned as possible with the donor’s intent.  The Vice President for Finance & Treasurer, in consultation with the Vice President for University Advancement, is authorized to determine and document a purpose that best aligns with the donor’s intent.  Upon receipt of, or conversion to, a donor-restricted spend-down gift, such funds will no longer participate in the investment pool’s allocation of earnings.

Generally, contributions to an endowment that meet the thresholds described above, and any subsequent gifts to an endowment, will begin accumulating earnings/losses in the calendar month following the date of the gift.

V.         Spending Policy and Calculation of Payout Distributions

To satisfy its long-term performance objectives, as further described in the Investment Policy, the University relies on a total return strategy in which investment returns are achieved through both current yield (interest and dividends) and capital appreciation (realized and unrealized).

This endowment spending policy determines the annual flow of funds from the endowment to mission support via the operating budget. It endeavors to adhere to the standard of prudence prescribed by UPMIFA; provide a predictable stream of operational funding to programs supported by endowments; and seek to maintain the purchasing power of endowment assets.  Therefore, it is intended that the long-term average annual spending shall not exceed the expected long-term inflation-adjusted total return of the endowment assets.

Donor-restricted endowments are intended to be maintained in perpetuity, with capacity to spend derived from investment proceeds.  Since a gift must be invested over time to produce spendable earnings, spending from newly established endowments will not occur immediately. 

The University calculates its payout distributions once each year.  Achievement of all restrictive stipulations to which a gift is subject (e.g. minimum dollar threshold or donor-imposed requirement) prior to the calculation date shall render the endowment eligible to participate in allocation of payout.  If all such restrictive stipulations are first satisfied at any time following the annual calculation, the endowment will be eligible for payout in the next annual calculation.

Each year, the University appropriates for distribution 4.50% of each endowment fund’s average market value over the prior twelve (12) quarters, six (6) months in arrears, to support mission activities in accordance with donor intent.

1.      For example, the FY21 distribution is calculated using the average of each fund’s market value as of October 31, 2019 and the eleven (11) prior quarters.

2.      For those endowments that have not been in existence for twelve (12) quarters, the average market value will be calculated using the quarters in which the fund has a market value.

In addition, each fund participating in the Investment Pool will incur a fee of 0.25% per annum, assessed quarterly, to provide the appropriate infrastructure support and stewardship for the Investment Pool. 

Only donor-restricted endowments and quasi-endowments are eligible to participate in allocation of payout.  Spending authority for all other funds will follow donor intent (if applicable, as documented by a valid gift agreement), and will be subject to applicable operating budget or capital budget conventions.

VI.         Spending from a Donor-Restricted Endowment or Quasi-Endowment

Payout distribution is allocated quarterly to each donor-restricted endowment or quasi-endowment on the 1st day of each fiscal quarter (i.e. May 1st, August 1st, November 1st and February 1st). Once this allocation is made, the resulting payout is separated from the investment pool and thus no longer accumulates earnings or losses.

Accounting standards impose a hierarchy of fund type for order-of-spend priority. Departments are required to adhere to this hierarchy when applying expenses against its various funding resources for a program, center, institute or activity.

The order-of-spend hierarchy is as follows:

1.      Grant funds

2.      Donor-restricted endowment payout distributions

3.      Donor-restricted spend-down gifts

4.      Quasi-endowment payout distributions

5.      Donations without donor restrictions

6.      Unrestricted operating funds

UPMIFA requires that donor-restricted endowments maintain their value over the long term at or preferably above the historical gift value.  To achieve this requirement, the Vice President for Finance & Treasurer is authorized and expected to actively manage individual and collective payout distributions, including modifying or suspending expenditure of payout distributions on any endowment whose market value falls below its historical book value.

VII.         Management of Unspent Payout Distributions

Payout distribution expenditure must be in accordance with restrictions detailed in a valid donor agreement (for donor-restricted endowments) or the restrictions set forth by resolution of the University Board of Trustees (for quasi-endowments).

Departmental spending of endowment distribution in a given fiscal year may not exceed its allocation. If a department awards or spends more than its allocation, it will be required to reimburse the deficit fund in that same fiscal year from other departmental sources for the overage, remaining within aggregate all-funds budget expenditure limits for the department. If such reimbursement is not able to be made, then the distribution for the following fiscal year(s) will be applied and no further spending will be allowed until the deficit is recovered.

Payout distributions from donor-restricted endowments can be carried forward to subsequent fiscal years if and only if no legitimate expenses can be identified to meet the donor’s purpose.  These must follow the order-of-spend hierarchy described in section VI of this policy. Written documentation of the deferral justification is required.  As part of the subsequent year’s annual budget process, departments must prioritize the use of unspent prior-year payout wherever possible as part of their total budget request for that fiscal year.  Unspent payout distributions cannot be added back to the principal of a donor-restricted endowment without explicit written instruction from a donor at the inception of the gift.

Unspent payout distributions from quasi-endowments will not carry forward into the following fiscal year nor be added back to principal, since these funds are unrestricted and would be “deemed spent” according to the hierarchy shown above. Instead, such distributions shall be transferred out of the quasi-endowment payout account to an unrestricted general university account controlled by the Treasurer.

VIII.         Stewardship Reporting

The University’s practice is to provide annually an endowment report to donors or their representatives, whenever possible, summarizing activity during the most recently completed fiscal year.  The report shall include information such as the historical gift value, market value as of the beginning of the fiscal year, investment performance, payout distribution, additional contributions, and market value as of fiscal year end.

IX.         Accountability

The University considers these endowment management practices to comprise a critical component of providing operational financial support for achievement of its mission.  Where this policy is found to be willfully and knowingly violated by departmental fund managers, penalty fees may be assessed against the department’s operating budget or unrestricted fund balances at the Treasurer’s discretion.