In early February, a joint letter from the Senate Committee on Finance, the House Committee on Ways and Means and the Oversight Subcommittee of the House Committee on Ways and Means was sent to 56 academic institutions. The letter asks a total of 13 questions dealing with such subjects as endowment management, endowment spending and use of funds, donations, and conflicts of interest. I have obtained a copy of the letter. In this post I will discuss some other questions dealing with endowment management. In a previous post, I discussed the first question on endowment management.
Question No. 2 is: Does your college or university hold any investments that are not included in the endowment? If so, what are they, and what are their fair market values and basis? How are they used to further the educational purpose of the college or university?
Although Congress is primarily interested in college and university endowment funds, and have selected the 56 institutions to receive this letter of inquiry based on the size of their endowments, congress is also interested in the general wealth of these academic institutions.
In all probability, institutions will have investments that are not part of their endowment funds. Every business and institution should maximize the use of its assets, and when an institution has funds that are temporarily unused, these should be invested to maximize their return. Do not be defensive about the millions of dollars your institution might have invested outside of the endowment investments. Don’t assume that the reader(s) of your response will be knowledgeable about cash flow needs of a large university. In all of your responses, be clear and detailed in describing your institution's assets and why they are needed.
One difficulty in answering this question is determining what an "investment" is. Obviously, funds used to make stock and bond purchases are investments. But is temporary cash placed in a savings or money market account an investment? What about funds in CDs? Assuming institutions answer all of the questions in this letter as of the end of their most recent fiscal year (most likely June 30th), they are likely going to have reasonable cash balances designed to see them through the summer until fall tuition payments are due. Regardless of where this working capital is located, should it be disclosed in response to this question? It depends on what you consider invested funds. Some would describe invested funds as all funds that are not held in checking accounts.
As with all inquiries from the government, be careful and thoughtful in your response.
Question No. 3 is: What is your endowment size, as measured by total fair market value of its assets? What has been the net growth and net investment return on your endowment each year?
The first part of this question was likely answered as part of your institution's response to question No. 1. The fair market value of your endowment should agree with the number reported on your financial statements and tax return and your answer to question No. 1.
The second part of question No. 3 is interesting. The letter does not specify a period of time. Is it two years, five years, 10 years? On Schedule D of a charitable organization’s Form 990, the institution is required to provide endowment information for the current year and the previous four years—five years of data in total. I believe, therefore, that one should present information for a five-year period in response to this question.
In a five year period, your investment returns may reflect both good years, average years and loss years. As discussed in a previous blog, Congress has honed in on the unusually high 2014 investment returns. Demonstrating that such returns is not the norm, should be one of your objectives in answering this question. Therefore, if your institution has had consistently high returns for all 5 years, look at the returns over a 10-year period and even consider reporting only the past single year.
The IRS provides an excellent format for presenting this information and I suggest adopting a portion of that format in answering this question. I suggest providing an information table as follows:
2 Years Ago
3 Years Ago
4 Years Ago
Beginning of Year Balance
+ Contributions Received
+ Net Investment Earnings, Including Gains and Losses
- Endowment Resources Used
End of Year Balance
The IRS requires more detail for the “endowment resources used” line, but since this letter does not request such detail, I believe it is in your best interest to provide less detail as noted above. I think that it goes without saying that your response to this letter should agree with your financial statements and/or your institution’s tax return.
Question No. 4 is: How much has your college or university spent each year to manage the endowment, and how many staff and contractors are employed to manage the endowment? For any fees paid to nonemployees for investment advice, asset management, or otherwise, please provide detail on the amounts paid, to whom, and the fee arrangement.
This appears to be a fairly straightforward question. Remember, when calculating the amount spent, include all of the costs associated with your in-house personnel involved in endowment management—salaries, benefits, facility costs, etc. The question does not specify how much detail is required except for the amounts paid to non-employees. I also assume that "managing the endowment" includes the accounting costs and not only the investment management costs. Since some respondents may not make this assumption, you should provide the costs broken down by category—salaries, benefits, etc.—and function, so that if your costs are substantially higher than other respondents, the reader(s) will have an idea of why your costs are higher.
Question No. 5 is the last endowment management question: If your endowment is required to file a Form 990 separately from your college or university's Form 990, please provide the endowment entity name(s) and Employment Identification Number.
Many institutions have development foundations (or multiple development foundations) that are separate legal entities from the college or university, although those entities exist solely for the support of the institution. If this is the case, the responses to this letter must include all of those entities. If there is not a single entity that will contain the figures reported elsewhere in your response, it may be useful to supply a schedule that relates all of the entities to the amounts reported in your response. Try not to leave any unanswered questions in the minds of the reader(s) of your response.
In future posts, I will review the questions asked in the areas of endowment spending and use, donations and conflicts of interest.