Universities: Here's What Congress Wants to Know About Your Endowment

In early February, the Senate Committee on Finance, the House Committee on Ways and Means and the Oversight Subcommittee of the House Committee on Ways and Means sent a joint letter to 56 academic institutions. The letter asks a total of thirteen 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 the first of the questions dealing with endowment management.

Here is the first question asked in the endowment management category:

What categories of assets are included in your college or university's endowment?

For each category, please indicate the amount of funds that are:

a. unrestricted;

b. permanently restricted by donors;

c. temporarily restricted by donors;

d. permanently restricted by your college or university (quasi-endowments);

and

e. temporarily restricted by your college or university.

f. For each restricted asset, please describe the uses for which the funds are restricted and the amount of the fair market value of the endowment apportioned to each use. How and why were the restrictions put into place?

I have been involved in endowment accounting for over 25 years and I will try to provide you guidance based on how I read this question and how I believe it relates to the GAAP endowment records you maintain in your institution. This will be useful information for both endowment holders (the institutions) as well as the donors to an institution’s endowment.

I am not sure what congress means when it asks what “categories of assets” are included in the endowment. The assets in an endowment are usually investments  stocks and bonds and other typical investments. Investments are assets you purchase with the expectation of capital appreciation, dividends, interest, etc. or some combination of all of these.

If the letter had asked what “type” of endowments comprise the university’s endowment, then one might assume they were asking about permanent endowments, term endowments and quasi-endowments. However, these “types” of endowment are actually covered by subparts a – e of the question.

Perhaps congress wants to know if the schools have scholarship endowments, endowed professorships, facility endowments, etc. This could, indeed, be what representatives have in mind when asking about “categories of assets.” Colleges and universities have many types of endowment funds and it should be possible (although lengthy) to list each of these in your response.  

Therefore, your response could list endowments such as the following:

  1. Permanently restricted endowment in which the income is unrestricted.

  2. Permanently restricted endowment in which the income is restricted to (statement of each purpose).

  3. Term endowment with the term expiring in 20xx, in which the income is unrestricted and the principal is unrestricted at the end of the term (or restricted to a stated purpose).

c.  Term endowment with the term expiring in 20xx, in which the income is restricted to (statement of each purpose) and the principal is unrestricted at the end of the term (or restricted to a stated purpose).

  • Unrestricted assets designated as funds functioning as endowment by the university where the funds are expected to remain on a permanent basis and where the income is undesignated.
  • Unrestricted assets designated as funds functioning as endowment by the university where the funds are expected to remain on a permanent basis and where the income is designated (for a stated purpose).
  • Unrestricted assets designated as funds functioning as endowment by the university where the funds are expected to remain until 20xx and where the income is undesignated.
  • Unrestricted assets designated as funds functioning as endowment by the university where the funds are expected to remain until 20xx and where the income is designated (for a stated purpose).

As you can see, this list will be very long, especially when listing each restricted or designated purpose.

As you can also see, subparts a – e are addressed via the above method of listing endowment funds. I have some comments and questions regarding subparts a through f and have noted those below.  

 

  • Part a – unrestricted endowment assets: There are funds that have been permanently restricted by the donor to the institution’s endowment fund but whose income is unrestricted as to its use. These gifts are permanently restricted, but because the income they generate is unrestricted, people incorrectly refer to them as unrestricted endowment gifts. I assume this is what congress wants for Part a, but see Parts d and e below.
  • Part b – permanently restricted by donors: As discussed above, gifts permanently restricted by donors are already covered in Part a.

 

But some donors make gifts permanently restricted to endowment and also add that the income those permanently restricted funds produce is permanently restricted for a specific purpose (such a building maintenance or library books, etc.). People incorrectly refer to these gifts as permanently restricted endowment funds.

I recommend that institutions report the appropriate figures in Part a and Part b, but use the correct terminology as I have done above. Part a is for ‘donor permanently restricted endowment gifts where the income is unrestricted as to use’. Part b is for ‘donor permanently restricted endowment gifts where the income is restricted to a specific purpose’.

Part c – temporarily restricted by donors:  No funds should be reported in Part c unless they are term endowments, although congress did not refer to “term endowments.”

A gift from a donor that the donor indicates can be used in its entirety is not permanently restricted because the donor indicated that it could be entirely spent. Such gifts are not deposited into the endowment fund of an institution. This is a letter requesting endowment fund information only, and should not include temporarily restricted assets unless they are temporarily restricted to the endowment fund by the donor.

If a donor said, "Here is $1 million for the support of the business school," but did not say the $1 million is permanently restricted to the institution’s endowment with the income from that endowment to be used for the support of the business school, that is a ‘temporarily restricted gift’ from the donor.

If the institution decides not to spend the $1 million and instead invest it like an endowment gift, and spend only the income from that investment for the support of the business school, then that is a temporarily restricted asset and not an endowment asset. The institution should report it as either a ‘fund functioning like an endowment’ or a quasi-endowment. See Part e below. Such a gift does not belong in Part c.

Sometimes a donor makes a gift and instructs the institution to hold it in an endowment fund for a period of time — 10 years, 50 years, whatever. After the time is up, the donor may also specify what is to be done with the remaining funds. This is called a “term endowment.” Congress did not ask about “term endowments,” but perhaps this is what they were looking for in Part c. I suggest that if your institution has term endowments, it identify them as such and not identify them as funds that are temporarily restricted by the donor.

Part d – permanently restricted by your college or university (quasi-endowments): No institution should be reporting any funds in Part d.

According to GAAP, there can be no funds permanently restricted by the institution. It is conceptually impossible. The simple reason is that whatever committee (board of trustees, board of directors, etc.) that permanently restricted the funds can simply reverse its actions at a subsequent meeting, thereby eliminating the permanence of their prior action.

When an institution does create funds that are intended to function in the same manner as a permanently restricted endowment, such funds are properly referred to as unrestricted "funds functioning as endowment" (because they have not been restricted by a donor) or unrestricted "quasi-endowment funds." Most professionals prefer to use the terminology "unrestricted funds functioning as endowment," as this more clearly describes the true nature of the funds.

If an institution were to establish a fund with unrestricted monies that is to function as an endowment for only a specific period of time  say, 20 years  this would be an "unrestricted fund functioning as a term endowment."

I recommend reporting funds functioning as endowment in its own category and separating permanent and term funds as necessary. Note that I listed such funds above, but did not identify them as being responsive to Subpart d. I believe it is important not to list any funds in subpart d so that congress does not misinterpret the information that is provided by the respondents.

Part e – temporarily restricted by your college or university: There should be no funds reported in Part e.

Once again, this type of asset does not exist in GAAP endowment accounting. If a donor made a $1 million gift indicating the institution could spend it as it saw fit, and the institution commits to using it for building maintenance, this is not a temporarily restricted gift. The institution can change its mind about how to use the gift the following day; therefore, the gift remains unrestricted. Such a gift is not to be reported in response to this question. Such a gift is not an endowment gift and is not part of this investigation.

If the institution were to take this $1 million gift and put it into the endowment fund, it would be a "fund functioning as an endowment" and reported as noted above. See the discussion under Part d.

In Part f, the question asks respondents to describe the uses for which the funds are restricted. This applies only to Part b and term endowments. Remember to indicate that it is the income from the permanently restricted fund that is restricted for the spending purpose. I strongly recommend that you be very careful and specific in your response  e.g., you do not have $20 million restricted to scholarships; you have $20 million permanently restricted to endowment, the income from which is restricted to scholarships.

In Part d, above where I spoke about "funds functioning as endowment," I noted that such funds could function either with or without a designation of how the income generated was to be used. Therefore, in describing ‘funds functioning as endowment,’ the institution should separate funds that are producing income the institution intends to use for a specific purpose from funds with no such designation.

Part f also asks how and why the restrictions were put into place. Here, they are only referring to funds in which the income is either specified by the donor or the institution for a specific purpose. This request would appear to be illogical for restrictions placed by the donor, but since the institution had the option of rejecting the gift because of its restrictions, the institution should indicate that the restrictions were placed by the donor (the "how") and accepted by the institution in order to (partially) satisfy a need for this type of funding (the "why").

Lastly, Part f asks for the “fair market value of the endowment apportioned to each use.” I am not sure “apportioned” is the correct term, here. What they want is the fair market value of each bucket of assets you have identified — i.e. Parts a, b, and the funds functioning as endowment. As I said, nothing should be reported for Parts c, d and e.

Ideally, you should answer this question as of your most recent fiscal year-end and the figures should agree with either your audited financial statements and/or tax return.

This questions took a long time to explain. Hopefully, it will take you less time to create your response.

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