ENDOWMENT POLICIES AND DEFINITIONS
The UofL Foundation Inc. was incorporated in 1970. The foundation receives and administers all gifts to UofL, including outright gifts, bequests, charitable remainder trusts and gift annuities. Contributions are tax deductible and are allocated according to criteria established by donors. Although closely associated with the university, the UofL Foundation is a separate and distinct charitable corporation, and its affairs are directed and supervised by its own board of directors.
The UofL Foundation board’s investment strategy for the pooled endowment fund involves mitigating market risk by maintaining diverse investments through the use of target asset allocation guidelines. These guidelines ensure the foundation’s investment pool consists of a variety of publicly traded fixed income and equity securities, private equities and other nonmarketable securities, and real estate investments. The UofL Foundation’s investment objective is to preserve the principal of each endowment both in absolute and real terms while reasonably maximizing the total rate of return.
Endowment gifts remain permanently invested and only a portion of the total return is expended. The amount distributed to each endowment is determined by the foundation’s board of directors. The current spending policy provides for an annual distribution of 5.5 percent of each endowment’s three-year average market value as calculated on December 31. This formula reduces the volatility of an endowment’s spending from year to year and minimizes the negative effects of moderate market downturns. For underwater endowments, the foundation has established a pro-rated amount based on this policy.
The UofL Foundation’s fiscal year is July_1 through June 30 and mirrors that of the University of Louisville. In January the university begins projecting its budget for the following fiscal year. In February the foundation calculates the projected spending amounts for all endowments using the formula in the approved spending policy. Final decisions on UofL’s budget are made in June when the board of trustees formally approves the new fiscal year budget.
All newly created endowments must be invested for one full calendar year prior to participating in the UofL Foundation’s spending policy calculation. This investment time begins on January 1 following the date of the gift.
Reinvestment is the process by which an endowment’s annual spending policy distribution, in excess of current needs, is returned to the principal of the fund. Recently, the UofL Foundation instituted a formal policy to govern this procedure to help increase the annual amount each endowment receives. Beginning fiscal year 2014, all annual spending distributions will be reinvested in endowments with a carryover balance in excess of $1,000, unless this action is specifically prohibited by the gift instrument. All reinvestments are subject to a 2 percent fee. The dean of the school or chair of the department benefitting from the endowment may annually request an exemption from this policy.
The University of Louisville Foundation’s board of directors follows the Uniform Prudent Management of Institutional Funds Act (UPMIFA), a law providing parameters for charitable institutions regarding investment and expenditure practices. The law ensures nonprofit administrators remain focused on the long-term viability of the funds entrusted to the organization.
UPMIFA requires “prudent judgment” be used to ensure management costs associated with endowment funds are proportional and appropriate.
UPMIFA allows flexibility in defining and spending from “underwater” endowments (funds with a market value lower than the book value).
UPMIFA reinforces the importance of “donor intent” and provides a closely controlled process for modifying restrictions that have become impracticable.