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Anatomy of an endowment

Published: October 8, 2010
Section: News


Every year Brandeis relies on the university’s endowment to fund roughly 12 percent of its operating expenses. In fiscal year 2009, the university’s endowment dropped from $712 million at the beginning of the year to $558 million at the end of the year, directly affecting all corners of university life, including scholarships, financial aid, fellowships, department chairs, and research and teaching funding. As of June 30, 2010, the endowment was $620 million.

Dissecting the endowment

The Brandeis endowment was created by1,773 separate gifts to the university and is divided into two parts: the “true” endowment and the “quasi” endowment.

The “true” endowment is composed of restricted funds that were donated to the university for a specific use.

The “quasi”-endowment, also known as a“fund functioning as endowment” was created by the board of trustees roughly 10 years ago when President Jehuda Reinharz and then-Executive Vice President and Chief Operating Officer Peter French decided the university needed more unrestricted funds in the endowment to increase the university’s financial flexibility. Because the quasi-endowment is essentially a reserve created by the board of trustees and invested by the board, any or all of the quasi-endowment’s returns and principal can be used by the board for the budget at any point in time. For that reason, the quasi-endowment is often referred to as the “reserve fund.”

In addition to the endowment, the university also receives gifts in the form of “funds held in trust by others.” These gifts are given by a donor and held and managed by an outside trustee. While Brandeis is the beneficiary of these gifts and the university is informed of their value, it does not have control over where the funds are invested. In fiscal year 2009, the university earned $292,000 in investment income from trusts held by others.

Investing the endowment

Money from the endowment is invested by Brandeis, and the university maintains an assent allocation policy “in order to have a responsible probability of achieving the [endowment’s] investment goals and objects at an acceptable risk level,” according to the policy.

The university aims to invest 35 percent of the endowment in equity, 45 percent of the endowment in hedge funds and credit, 10 percent of the endowment in real assets, and 10 percent of the endowment in fixed income and cash, according to the policy, which was last revised in March 2010.

As of June 30, 2009, the university had $588 million invested at fair value. Of that, $41 million was invested in cash and cash equivalents, $98 million in fixed income, $97 million in equities, $44 million in real estate, $79 million in private investments, and $227 in marketable and non-marketable alternative investments, according to the university’s fiscal year 2009 financial statement. The university also had $16 million in short-term investments.

University Vice President for Communications Andrew Gully would not give examples of the university’s real estate investments, private investments or alternative investments, in accordance with the university’s policy to not discuss university investments. However, according to the university’s tax exemption forms from fiscal year 2009, the university did have funds invested in Europe, Central America and the Caribbean.

In fiscal year 2009, the university suffered losses in investments from both its restricted and unrestricted funds, with $29 million lost in realized and unrealized investments of unrestricted assets, $95 million lost in temporarily restricted assets and $2.4 million lost in permanently restricted assets. The total net loss from investments in fiscal year 2009 was $126.49 million.

The university also purchased $175 million in new investments and made $193 million from the sale and maturity of investments.

Effects of the endowment

The Brandeis endowment had a 13.8 percent gain in fiscal year 2010, marking the first gain the endowment has had since the university was hit by the global economic crisis in the fall of 2008, university Senior Vice President of Finance and Chief Financial Officer Frances Drolette said in an interview with The Hoot.

The 13.8 percent gain is a huge jump from the 17 percent loss the endowment suffered in the 2009 fiscal year. The prospects for this year also look promising, with the endowment $62 million ahead of where it was at this time last year.

The annual gains or losses of the endowment have a direct effect on how the university functions, with 12 percent of Brandeis’ operating budget coming from endowment returns.

Indeed, the academic cuts of last spring were, in part, a response to the endowment’s poor returns in the prior year.

“Because the university budget relies on the endowment … when the value of the endowment goes down, the university’s revenue produced decreases,” Drolette said.

Drolette further explained in an e-mail to The Hoot that the university assumes investment returns will average 8 percent annually, so “the minus 17 percent return in [fiscal year 2009] only partially affected spending” in fiscal year 2010.

Despite that, the university’s 13.8 percent gain for fiscal year 2010 “is better than some other institutions that have reported thus far,” the university’s endowment value is currently more than 20 percent lower than it would have been had the endowment earned 8 percent in each of the last three years.

“The 13.8 percent return does help and no budget reductions are planned for this year,” Drolette wrote, “however, investment markets remain volatile and the university continues to monitor closely other changes in revenues and expenses as it proceeds with its plan to balance operations by 2014.”

Regulating the endowment

In fiscal year 2010, the university adopted the provisions of the Universal Prudent Management of Institutional Funds Act (UPMIFA), a law enacted by Massachuesetts July 2, 2009, which allows non-profit organizations like the university to use funds from their true endowment to help close budget gaps.

Before the change, the university had been following provisions of the Uniform Management of Institutional Funds Act (UMIFA), which only allowed the university to spend returns gained from the gifts adjusted for inflation and interest rates. The university was not allowed to spend from the donations themselves, which were intended to exist in perpetuity.

But under UPMIFA, the university could use any “prudent” amount of the “true” or restricted endowment.

For example, if a donation of $100 was invested and suffered a 25 percent loss, under UMIFA the university would be unable to spend the remaining $75. Under the new law, however, the university is allowed access to the $75, as long as they do so “prudently.”

Drolette said the university’s gains in fiscal year 2010 are due to improvement in the market, not the new law. She added that because the funds had come up so much in fiscal year 2010 that the university didn’t have to use the “underwater” funds to the same level it had originally intended.

The Massachusetts version of UPMIFA does not provide any guideline for what “prudent” spending of an endowment would entail; however, the model version of the bill, originally written by the Uniform Law Commission and adapted by various states, creates what is called a “reputable presumption” that any spending more than 7 percent of an endowment would be imprudent. While that presumption is not law, it does set a guideline for non-profit organizations in other states.

Currently, Drolette said the university hopes to be at a 5 percent spending objective by 2014 in order to maintain the purchasing power of the endowment.

“In the university five year plan, we have adjusted the spending rate to spend a little more in the early years to adjust for the downturn in the overall endowment, and expect to be at 5 percent again in fiscal year 2014,” she said.