Getting Started with Endowments and Gifts

What is a Gift?

A gift is a voluntary, irrevocable, gratuitous transfer to, and acceptance by, Columbia of cash or cash equivalent, securities, property of value, or execution of an instrument that legally vests an interest of value in the University.

Gifts may be designated for current use, where the gift is fully expended in accordance with the terms, or endowment, where the gift is invested and an annual payout is spent in accordance with the terms.

What Is a Current Use Gift?

If a donor has not designated a gift for endowment, the gift is to be fully expended in accordance with the terms. To track the gift and related spending, these current use gifts are credited to an ARC gift fund (GTXXXXXX). If the gift is for a capital project, it will be credited to an ARC plant fund (CPXXXXXX). Gifts are credited to the 425XX series of revenue accounts.

What Is an Endowment?

If a donor has designated a gift for endowment, the gift is held in an ARC endowment fund (ENXXXXXX) where the gift is invested and an annual payout is spent in accordance with the terms. Gifts are credited to the 425XX series of revenue accounts.

There are two types of Endowments:

• A permanent (“true”) endowment is a fund established in accordance with donor restrictions, to exist in perpetuity.
• A quasi-endowment (sometimes called “board designated”) is a fund that functions as an endowment, but without any legal restriction to hold the fund permanently.

The difference between a true endowment and a quasi-endowment is that the principal of a quasi-endowment may be spent. Quasi-endowment funds are occasionally created by donors and must be spent in accordance with donor terms and restrictions. Quasi-endowment funds are more often created with funds set aside by a School or department.

The amount invested in the endowment may not be accessed for a period of ten years, but the spending of the payout may begin right away. The endowment portfolio invests for the long term, so we need to prevent frequent short-term deposits and withdrawals.

How Do Endowments Work?

Endowment activity in ARC is categorized by Fund:

• Principal (Funds 4X) – Gifts and transfers to establish or add to a fund are credited to principal funds.
• Appreciation (Funds 5X) – Endowment gains/losses and reinvestments are credited to appreciation funds.
• Income (6X) – Endowment payout (also called endowment distribution or endowment income) is credited to the income fund. Expenses are charged to this fund. 

The University’s endowment works like a mutual fund—each endowment owns shares. The Controller’s Office calculates the market value per share on a monthly basis. Additions to or withdrawals from endowment funds buy or sell shares in the endowment pool, based on the monthly price per share.  Shares are used as the basis for determining the market value of the fund and for distributing endowment payout.

The Office of Management and Budget establishes the annual spending rate per share, approved by the Trustees. Schools can budget the endowment payout available to spend based on the estimated number of shares in each fund. One-twelfth of the annual endowment payout is distributed monthly, based on the number of shares at the end of the prior month.

Endowment payout is comprised of:

• Regular (base) distribution (account 44000)
• Additional (campaign) distribution
  • Endowments coded “current” and “central” are key to University’s development efforts and receive an additional 70 bps distribution to spend (account 44001).
    • Current – No restriction/reason payout cannot be spent currently
    • Central – Substitutional, central to Columbia’s mission (like financial aid, faculty support, research, unrestricted funding)
  • For parity, all endowments receive an additional distribution. If a fund is non-central/noncurrent, the distribution is added to the principal rather than as spendable income (account 44002), slightly increasing shares each month.

What Is the Endowment Spending Rule?

The endowment spending rule utilized by the University is designed to be directly responsive to both investment returns and the current level of price inflation. Its long-term objectives are:

• To protect the corpus of the endowment by spending no more than the real investment return
• To cushion spending against market volatility
• To provide specific spending instructions and multiyear spending projections based on explicit future investment return assumptions

The current endowment spending rule is based on two factors: first, the market value multiplied by a target spending rate that may range from 4.5 to 5.0 percent, which provides a response to investment market conditions; and second, the prior year’s spending plus inflation, which ties spending increases to operating needs and cushions spending against market volatility. This allows the University to maintain the purchasing power of the endowment assets held in perpetuity or for a specified term as well as to provide additional real growth through new gifts and investment return.

As a general policy, each fiscal year’s base spending rate distribution is calculated by adding together the following:

1. The market value of the endowment at a point twelve months prior to the beginning of the given fiscal year, multiplied by the target spending rate, multiplied by a 40 percent weighting.
2. Endowment spending in the year immediately preceding the given fiscal year, grown or reduced by an inflation factor, which is defined as the Higher Education Price Index (“HEPI”), multiplied by a 60 percent weighting.

From time to time, management may recommend and the Trustees may approve a temporary override of the spending rule to ensure the University’s ability to sustain the permanent nature of the endowment.

In years when market conditions negatively affect endowment values, some University endowments may be "underwater”, as the market value of the fund is less than the amount of the original gifts to the fund. The University’s endowment management guidelines provide for a pause in spending when the fund is under the value of the original gifts by more than 8% as of the end of the prior fiscal year. The University reinvests the endowment payout to allow the fund to recover and protect the permanent nature of the endowment.