Endowment Funds

What is an endowment?

An endowment is a fund set-up to provide income for the maintenance of a not-for-profit organization. The use of the assets of the fund may be permanently restricted, temporarily restricted, or unrestricted. Endowment funds generally are established by donor-restricted gifts and bequests to provide a permanent source of income. In this case, the gift itself may not be expended and is thus permanently restricted.

An unrestricted endowment is one where the fund may be spent in its entirety. See quasi-endowment for more information.

How does an endowment fund work?

When an endowment is established, the asset funding the endowment (i.e. the gift) will purchase units in an investment pool. The price at which the units are purchased is calculated at the end of the quarter. Once an endowment purchases units in the pool, it participates in a per unit allocation of investment pool earnings and distributions.
This allocation will move money from the investment to a spendable fund where it may be spent in accordance with the donor restriction (as in a permanently restricted endowment) or to meet the needs of the University (as in an unrestricted endowment).

What is a pool?

A pool is the collection of gifts and their associated appreciation that has been gathered together (“pooled”) for the purpose of investing.

At Wake Forest University, the pool is managed by the Office of Investments and holds the pooled endowments for Reynolda Campus, Reynolda House, and the Medical School as well as several funds invested alongside the endowment.

Funds that participate in the pool own units in that pool. Each unit represents a fraction of the ownership in the pool. Units are purchased through endowment gifts, reinvestment of distribution, and transfers of funds to or from the endowment.

What is a quasi-endowment?

From time to time the Board of Trustees will approve the transfer of unrestricted funds to be invested to provide income for a long but unspecified period. Such funds, which are also known as fund functioning as endowment, are allowable with Board approval only and may be spent in their entirety. These funds generally start an “EU” numbering scheme.

Please note that endowments may not be established by individual departments.

What is an endowment corpus fund?

The original gift that funded the endowment is known as the endowment corpus.

For regular permanently restricted endowments, the corpus as well as any appreciation is generally held in a fund that begins with an “EP” numbering scheme.

Assuming the fund is not reinvesting, a specified portion of the endowment earnings (known as the endowment distribution) is allocated from the EP fund and made available for use in the “spendable fund”. See endowment spendable funds for more information.

If the fund is reinvesting, the endowment distribution will be reinvested in the corpus fund.

When does an endowment gift buy into the pool?

As previously mentioned, endowment gifts are allowed to buy into the pool at the end of every quarter.

Gifts received between these dates Will purchase units on this date
July 1 – September 30 September 30
October 1 – December 31 December 31
January 1 – March 31 March 31
April 1 – June 30 June 30

Except on rare occasions, endowment units are purchased based upon the date the purchasing gift was received by the endowment fund – not by the date in which the gift itself was received by the University. While these two dates are generally the same, there may be situations where they are not (i.e. at the time the gift was donated, the donor was unsure as to how he or she would like the gift used and some time elapsed between the time between gift receipt and when the donor notified the University that the gift was to be endowed).

What is an endowment spendable fund?

An endowment spendable fund is the fund that holds the portion of the endowment earnings that are available for spending as well as the expenses incurred that meet the donor’s endowment restriction.

At Wake Forest University, endowment spendable funds generally starts with an “ER” numbering scheme and ends with the same number as the “corpus” fund from which it receives a distribution. Ideally, every “corpus fund” will have a corresponding “spendable fund”. The spendable fund receives its available revenue through a credit to account 42010 – Pooled Endowment Income while the corpus fund will show an offsetting debit to the same.

What is an endowment distribution?

The endowment distribution is the portion of the earnings made available for spending. The actual amount to be distributed is determined annually when the spending rate is calculated.

In determining the amount of endowment earnings to be distributed or accumulated, the Board of Trustees, in accordance with UPMIFA, considers the following factors:

1. The duration and preservation of the fund
2. The purposes of the University and the donor-restricted endowment fund
3. General economic conditions
4. The possible effect of inflation and deflation
5. The expected total return from income and appreciation of investments
6. Other resources of the University
7. The investment policies of the University

The current approved endowment distribution rate is 5.3%.

How is the 5.3% distribution calculated?

An average per unit market value is calculated using data points from the previous three June and December closes. The gross withdrawal from the corpus fund is 5.3% of this per unit average subject to a 10% maximum growth or decline when compared to prior year.

What distribution can be expected on a particular endowment?

Assuming the continuation of the 5.3% spending rate, using the formula above the Budget and FAS office will determine an expected spending rate. The actual per unit spending rate will be made available in February for the following fiscal year. For a given year, an endowment can generally expect to receive an amount equal to the number of units it holds in the pool * the annual spending rate.

When does an endowment begin distributing?

Technically, an endowment will distribute every quarter once it has purchased units in the endowment pool. However, until the following criteria are met, the distributions will be reinvested in the fund.

1. The endowment must have a signed fund agreement.

2. The endowment must have received the gift amount specified in the fund agreement. If no amount is specified, it is assumed to be the University’s required minimum per the Gift Acceptance Policy at the time the fund was established.

Until these criteria are met, the fund is said to be reinvesting and, as such, will be housed in the reinvesting department on the general ledger (see reinvesting funds for more information). Once these criteria are met, the endowment will distribute the appropriate amount to its corresponding spendable fund as of the following quarter.

If the fund minimum is met & a signed fund agreement is received as of The endowment will distribute to the spendable fund beginning with the distribution on
June 30 September 30
September 30 December 31
December 31 March 31
March 31 June 30

How is the quarterly spending rate calculated?

The per unit quarterly spending rate is ¼ of the annual spending rate described above. The actual amount distributed is based on the number of units held in the pool as of the beginning of the quarter.

Units owned as of Determines distribution to be received on
June 30 September 30
September 30 December 31
December 31 March 31
March 31 June 30

What is a reinvesting fund?

A reinvesting fund is one where the distribution is not made available for spending but is put back into (reinvested) into the fund. The amount of the reinvestment is considered to be new money and buys units into the pool.

On occasion, funds that have previously distributed their income to the spendable fund will reinvest their distribution. This usually happens when a donor has requested that their earnings be reinvested when the fund is underwater. See underwater funds for more information.

What is an underwater fund?

While it is expected that over time the value of an endowment gift will appreciate as it benefits from market growth, from time to time, its value may fall below that of the original gift and unspent distribution. When this happens, the fund is said to be underwater.

Are distributions taken on underwater funds?

In cases where the donor has been silent on the subject of underwater distributions or has given consent for the University to distribute when a fund is underwater the Investment Committee will make a determination as to whether to distribute. In general, the Investment Committee will review the underwater status of funds at December and June. In December, they will make a preliminary recommendation on spending for the upcoming fiscal year with a final recommendation in June.

In general, in cases where the donor has asked the University to suspend distribution if a fund is underwater, a preliminary determination is made in December on spending for the upcoming fiscal year and a final determination is made in June. If a donor has requested that underwater distributions not be made and the fund is underwater at June 30, then all distributions for the following fiscal year will be reinvested regardless of whether that fund comes back “above water”.