Endowments 101

By David Nugent and Christina LoBrutto

If it weren’t for the scholarships that Westminster Choir College (WCC) gave to Lois Laverty, she would not have been able to attend the school or receive the two degrees she earned from there years ago. Now, she has found a way to pay it forward.

Laverty, ’52, went on to teach at WCC for 31 years and has been the benefactor of the Lois Laverty Endowed Scholarship for about 10 years. This year Ryan Brown, a WCC junior music education major, has received the $500 scholarship for the third time. He was able to come face-to-face with his donor on April 4 at the annual “Stewardship Luncheon,” during which students had the opportunity to meet with and thank their donors for their support.

College endowments, which are investments whose interest can be used for campus improvements, scholarships and operating expenses, can benefit students if they are generating high returns and if they are growing.

“Receiving this scholarship is so important to me, and Lois is such a great person and legacy at Westminster that it means a lot to me to be the one to receive this award,” Brown said.

Rider’s endowment decreased by 4.6% to $50.3 million in fiscal year 2012, according to results in an annual survey conducted by the National Association of College and University Business Officers (NACUBO).

“A university’s endowment is often an important source of funding for scholarships and academic programs — two issues in which many students have great interest,” said Jonathan Meer, vice president of University Advancement. “A lion’s share of Rider’s endowment is earmarked by donors for scholarships.”

NACUBO releases endowment data annually in February for the previous fiscal year, which for most schools runs from July 1 to June 30. Like Rider, more than half of the 843 institutions in the survey saw their endowment values decline in 2012, according to an analysis conducted by The Rider News.

The year before, Rider and all but 11 of the 839 institutions saw gains in their endowment values. Rider’s went up 12.2% that year.

In the year ending June 2011, “every category of investments had positive returns and many categories showed double digit returns,” said Julie Karns, treasurer and vice president for finance. The following year, bonds had a moderate return of 6.8%, but other investments were flat or declined.

Rider has seen a positive return so far this year. “From the June survey date to the end of January, Rider’s endowment investments increased by 9.8%,” Karns said.

 

 

Valuing Endowments

There are several factors that affect endowment values. Raising the total endowments are investment income from dividends and interest, market appreciation, gifts, bequests and other additions, said Karns.

Withdrawals allowed by the university’s spending policy, market depreciation and fees paid to advisers and consultants account for negative impacts.

Meer said the spending policy is set by the Board of Trustees in accordance with guidelines set by the State Uniform Prudent Management of Institutional Funds Act.

According to Meer, any endowment transactions are subject to review by the university’s external and independent auditor KPMG, which then reports its findings to the Board of Trustees.

Gifts may be either current use or endowed, said Karns. Current-use gifts are permitted to be spent when they are received. Endowments are invested and spent over time. Only a pre-approved annual amount, funded by both income and accumulated net appreciation, is spent each year, Karns explained.

Whether endowment or current use, gifts may also be restricted or unrestricted. Restricted gifts are those that have a specific purpose that the donors choose as a condition of the gift. Unrestricted gifts can be used to support Rider’s overall operations or special projects selected by Rider.

“If a donor gives a $100,000 currentuse gift for scholarships, the impact is felt now, and we award the full $100,000 amount,” said Karns. “On the other hand, and to simplify a little bit, the $100,000 endowment gift with a 5% spending policy funds a $5,000 scholarship this year, and over the long-term, that $5,000 annual scholarship gift grows to larger amounts that give the same benefit to a future student as today’s student.”

Quasi-endowments make up another category. Unlike “true endowments,” the quasi-endowment money comes from inside the university, said Karns.

Karns added that quasi-endowments come from internal sources by way of the Board of Trustee actions.

“They can only be used for purposes other than the regular spending policy withdrawals when the Board of Trustees approves the special use,” she said.

The purchase of a new residence for Dean of Students Anthony Campbell and the new homes for the offices of Information Technology and Public Safety were paid for through quasi-endowment, according to Karns.

The net revenue generated by Centennial Hall will be used to repay the money taken from the quasi-endowment, she said.

Endowment spending policy is set by the Board of Trustees. Some states enforce limitations on endowment spending policy, but New Jersey has no such limitations, according to Karns.

As an example, current policy dictates that Rider invest between 42%-62% of its endowment funds in equity, with a target of 52%. Within the equity category, several sub-categories exist.

Karns explained a recent policy change by Rider’s Board of Trustees.

“The Board did authorize additional investments in alternative investment categories (real estate, energy/natural resources) in October to move further toward the policy goals in those asset classes — categories that generally produce higher returns,” she said.

Rider has set targets of 4% in both natural resources and real estate, according to data provided by Karns.

Rider, like most schools, uses a three-year average of endowment values to calculate spending, said Karns.

 

 

Comparing Endowments

Rider compares itself with other schools in different categories. The mix of schools Rider uses to compare itself to in endowments is different than those used for enrollment or for physical plans or admissions.

IRS Form 990 can be a better measure because the tax form shows gifts as line items, allowing for a better comparison and for a more detailed look than the NACUBO survey provides.

Professor and Chair of Finance Maury Randall agreed that judging Rider’s ranking on the NACUBO survey alone would be an unfair comparison.

“The list seems to be looking strictly at the size of the endowment,” he explained. “It is looking at the size of the contributions that are being made to those schools. Rider can’t be compared to a school like Harvard.”

Harvard was the top school in the fiscal year 2012 survey, with an endowment of $30.44 billion. Yale was a distant second at $19.35 billion and the University of Texas was third at $18.26 billion. Princeton ranked fifth ($16.95 billion), down two spots from 2010. That year, Harvard, Yale and Princeton were the top three schools.

Karns said Rider’s internal comparison to other schools is based on size category, although she did not give specifics.

“Endowments of similar size tend to have similar risk tolerance and fairly similar investment mix — one of the key drivers of investment performance,” she said.

“I’m always interested in seeing how peer schools are doing, but for individual schools, all we can see is the overall change, not what is ‘behind’ the value change,” said Karns. “For example, big one-time gifts, a riskier investment mix, or a school’s choice to add funds into the endowment could all contribute to differences in the ‘net change in value.’”

Randall shared similar sentiments.

“Some schools might like to be less risky with how they invest their money.” he said. “There may be different constraints that organizations are held to. Some schools are big, some are small, some are private. They may do well, or they may invest at the wrong time and may have very large losses.”

Karns said the new numbers have not been fully digested, but a presentation will be made at an upcoming Board of Trustees meeting.

Karns said Prime Buchholz, Rider’s investment advisory firm, was chosen through a competitive bidding process. She said Prime Buchholz handles other schools’ accounts as well.

In 1982, Rider’s endowment was valued at $4.48 million. Over the 30 years from 1982 to 2012, the endowment grew by 1,122%, and the annual growth rate was 8.39% over that time frame, according to Karns. This growth rate is a net number that focuses strictly on investment performance.

Rider’s focus, which had been on asking donors for campus improvements, is beginning to shift toward building endowment.

“While the university always solicits endowment gifts, as well as gifts for specific current needs like buildings and scholarships, Rider’s emphasis over the last several years has focused more on those current needs,” Karns said. “I would say the focus is now shifting more toward seeking endowment gifts. Ultimately, the donors get to choose which type of gift is most rewarding to them.”

Contact this writer at lobruttoc@theridernews.com


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