Participation and distribution policy and underwater accounts reserve fund for the endowment pool
The Investment Policy for the Endowment Pool identifies and defines the investment authority, philosophy, organizational structure, principles, processes and procedures to be adhered to in the execution of the investment management function. This Endowment Pool Participation and Distribution Policy provides the specific policy which governs the Endowment Pool.
This policy applies to all funds that participate in the Endowment Pool of the Kansas State University Foundation.
A minimum contribution of $25,000 establishes an endowed account, which can be accumulated through multiple contributions over time. Once the account contributed value reaches $25,000, it is invested in the Kansas State University Foundation Endowment Pool. The pool operates much like a mutual fund with each account owning shares in the pool. The initial invested dollars in a newly endowed account for permanent endowments are retained in the account for one year with the distributions reinvested to allow for growth.
Distributions are declared each fiscal year and paid quarterly to fund the purpose of the account and help support the Kansas State University Foundation (Foundation) operating budget. For permanently endowed accounts the annual distribution amount is based upon an inflation adjusting formula that attempts to maintain the purchasing power of the annual distributions. Term-endowed accounts have specific distribution formulas as they can utilize the contributed value to make distributions.
Permanently endowed accounts with a market value less than eighty-five percent of the contributed value are referred to as “underwater” and do not participate in the distribution formula. However, all current income is distributed from these accounts until their market value again qualifies them for distributions. Permanently endowed accounts with a market value between 7.51 and 15.00 percent less than the contributed value receive half of the regular distribution.
A minimum of $25,000 must be available for investment before a qualified non-expendable account may participate in the Endowment Pool. Until contributions to an endowed account total $25,000, the cash from liquidated contributions will be held in the Expendable Funds Pool. Cash in qualified accounts is invested at the beginning of the quarter after receipt. Participating accounts are issued shares based on a unit value determined by the current market value of the Endowment Pool holdings at the end of the most recent quarter; the pool valuation is finalized 25 days after quarter-end.
Inflation Adjusted Distribution Policy for Permanent Endowments to be held in perpetuity
Distributions will be calculated by adjusting the distribution amount annually for inflation, positive or negative. Fiscal year 2006 was determined as the base year; thereafter, the distribution is adjusted annually by the rate of inflation using consumer price index (CPI). The maximum distributions to purpose are 4.50 percent of market value and the minimum distributions are 3 percent, both of which are calculated annually using the market value at the beginning of the fiscal year.
Permanently endowed accounts with a market value less than eighty-five percent of the donor’s liquidated contributed value may receive expendable distributions from the endowment pool only to the extent of their proportionate share of the endowment pool’s net current income, defined as dividends, interest, and rents, less the Foundation management fee and calculated using a four-quarter rolling average. Permanently endowed accounts with a market value between 85.00 and 92.49 percent of the donor’s liquidated contributed value receive fifty percent of the regular distribution. All endowment pool participating accounts will be reviewed each quarter to determine if their respective market values are 92.49 percent or less of the donor’s aggregate liquidated contributed value.
For those participating accounts qualifying for a regular distribution, the Inflation Adjusted Distribution Policy applies; the distributions, expressed as a percent of market value, for fiscal year 2016 are as follows:
- 4.5% of the fund market value as of the beginning of the fiscal year, converted to a per share distribution amount, will be distributed on a quarterly basis to the expendable balance of the participating accounts and will be made available for expenditure in accordance with their respective memos of understanding.
A 1.4 percent (baseline) management fee will be distributed quarterly to the Foundation in support of Foundation operations. This fee is charged at the pool level, not to each individual investor account. The market value, for the purpose of this fee, is calculated quarterly using the prior year ending price per share multiplied by the number of shares in the pool. This fee may be reduced in any given year by operating surpluses as outlined in the Comprehensive Reserve Policy. Total return on the Endowment Pool in excess of the total distributions will be returned to the account as an addition to principal to provide growth.
|Fair market value of fund||Distribution|
|92.5% to 100%||Full distribution|
|85% to 92.4%||One-half distribution|
|Less than 85%||No distribution|
For those participating accounts with a market value less than eighty-five percent of the donor’s liquidated contributed value, distributions will be made based on the following prioritization:
- The Foundation management fee will be distributed to the Foundation in the same manner as discussed above for regular distributions.
- To the extent current income, defined as dividends, interest, and rents, remains available, a distribution will be made to the expendable balance of the participating account, up to that amount that would have been distributed had the account fallen into the “market value in excess of eighty-five percent of the donor’s liquidated contributed value” category.
- To the extent current income remains available, a distribution to the Dean’s excellence account will be made, up to that amount that would have been distributed had the account fallen into the “market value in excess of the donor’s liquidated contributed value” category.
- Remaining current income, if any, will be retained in the account as additional principal.
Donors have the option of contributing to an underwater account to restore the account to the contributed value. This would remove the account from underwater status so that regular distributions could be made.
Distribution Policy for Term-Endowments
Term-endowed accounts are invested in the same manner as permanently endowed accounts and share the same endowment pool operating costs. They differ from permanently endowed accounts in that term-endowment distributions may utilize the donor’s gift and earnings/investment growth to make the distribution to purpose and the distribution rate is specific to the memo of understanding.
A donor to a term-endowment account may choose from three distribution options:
Fixed dollar option pays distributions in multiples of $500; or
Situational option pays distributions of 50 or 100 percent of tuition and fees for the number of hours taken by an average full-time student.
Term-endowed accounts are to be established at a financial amount expected to sustain the account for 10 years or more.
|Invested||A fund in which monies are invested subject to the Investment Policy for the Endowment Pool, which establishes the rules for the minimum amounts required for investment. Invested monies may have a permanent restriction or a temporary restriction. Earnings from monies that are invested are generally placed in the Expendable portion of the fund for distribution to purpose, unless there is direction to “re-invest” the monies into the principal account.|
|MOA||MOA stands for Memorandum of Administration. This is the document that is created to establish restrictions placed on the use of monies provided through a bequest, trust, life insurance policy or other testamentary bequest as a result of the donor’s death. An MOA is also used to document a fund that is established by a University or Foundation unit.|
|MOU||MOU stands for Memorandum of Understanding. This is the document that is created to establish restrictions placed on the use of monies provided by a donor(s) who is alive at the time the document is created.|
|Permanent endowment||A permanent endowment is created by a donor with the stipulation, as a condition of the MOU or MOA, that the principal is to be maintained and invested in perpetuity to produce income, investment growth or both.|
|Term endowment||A term endowment is created when a donor (or other external party, i.e. the University or Administrative Unit) specifies that the funds must be held and invested until the passage of a specified time or the occurrence of a specified event. The donor (or other external party) also specifies what is to be done with the income and investment growth during the specified period.|