Legal Disclosures and Regulations You’ll Now Need to Know
By Joseph N. Russell, CPA
Recent studies show an increase in gifting to college and university endowments over the past several years, with donors expecting their funds to be invested to support their intentions, both now and in perpetuity. Market volatility, however, can sometimes push an endowment’s value underwater; an endowment is considered underwater when its fair market value falls below the original gift amount. Current market turmoil highlights this risk, illustrating how gift timing can greatly affect whether an endowment becomes underwater.
If this has happened to your endowment where it’s now underwater, you should know that additional disclosures and restrictions will be required by law. But before breaking down what those are for underwater endowments, we first align on the standard disclosures for endowment net assets (regardless of market value) to provide a comprehensive perspective for your planning.
Required Disclosures for Endowment Net Assets (Regardless of Market Value)
Financial statement disclosures for all endowment assets, both donor and board-restricted (quasi-endowments) must include the following:
- Description of the institution’s net asset classification of donor-restricted and board-restricted endowment funds.
- Policy for the appropriation of endowment assets for expenditure.
- Investment policies, including established risk objectives and parameters.
- Composition of net asset class, including donor-restricted and board-designated endowment funds.
- A reconciliation to include beginning balance of the endowment, investment return, contributions and amounts appropriated for expenditure along with the ending balance of the endowment by net asset class.
Additional Disclosure for Underwater Endowments
In addition to the required disclosures above, institutions with underwater endowments are required to present the following disclosures:
- Accumulated losses within the endowment fund as a component of net assets with donor restrictions.
- Fair market value of the underwater endowment.
- Fair market value amount of the original gift to be maintained by the institution.
- Amount of deficiency of the endowment as measured by the variance between the fair market value of the endowment at the reporting period and the original gift amount.
Know the Legal Regulations for Underwater Spending: UPMIFA
In addition to disclosure requirements, your institution’s governing board must ensure that its policies follow the laws, regulations and parameters on spending established by the Uniform Prudent Management of Institutional Funds Act (UPMIFA) — specifically with regard to underwater endowments. While UPMIFA eliminated the requirement that an endowment could not be spent below its original gift amount, it did establish prudent spending guidelines: spending in excess of 7% of the fair market value of an endowment fund is considered imprudent. Thus, your institution must comply with these laws governing prudent management of endowment funds.
Spending Rates and Protection of Endowment Assets
History has shown that the stock market can offer a great source of revenue generation. But with that benefit comes volatility and risk. The valuation of endowment gifts will always be susceptible to declines in the market and therefore declines in their fair market value.
As stewards of these assets, institutions of higher education will always be responsible for not only addressing the current needs of the organization but guiding the long-term appreciation of endowment assets to ensure they survive in perpetuity — all to fulfill donor intentions. Your governing board should constantly review its investing and spending policies to follow the law and ensure donor wishes are fulfilled.
We Can Help
Should your organization wish to discuss projects and initiatives in the areas discussed above, please contact a member of the PKF O’Connor Davies Higher Education service team or:
Joseph Russell, CPA
Partner
jrussell@pkfod.com | 551.249.1155
Mark Bednarz, CPA, CISA, CFE
Partner
mbendarz@pkfod.com | 646.449.6376
Lori Edelbach
Director
ledelbach@pkfod.com | 551.249.1151
Jessica Mendoza
Director
jmendoza@pkfod.com | 201.639.5752
Kayla Watt
Supervisor
kwatt@pkfod.com | 908.272.6200