F.1. Types of Funds January 1989 Development Policy and Administration Manual Chapter III. Gift Administration Policy Section F. Fund Types and Their Investment ************************************************************* TYPES OF FUNDS Gift funds generally fall into one of the categories described below. If the donor does not designate a fund type, it is neces- sary to allocate the gift. Endowment Funds An endowment fund is a fund whose donor has stipulated that the fund principal must remain inviolate and that only income may be expended. In accepting endowment funds, the University is legally bound to keep the principal intact and to comply with donor restrictions governing the use of income. Most endowment funds participate in the General Endowment Pool (GEP), where investments emphasize long-term growth of both income and principal, preserving and enhancing the market value of the fund. Because of the cost of fund administration in relation to projected annual income, the Office of the President uses a guideline of a minimum of $10,000 to establish a new endowment. For more information concerning the GEP, see Section III: F.2, Investment Pools for Gift Funds. For more information about endowments, see Section VI: B, Management of Endowed Funds. Funds Functioning as Endowments A fund functioning as an endowment is a fund, the principal of which has been set aside by administrative action to be invested in the manner of an endowment fund (see Section III: E.2, Allo- cating and Reallocating Gifts and Bequests). Principal is held inviolate, but, because there are no legal restrictions regarding expenditure of principal, the decision to hold the principal inviolate may be reversed by appropriate administrative action. Funds functioning as endowments are also normally invested in the General Endowment Pool. (For more information concerning the GEP, see Section III: F.2, Investment Pools for Gift Funds.) As with endowed funds, the Office of the President uses a guideline of a minimum of $10,000 to establish a new endowment. For more information about funds functioning as endowments, see Section VI: A, Management of Endowed Funds. Since the majority of gifts received are for current use, it becomes important to build the University's endowment as a foundation for the future. It is therefore suggested that funds in excess of $100,000 be allocated as funds functioning as endowments. Based on historical rates of return, a new fund entering the GEP will have earned its original value in interest by about its fifteenth year of existence. Externally Held Trusts An externally held trust is one in which funds are held in trust for investment by another institution acting as trustee. The terms of these trusts vary; the University may be designated as income beneficiary, remainder beneficiary, or both. Any income disbursed to the University by the trustee is to be accounted for and used in the same manner as income from endowment funds. Externally held trusts are recorded on the University's books for accounting purposes at the nominal value of one dollar, but are reported in gift records at the fair market value of the assets when this information first becomes available. If the trust eventually terminates and the assets are distributed to the University, the fund is revalued for accounting purposes at that time. A determination of whether it is necessary to reallocate the fund is made at the time of such distribution. Loan Funds Loan funds exist as a form of financial aid to students. They are held at the campus as a loan pool, with any unloaned balance earning Short Term Investment Pool (STIP) income. Occasionally, the donor's terms will require establishment of an endowed loan fund. The corpus of an endowed loan fund is held intact and the income is loaned to students. In such cases, the corpus is held by the Office of the President as an endowment and the annual income is transferred to the campus for addition to the loan fund. It is the practice of the University to allocate funds for student aid for scholarships rather than loans whenever possible, for several reasons: - there is a more-than-adequate supply of student- loan funds, whereas there is a less-than-adequate supply of scholarship or fellowship funds; - loans are less meaningful than scholarships as recognition for academic excellence; - currently (1988) the majority of student aid is awarded as loans, and many students graduate with a substantial amount of loan indebtedness; and - loans are expensive for the University to administer. Current Funds If a fund is to be expended within a short time, it should be allocated as a current fund and held in an account invested in STIP. The immediate rate of return is higher than for the GEP because no consideration is given to preserving the value of the corpus from erosion due to inflation. For more information about STIP see Section III: F.2, Investment Pools for Gift Funds. Plant Funds Funds used for construction, for renovation of facilities, or for the purchase of real property are also invested in STIP but, unlike current funds, a plant fund will normally be expended over a period of several years.