ENDOWMENT FUNDS EXPLAINED

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1 Endowment Funds Explained All endowments require the creation of an endowment capital fund and an associated spendable income fund. An endowment capital fund (fund type 6A) is the donated capital held in perpetuity by the University and used to generate annual income. All transactions pertaining to these fund types are handled by Endowment Accounting, Financial Services. The spendable income fund (fund type 2A, 2B, 2C, 2D, 2G, or 2K) is the fund linked to an endowment, where the annual income generated by the endowment capital fund is recorded and spent in accordance to the donor wishes. The amount of income distributed to spendable income funds (budget) is determined by multiplying the number of MIP units held in the related endowment capital fund by the spendable rate per unit for the endowment year. This spendable rate is communicated each Fall via the FFO listserv and is also referred to as the MIP Unit Income Distribution Rate, MIP rate, and/or distribution rate. The spendable rate for any given fiscal year is displayed when using the Banner form FNIEBAL. [The McGill Investment Pool (MIP) is a unitized pool. When funds are transferred into an endowment capital fund, they are used to purchase MIP units at the applicable market rate prevailing on the date of the transaction. The MIP market value per unit rate is updated four times a year, as at April 30th, July 31st, Oct. 31st, and Jan 31st, and is displayed when using the Banner form FNIEBAL.] Budgets for spendable income funds are set-up in early June once the prior fiscal year closes, by Endowment Accounting. The budget is based on the number of MIP units held in the endowment capital fund at year-end and reflects any year-end requests for decapitalization, capitalization and authorized carry forwards. The set-up of this budget allows for transactions to be processed on the fund without having received the full income for the year. Budgets are set-up in account code for endowed chairs and for all other endowment types. The Endowment Planning report has been created to help estimate budgets for the next fiscal year. Actual income received is posted on a monthly basis, through feeds, to account code This occurs when the monthly unitization and income distribution processes are run, three to five business days after a fiscal period closes. F i n a n c i a l S e r v i c e s, M c G i l l U n i v e r s i t y P a g e 1 11

2 Changes to endowment holdings (fund type 6A) may occur throughout the year and are usually due to two factors: A new donation is received which translates into an increase in the number of MIP units held in the endowment capital fund. Endowment Accounting processes a request to capitalize or decapitalize funds which translates into an increase or decrease in the number of MIP units held in the endowment capital fund. There may be a lag period between the gift date, when the money was received by the University, and the date when it was transferred to the endowment capital fund. The quarterly MIP market value per unit rate used for the unitization of new donations is based on the gift date, and not the date the transfer was processed to the endowment capital fund. While the Book Value of an endowment reflects new holdings as soon as they are transferred, the Number of (MIP) Units Owned is only updated the following fiscal period once the unitization process is run for the closed period. Changes in endowment holdings directly impact the budget set-up (spending power) for the associated spendable income fund and are reflected shortly after the fiscal period closes. Once the unitization and income distribution processes are run, budget adjustments and retro income distributions are posted through feeds to spendable income funds. This results in the budget being adjusted to reflect changes in endowment holdings incurred over the month. At year end, all current year unspent income is capitalized back to the respective endowment fund unless otherwise specified by donor agreement. This means that agreed upon carry forward balances from the prior year should have been used as indicated or will be capitalized. Any carry forward requests will be forwarded to the Office of the Provost for final approval. Spendable income funds should not end the fiscal year in over-expenditure. Should this occur, it is the responsibility of the Fund Financial Manager to correct the situation prior to the close of each fiscal year. Capitalization and Decapitalization Requests to capitalize income from spendable income funds (fund type 2A, 2B, 2C, 2D, 2G, or 2K) may be made at any time during the year unless prohibited by the donor agreement. Only income which has been carried forward from the prior fiscal year may be capitalized. Requests to decapitalize income from the endowment capital fund (fund type 6A) may be made at any time during the year unless prohibited by the donor agreement. Decapitalization requests are limited to unspent income capitalized during the last five years. F i n a n c i a l S e r v i c e s, M c G i l l U n i v e r s i t y P a g e 2 11

3 The amount to decapitalize may not exceed the amount capitalized during that time frame and must take into account prior requests for decapitalization within the same time frame. Decapitalization may not encroach upon the capital used to establish the endowment unless agreed upon by the donor. Decapitalization should not result in a carry forward balance at year end. These request must be made in writing ( is acceptable) to Endowment Accounting and must come from the Fund Financial Manager (FFM) or the FFM must be cc'd to signify their sign-off on the request. The need for the additional funding (decapitalization requests) or confirmation that the funds will not be required (capitalization requests) must be clearly stated in the request. For decapitalization requests: The amount will be decapitalized from the endowment fund and credited to the corresponding spendable income fund using the quarterly MIP market value per unit rate in effect at the date of the request (as indicated in FNIEBAL). Since decapitalization impacts endowment holdings, budgets will only be updated once the budget adjustments and retro income distributions feeds are posted to spendable income funds. This occurs as soon as the unitization and income distribution processes are run at the end of the fiscal period in which the request was processed. TIP: Budget To calculate how current budget in account code for an endowment spendable income fund will be affected by a capitalization or decapitalization request, use the formula below: Budget = Adjusted Budget for account code from FGIBDST + (capitalization amount/mip market value per unit rate from FNIEBAL * spendable rate from FNIEBAL) OR Budget = Adjusted Budget for account code from FGIBDST - (decapitalization amount/mip market value per unit rate from FNIEBAL * spendable rate from FNIEBAL) + decapitalization amount F i n a n c i a l S e r v i c e s, M c G i l l U n i v e r s i t y P a g e 3 11

4 Frequently Asked Questions about Endowments Question May I contact the donors of an endowment fund? Which FOAPAL do I use for my transactions? Should I be processing expenditure transfers on a spendable income fund (JE16)? Should I be processing fund transfers on a spendable income fund (JE16)? No. Answer All communications with donors should be solely prepared and issued by University Advancement Donor Relations and Stewardship, or your Faculty Development Officer to ensure accuracy of information relayed and that any changes are reviewed by McGill Legal counsel accordingly. Always use the fund code for the spendable income fund and use an account code which best describes the nature of the expenditure. Account Code , miscellaneous expenses, is too general to use for reporting purposes. Always be sure to adhere to the guidelines of the fund, as stated in the fund text (FOATEXT). Allowable expenses should be charged directly to the spendable income fund to ensure that financial statements accurately reflect spending in accordance with donor wishes. If an expenditure was incorrectly charged to another fund, YES, a JE16 journal should be processed debiting the spendable income fund. BSA transactions should be processed directly on spendable income funds set up for that purpose. Fund transfers from spendable income funds which are of a discretionary nature may be processed using account code Always be sure to adhere to the guidelines of the fund, as stated in the fund text (FOATEXT). While fund transfers may be processed to and from spendable income funds to other funds of a similar nature, using account code , this practice is sometimes problematic: It makes it difficult to report back on endowment activities to donors. F i n a n c i a l S e r v i c e s, M c G i l l U n i v e r s i t y P a g e 4 11

5 The spendable income fund sometimes appears to be a holding fund with transfers in at year end and transfers out when the new fiscal year opens. We have a large project coming up, can we decapitalize all the unspent income capitalized since 2001? Why is my decapitalization request not processed yet? May I create an over expenditure on my spendable income fund? Do operating funds absorb the costs for endowed chairs? How do I forecast the budget for a spendable income fund for the coming fiscal year? Please note that Endowment Accounting reserves the right to disapprove fund transfers. No The time frame for decapitalizing income is five years. In general, decapitalization requests are processed within two weeks of receipt by Endowment Accounting. Any delays beyond this would only occur if the MIP market value per unit rate for the quarter has not yet been received. In these cases, as soon as it is received and entered in Banner, the request would be processed. No Should an over expenditure occur in the spendable income fund it is the responsibility of the Fund Financial Manager to correct the situation prior to the close of each fiscal year. No. A spendable income fund will be opened for each endowed chair to cover salaries and other related expenses as outlined by the Office of the Provost. Benefit costs will be funded via an interfund transfer from a central operating fund to the spendable income fund. The Endowment Planning report has been created to help you estimate the income budget you will receive (more information). (Must have the expected spendable rate per unit for the endowment year (MIP Distribution rate).) F i n a n c i a l S e r v i c e s, M c G i l l U n i v e r s i t y P a g e 5 11

6 The Process of Opening an Endowment Capital Fund and Associated Spendable Income Fund 1. Requests for the opening of new ENDOWMENT FUNDS are made by completing the Requests for a new fund online form found on the Financial Services website (sign-in is required). o o Be sure to select Yes when answering the question Is funding from a donation? You must submit supporting documentation with this form. This documentation could be one or many of the following: Memorandum of Agreement (MOA) Provost and Vice-Principal's approval (if the donation is to be used for a univeristy chair CESA approval (if the donation is to be used for a scholarship/award/prize/fellowship - if applicable) Written agreement/letter of intent o If missing supporting documentation, contact Sheila Sears ( x.8306) 2. Financial Services will assess and process the request. 3. Endowment Accounting will open the endowment capital fund (fund type 6A) and related spendable income fund (fund type 2A, 2B, 2C, 2D, 2G, or 2K) in Banner. 4. Once the funds are opened, you will receive a confirmation The initial donation or transfer is processed to the endowment capital fund. 6. Once the month closes and the unitization and income distribution processes have been completed, the resulting income budget is set up in the spendable income fund. Frequently Asked Questions about the fund opening process Question I was notified that a new endowment was opened this week - why is there still a zero balance in my spendable income fund? Answer When a new endowment has been created, the initial donation or transfer is processed to the endowment capital fund. Only once the month has closed and the unitization and income distribution processes have been completed, may the resulting income budget be set up in the spendable income fund. F i n a n c i a l S e r v i c e s, M c G i l l U n i v e r s i t y P a g e 6 11

7 How to look up non-financial fund information for an endowment capital fund (fund type 6A) Non-Financial Information Resource to Consult Endowment Fund Information Web/Crystal Report available on the Financial Services website Endowment Fund Definition Form FNMENDW in Banner Note: To use this form, you must have either the endowment fund or the spendable income fund code on hand. When was the endowment fund established? Who is the assigned financial manager? What is the default FOAPAL for the investment income? What is the associated spendable income fund? 1. Select FNMENDW from the Finance Fast Track Menu or type FNMENDW in the GO field and press Enter. 2. Click on the Enter Query icon or hit F7 if using the keyboard. 3. Tab to the Principal Fund field and enter the endowment fund code. To search for a fund code, click on the Search icon to perform a query. OR [Optional] - Tab to the Spendable Fund field and enter the spendable income fund code. To search for a fund code, click on the Search icon to perform a query. 4. Click on the Execute Query icon or hit F8 if using the keyboard to bring in the requested information. 5. To view the related endowment fund document text, select Endowment Fund text from the Options menu. 6. To view the related spendable income fund document text, select Spendable Income Fund text from the Options menu. F i n a n c i a l S e r v i c e s, M c G i l l U n i v e r s i t y P a g e 7 11

8 How to look up financial information for an endowment capital fund (fund type 6A) Financial Information What is the MIP market value per unit rate for the quarter? How many units are held in the pool for a particular fund? What donations were received this year? How many new units were purchased? Resource to Consult Faculty Consolidated Endowment Statement Web/Crystal Report available on the Financial Services website Endowment Fund History Form FNIEBAL in Banner Multi Period Endowment Fund Details Web/Crystal Report available on the Financial Services website. This report is the only place that you will see the associated gift date for the donations or transfers made for the endowment capital fund. Please note that the gift date will only appear after the funds have been unitized. Minerva Financial Statement FZRG0020 Endowment Fund Details Endowment Fund History Form FNIEBAL in Banner What is the endowment capital fund balance? Type FNIEBAL in the Go field and press Enter. 1. Tab to the Fiscal Year field and enter the fiscal year to review. 2. Tab to the Fund field and enter the Endowment fund number. To search for a fund code, click on the Search icon to perform a query. 3. Click on the Next Block icon or use Ctrl-Page Down if using the keyboard. 4. Data is displayed by Fiscal Period and includes the Period End Date, Market Value $/Unit, Number of Units Owned, Aggregate Market Value and Book Value and Spendable Rate/Unit/Endowment Year rate are displayed. Note: While the Book Value of an endowment reflects new holdings as soon as they are transferred, the Number of (MIP) Units Owned and Aggregate Market Value are only updated once the unitization process is run. The Market Value $/Unit rate is entered at the beginning of each quarter: o As of April 30th for the months of May, June and July F i n a n c i a l S e r v i c e s, M c G i l l U n i v e r s i t y P a g e 8 11

9 o As of July 31st for the months of August, September, and October o As of Oct. 31st for the months of November, December and January o As of Jan 31st for the months of February, March and April 5. To view the transactions associated to a specific period, highlight the row. From the Options menu, select YTD by Account within Fund. How to look up non-financial fund information for a spendable income fund (fund type 2A, 2B, 2C, 2D, 2G, or 2K) Non-Financial Information Who is the assigned financial manager? What are the FOAPAL defaults? Note: Looking up non-financial information for an endowment capital fund will also provide information on the spendable income fund Resource to Consult Fund Information Web/Crystal Report available on the Financial Services website Fund Code Information Form FTMFUND in Banner Endowment Fund Information Web/Crystal Report available on the Financial Services website Endowment Fund Definition Form FNMENDW in Banner How to look up financial information for a spendable income fund (fund type 2A, 2B, 2C, 2D, 2G, or 2K) Financial Information What is the available balance? What transactions have been posted to the fund? Minerva Budget Queries Resource to Consult: Any Web/Crystal Report available on the Financial Services website which queries "funds" such as Multi Period Fund Details Minerva Financial Statement FZRG0021 Monthly Fund Details Report Organization Budget Status Form FGIBDST in Banner F i n a n c i a l S e r v i c e s, M c G i l l U n i v e r s i t y P a g e 9 11

10 What is the available balance? What is the capitalization / decapitalization history for the last few years? What is the budget breakdown (endowment income vs carry forward vs transfers) What is the expected income (budget) for the coming fiscal year Endowment Monitoring Web/Crystal Report available on the Financial Services website. For each fund, a value for Current Year Endowment Income to be Capitalized is displayed: This value is the lesser of Endowment Income and (Available Balance Remaining + Commitments). As Commitments are released, this amount will fluctuate. Endowment Planning Web/Crystal Report available on the Financial Services website. (Must have the spendable rate per unit for the endowment year (MIP Distribution rate).) Frequently Asked Questions about FIS access and Requests for Support Question How do I get access to view endowment fund information and the related spendable income fund information? How do I get access to the Endowment Management Module forms in Banner? How do I get access to the Endowments Web/Crystal Reports found in the Reporting section of the Financial Services website? Who do I contact if I have any questions about an endowment/spendable income fund? Answer Complete the FIS Authorization form requesting the appropriate fund access. If you have access to the Finance forms in Banner, you have access to the Endowment Management Module. To use the forms in Banner, you need to have access to the appropriate funds. See above. If you do not already have access to run web/crystal reports, you need to complete the Data Warehouse Request Form. You also need query access to the Funds. See above. There are several people you can contact for help: Your Faculty Development Officer for donor/pledge or memorandum of understanding/agreement information F i n a n c i a l S e r v i c e s, M c G i l l U n i v e r s i t y P a g e 10 11

11 The Endowment Fund Administrator. (You can look up the Fund Administrator using the form FTMFUND in Banner.) Who do I contact if I have questions about using the forms in Banner/Minerva or running the reports? Contact the Finance Helpdesk by or by phone at F i n a n c i a l S e r v i c e s, M c G i l l U n i v e r s i t y P a g e 11 11