Endowments Explained: A Guide for Professional Advisors

Endowments are the hallmark of a great university and the cornerstone for innovative breakthroughs and worldwide impact. In simple terms, an endowment is a fund that is established by a donor and invested by the charity so that the income is used to support a specific charitable purpose. Endowments ensure financial stability for vital programs and research that last in perpetuity. With unpredictability in key revenue sources, the University of Florida (UF) relies on the generosity of alumni and friends who establish endowments to ensure stability for university program and initiatives. 

Endowments can be established for a specific purpose or for unrestricted general support of the university. Endowments can be funded with a variety of assets, including cash, securities, retirement plan assets, donor advised funds, real estate, and even gifts-in-kind such as artwork or rare metals/coins. They can also be funded through multi-year pledges and deferred gifts, including bequests, charitable remainder trusts, life insurance, and charitable gift annuities. UF’s endowment comprises funds that support faculty and students, including professorships and financial aid for undergraduates, graduate fellowships, student life and activities, as well as programs and research.

Endowed Gift Creation and Documentation

Endowed funds are carefully established by gift agreements clearly documenting donor intent. A gift agreement is a written agreement between the donor and the university that specifies the terms, use of the donor’s gift, and the schedule of contributions. Documenting donor intentions for their endowed fund through a gift agreement is of vital importance since the gift agreement will legally bind UF to correctly administer the endowed fund according to the terms outlined in the agreement. Each endowment is structured with a principal fund and a spendable fund. The principal fund is invested with the University of Florida Investment Corporation (UFICO) in the endowment pool and generates spendable transfers that are made available in the spendable fund to drive donor impact. Each year, the University of Florida Foundation (UFF) provides donors with detailed endowment reports so the donor can see the impact their endowed fund is making on campus. The endowed fund lives on in perpetuity so donors have peace of mind and the satisfaction knowing that their philanthropy will live on forever.

Administration

UF’s endowment consists of thousands of individual funds with specific purposes established by donors. UFF stewards and administers the endowment in accordance with the Florida Uniform Prudent Management of Institutional Funds Act (FUPMIFA) and the policies set forth by the UFF Executive Board.

Each individual endowed fund generates an annual payout which is transferred on a quarterly basis to the college or unit that the fund supports. The payout rate is 4% of each endowment’s spending base, in accordance with Policy 5.02. The spending base represents the fund’s base for calculating endowment spending transfers and fee assessments. This base remains fixed for the year, adjusting only for new gifts, thus providing a predictable funding stream for colleges and units.

New endowed gifts are invested quarterly, with the first spendable transfer occurring at the end of its first invested quarter. As a result, new gifts may take up to four months to be invested and up to seven months to generate the first spendable transfer.

If an endowment’s market value becomes less than the original book value, it is considered an underwater endowment. These funds continue to pay out unless the market value drops below 70% of the original book value. If that occurs, all spending transfers and fees are suspended until the market value rises above 70% of the book value.

Principal and spendable funds are assigned a fund administrator in the college/unit for which it is designated. Fund administrators must be employees of the university, UFF, any other university direct support organization, Shands Hospital or its affiliates, or an emeritus professor. The fund administrators, in conjunction with their supervising dean, director, or vice president, are responsible for disbursing monies for the purpose intended by the donor.

Investment and Oversight

The mission of UFICO, established in June 2004, is to promote the educational and research purposes of UF by serving as the fiduciary for the financial assets entrusted in its care. Since its inception, the investment of the endowment pool has been managed by UFICO, which is governed by a volunteer board of experienced investment professionals who are independent from the university and the UFF. The finance committee of the UFF Board provides oversight and quarterly reviews/approval of the investment strategy executed by UFICO. The endowment pool is invested long term to maximize risk-adjusted returns. It provides a sufficient income stream that supports the university and preserves donor impact indefinitely. Investments naturally contain a degree of volatility and risk similar to one’s personal retirement and investment portfolios. Without an appropriate approach to embrace an acceptable level of risk, while mitigating impacts of significant losses, a long-term investment would undergo challenges overcoming the hurdles of inflation, market changes, and budgetary expectations.

Investment performance results are benchmarked against a composite including 70% MSCI (Morgan Stanley Capital International) All Country World Index and 30% Barclays Global Aggregate Bond Index as well as CPI (the consumer price index) +5%. The UF endowment returned 7.2% for the 2024 fiscal year, and it significantly exceeded the investible benchmark return for the 5-, 10- and 15-year time periods. As shown on the accompanying graph, for the ten-year period relative to the investible alternative benchmark, the endowment has outperformed by 1.2% annually while realizing less than 90% of the benchmark’s volatility.

For the fiscal year-ended June 30, 2024, the endowment pool started with a balance of $2.3 billion. During the fiscal year, $68 million in cash flowed into the endowment pool thanks to the generous support of donors. Endowment investment performance resulted in a net gain of $167 million for the fiscal year. Additionally, the endowment pool had $114 million of cash outflows during the fiscal year to help support the University of Florida and its programs. The fiscal year ended with an endowment pool balance of $2.5 billion.

Gift and Administration Fees

The university has strategically chosen to invest in Advancement through fees aligned with fundraising activities. A one-time fee of 5% is assessed on all new gifts. This fee is accrued in the spendable fund to avoid eroding the endowment principal and is paid down using up to 50% of spending transfers — allowing the endowment to begin making an impact with the first spending transfer. In addition, there is an annual administrative fee of 1.35% of each endowment’s spending base. For every $1 contributed to the endowment, the university receives a return on investment of about $9 over time.

Governance and Investment Oversight

Governance and oversight of the endowment’s investments are paramount to the university’s mission to advance education, service and discovery. The UFF executive board — along with the Audit and Finance committees— is vigilant in providing continuous and rigorous oversight of policies, procedures, controls, and investment management. The Finance Committee performs quarterly reviews of investment performance and annual approvals of endowment administrative policies, investment benchmarks, and asset allocations. Endowment expenditures are regularly audited by both UFF staff and UF’s Office of Internal Audit.

Fulfilling donor intent is a fundamental obligation of every charitable organization. The Donor Bill of Rights, adopted by UFF in its Code of Ethics, declares that all donors have certain rights, including the right to “be assured their gifts will be used for the purposes for which they were given.”

The Disbursements Auditors audit expenditures made from spendable funds to promote compliance with UF policies and procedures and alignment with donor intent. The UFF Gift Compliance team reviews gift agreements for endowment funds. Additionally, UFF uses UF’s Office of Audit and Compliance Review to conduct various internal audits in accordance with the directions given by the UFF Audit Committee.

UF’s endowment provides a perpetual source of financial stability that ensures the continuance and growth of vital programs and research. The endowment is an evergreen way to support UF and its strategic initiatives. Our hope is to continue to grow the endowment to meet the needs of the future efforts at the University of Florida. If you would like to learn more or have questions, please feel free to contact the Office of Estate & Gift Planning.