UConn Advance - March 30, 2009 - Foundation adapts to challenging economy

Faced with dramatic declines in investment markets, the UConn Foundation has taken steps to both stabilize its revenue sources and at the same time provide predictable spending allocations to the Schools and Colleges. One is to enact a gift fee on all new gifts, effective Feb. 1. Another involves changing how the endowment management fee is assessed.

“It was important that we take decisive action so we could continue fulfilling our mission despite the slump in the economy,” says John Martin, president of the UConn Foundation. “Even though year-to-date new gifts and commitments are running about even with last year, the uncertainty in the financial markets has raised the question about whether giving can be sustained.”

Like other institutions, the University of Connecticut relies on its endowment to provide a stable funding source for scholarships and graduate fellowships, faculty research, academic programs, and a host of student activities and facilities needs.

At the same time, most institutionally related foundations like the UConn Foundation depend on endowment management fees to support fund-raising activities and help pay the costs of professionally managing the endowment for the highest rates of return.

Because UConn’s endowment decreased in value by 22 percent from June 2008 through January 2009, there has been a corresponding reduction in the operating funds needed to provide services for which the Foundation is contractually obligated to the University.

Last June, the UConn Foundation reported an overall University endowment of $317 million and total assets of $397 million. Despite a slight decrease from the previous year and signs of a larger market decline looming, at the time these figures reflected a remarkable five-year period during which each had grown by more than 50 percent.

Since then investment markets have seen the value of most higher education endowments in the country fall by 20 percent to 30 percent or more.

In December, a decision was made to eliminate 12 positions from the Foundation’s approved headcount. Seven of these were currently filled, while the remaining five were being actively recruited to bolster fund-raising and support staff in anticipation of the major fund-raising campaign that will be launched publicly this fall.

Now, the Foundation is taking further steps.

The fee on all new gifts is 3 percent on endowed gifts and 5 percent on non-endowed gifts. A recent Council for Advancement and Support of Education (CASE) survey of higher education foundations in the U.S. found that 35 percent to 40 percent currently employ gift fees averaging 5 percent on all new gifts, while a majority of others are strongly considering such fees in the near term.

When the fee proposal was reviewed by UConn’s deans it was suggested that 25 percent of the non-endowed fee be returned to the School or College receiving the gift, to be used at its discretion. This provision was approved by the Foundation’s Board of Directors in February.

“Based on our calculations, we believe the gift fee will make us far less subject to the ups and downs in the financial markets,” says David Vance, the Foundation’s vice president for finance and controls. “The deans were fully supportive of these changes, because they recognize that the Foundation provides a valuable service to support their academic missions.”

A second decision changes the assessment of the endowment management fee. Previously, a fund was charged 1.7 percent of its average market value for a specified period, in exchange for managing the assets.

This has been reduced to 1.25 percent, but will now be assessed against the fund regardless of whether the current market value is less than its historic value (contributions plus investment returns), due to market declines.

The so-called “underwater funds” will be closely monitored according to prudent industry standards, to ensure that they remain a permanent source of funding for the University.

“Over the long term, the changes approved by our Board will greatly stabilize our operational funding and actually save the endowment money when compared to the old fee structure,” says Martin.

“We’ll continue to monitor our budgets closely, but these decisions will enable us to continue providing UConn with increased levels of private fundraising to support its academic mission. That’s the best result we could ask for.”