Frequently Asked Questions
Frequently Asked Questions about Endowed Funds at Michigan State University
What is an endowed fund?
An endowed fund is a fund in which the principal (usually the original gift of a donor) is not spent, but rather is invested in perpetuity. Endowed funds receive programmatic spending policy distributions which are available to be spent on the donor's restricted purpose (such as a scholarship, professorship, program support).
How are endowed funds invested?
As with a mutual fund, endowed funds are pooled and invested collectively in MSU’s Common Investment Fund (CIF). Each gift to an endowed fund buys units in the CIF. As the market value of the CIF increases (or decreases), the value of each CIF share increases (or decreases) -- and so the value of each specific endowed fund goes up or down.
MSU’s Investment Office manages the day-to-day activities of the CIF investment portfolio. The investment objectives of the CIF are to achieve a total rate of return sufficient to generate the amount annually made available for spending by the endowed funds and still provide a modest increase in the inflation-adjusted unit value while assuming only moderate risk.
The CIF is made up of many separate investments, diversified over many asset classes. The investment policy for the CIF can be found here: https://trustees.msu.edu/policy-manual/01-07-01.html.
Why are endowed funds pooled?
Endowed funds are pooled and purchase shares in the CIF primarily for three reasons:
- There are thousands of endowed funds at MSU
- Endowed funds range in size from thousands to millions of dollars
- The endowed funds are established at different times, which results in different purchase prices
Though the pooled system may seem complex, there is no alternative method that is efficient and cost-effective for investing so many separate and differing funds. Most universities employ this very efficient and productive “pooling” process to invest their endowed funds.
How is the endowment spending policy determined?
MSU has a fiduciary responsibility to preserve the purchasing power of its endowed funds in perpetuity so that they will forever provide resources to important purposes that donors have chosen to support through their generous gifts. Each year, the MSU Board of Trustees reviews the endowment spending policy, which determines the amount distributed to endowed funds for spending on the fund's purpose. The endowment spending policy is in MSU's Investment Policy, which can be found on the Board of Trustees website.
How does an endowed fund receive the programmatic spending distribution?
As the endowment spending policy states, the programmatic spending percentage is translated into a dollar value per CIF unit, referred to as the Programmatic Spending Rate. For example, this is how the 2023-24 spending rate per CIF unit was calculated:
A. 20 quarter average of the CIF unit value was $8.20247673
B. Programmatic Spending Percentage per the Board endowment spending policy: 4.4%
C. Programmatic Spending Rate per CIF unit ( A x B = C ): $0.3609
The number of units that an endowed fund owns in the CIF determines how much annual programmatic spending distribution the fund receives. For example, if an endowed fund owned 12,500 units during 2023-24, it would receive $4,511.25 (spending rate of $0.3609 x 12,500 units) for 2023-24.
How does the department spend the programmatic spending distribution?
Departments must spend the programmatic spending policy distribution according to what the specific endowment agreement says. Endowment agreements are legal documents that have been carefully written and signed by the donor and MSU. Agreements specify which MSU department is responsible for the administration of the endowment. These departments have access to their endowment agreements and adhere carefully to donor requirements.
Agreements also specify what to do with unspent spending policy distributions each year. Some agreements require the unspent spending policy to be reinvested into the principal account, purchasing additional units in the CIF, which generates more spending in the future. Other agreements require the unspent spending policy to be held for spending in the future.
If a department has an unexpected shortfall and needs cash, can they use the principal?
Never! Once an endowed fund has been established, that principal amount CAN NEVER be used for programmatic spending. Only the spending policy distribution can be spent.
How often are units purchased and spending policy distributed?
On January 1, April 1, July 1, and October 1, we purchase units for new gifts received during the preceding quarter. The units are purchased at the CIF unit value as calculated by the Investment Office.
Programmatic spending policy distributions are also made quarterly, but the entire fiscal year amount may be spent at any time during the year. The administering unit doesn’t need to wait for funds to be distributed before spending it. Because the number of units owned by an endowed fund doesn’t decrease, it is easy to estimate the annual amount of programmatic spending that will be distributed over the year.
Any new gifts added to the principal balance increases the programmatic spending distributed in subsequent quarters.
Who is responsible for fundraising for the endowment?
University Advancement is responsible for fundraising in support of the mission of the university, its faculty and students. Please visit https://givingto.msu.edu/endowments/ for more information.
