Policy on Underwater Endowments

The University of Connecticut Foundation, Inc. strives to balance the donor’s desire to fund current program, faculty, and scholarship needs with the commitment to preserve, over time, the Historic Dollar Value (HDV) of endowments. Historic Dollar Value is defined as the aggregate value of all contributions to an endowment fund at the time they were made. Furthermore, the Foundation takes seriously its responsibility to provide prudent fiduciary management, oversight of the endowments, and intergenerational equity in accordance with Connecticut General Statute, Sections 45a-535 to 45a-535i, Connecticut Uniform Prudent Management of Institutional Funds Act (UPMIFA). However, the Foundation is aware that despite diversification in its investment portfolio, and its Board members acting in good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances, there may be times when the fair market value of an endowment may fall below its Historic Dollar Value creating “underwater” endowments.

As summarized in the Foundation’s Policy on Expenditures from Endowed Funds, decisions on spending distributions for all endowed funds for the following fiscal year are made on an annual basis utilizing guidance provided by the appropriate dean or department head.

In the event an endowment falls underwater by greater than 20% of its Historic Dollar Value, an analysis of the fund will be undertaken in order to make a determination on future spending distributions. This analysis will include the following factors required by UPMIFA:

  1. The duration and preservation of the endowment fund;
  2. The purposes of the institution and the endowment fund;
  3. General economic conditions;
  4. The possible effect of inflation or deflation;
  5. The expected total return from income and the appreciation of investments;
  6. Other resources of the institution; and
  7. The investment policy of the institution

In addition, the following additional factors will be considered during the analysis of each fund that falls underwater by greater than 20%:

  • level of impairment of the fund
  • discussions with the appropriate Dean or department head
  • the need of the affected fund for continued support
  • cash balance available for use by the affected fund
  • consultation with the donor (if possible)
  • identification of any temporary alternative funding sources

In the event an endowment falls underwater by greater than 25% of its Historic Dollar Value, future spending distributions, and the assessment of administrative fees, will be suspended until the fund again exceeds the 25% level. Exceptions to this requirement are intended to be extremely rare and can only be granted with the joint approval of the Provost and the Foundation’s Vice President of Finance. Exceptions must be re-evaluated on an annual basis.

The intent of this policy is to appropriate for expenditure or accumulate so much of an endowment fund as the Foundation determines to be prudent for the uses, benefits, purposes and duration for which the endowment fund is established. In doing so the Foundation will balance the need to make spending distributions to support the scholarships, programs, and faculty as designated by the donor, and in accordance with Connecticut laws, with its desire to preserve the long-term purchasing power of the endowment.

Policy Owner: Finance and Administration
Category: Finance and Administration
Applies to: All staff
Approved by: Board of Directors (Committee: Investment)
Effective Date: March 11, 2016
Contact: Vice President of Finance and Administration
Official Website: www.foundation.uconn.edu/policies
Revision History: