Unit 3 Finance/Investments

1. Community Foundation Boot Camp Unit 3Finance/Investments

2. Stewardship and Fiscal Responsibility Good stewardship involves the following: • Fiscal accountability • Managing risk • Operational sustainability • Protecting donors intentions

3. Items to be covered • Fund Accounting • Investments • Budget • Legal/Accounting Issues

4. Fund Accounting

5. Fund Accounting • Fund accountingis an accounting system emphasizing accountability rather than profitability, used by non-profit organizations and governments. Each individual componentfundhas its own set of accounts, which are defined by donors for specific purposes. • Very similar to a mutual fund, the earnings and expenses are allocated based upon the individual fund’s percentage of ownership within the investment pool.

6. Fund Accounting Activity • All investment earnings are allocated based upon each component fund’s balance within the total investment pool. • All component funds are charged an administrative fee. The fee is transferred to the general operating fund. • Annual distributions are transferred to the available to spend upon approval by the Board. Grants are paid out of the spendable balance. This will show as ‘release from restrictions’ on Income Statement.

7. Interim Financial Statement Classifications do NOT equal Audit Classifications Unrestricted Net Assets Operating Funds Temporarily Restricted Assets Pass-Through Funds Permanently Restricted Net Assets Endowment Funds

8. Sample Chart of Accounts

9. Audit vs. Accounting Language

10. Investments

11. Definitions First • Total Return – investment return that includes interest, dividends, realized (occurs when an asset is sold) and unrealized changes in market value • Asset Allocation – distribution of investment assets among various asset classes including domestic and foreign stocks, bonds, cash, alternative investments, etc. • Investment Policy – policy that guides all investment activity of the foundation • Spending Policy – policy that determines the annual spending for grants, scholarships, and administrative fees to cover operating expenses

12. Committee Structure Investment Committee - Reports and processes dealing with the investment of endowment assets Finance Committee - Reports and processes dealing with budgets, interim financial statements, etc. Audit Committee - Oversees selection of auditor and annual audit One committee can handle these responsibilities!

13. Common Investment Objectives ofCommunity Foundations • Maintain the purchasing power of all endowed assets and future contributions • Maximize total returnwithin prudent and reasonable levels of risk • Minimize the short-term volatility of spending patterns • Increase the predictability of spending patterns • Recognize and fulfill donor wishes

14. Investment and/or Finance Committee Oversees all issues pertaining to the financial status of the community foundation and interpreting this information for the full board Tasks Include: • Recommend investment and spending policies for approval by the full board • Review asset allocation and the performance of individual investment managers on a regular basis • Interview and recommend new investment managers to the full board Continued…

15. Investment and/or Finance Committee Tasks Continued… • Recommend annual Foundation budget to the full board for approval • Monitor Foundation expenditures in accordance with the annualbudget • Establish the audit process, review and evaluation of the annual audit, and presentation of audit results to the full board Auditors work for you–understanding your policies and procedures are important.

16. Investment/Spending Policy The purpose of an investment/spending policy is to provide sufficient return to support the foundation’s cash needs, provide for inflation and to protect the historic gift value of the endowment funds. Items to include: • Describe duties of the Investment/Finance Committee • Clear investment goals and performance objectives • Clearly define asset allocation target and ranges • Determine investment benchmarks to measure asset performance • Monitoring and regular assessment of investment performance against benchmarks • Standard evaluation procedure for investment managers • Process for changing investment managers

17. Investment/Spending Policy The foundation makes payouts for grants and administrative fees from the earnings of the endowment funds each year. In order for the endowed assets to grow, the net totalreturnmust be enough for the annual payout needs plus inflation and real growth over time.

18. Investment/Spending Policy • Investment/spending policies use a trailing quarter average • Example 12 or 16 quarters • Levels out market fluctuations • Annual grant distributions are more consistent from year to year

19. UMIFA (UPMIFA) • The Uniform Management of Institutional Funds Act (UMIFA) was a pioneering statute, adopted in 1972, providing uniform and fundamental rules for the investment of funds held by charitable institutions and the expenditure of funds donated as “endowments” to those institutions. • In 2007, UMIFA was changed to include the word ‘prudent’ (UPMIFA). The UPMIFA (UMIFA in Indiana) now allowed the boards of institutions with endowment funds to spend principal of endowment funds when considering the following elements: • Duration and preservation of the endowment fund • Purposes of the foundation and the endowment fund • General economic conditions • Possible effects of inflation or deflation • Expected total return from income and appreciation of investments • Other resources of the foundation • Investment policy of the foundation

20. UMIFA (UPMIFA)

21. Asset Allocation

22. Asset Allocation Investment styles: • stocks of companies that are growing earnings and/or revenue faster than its industry. • mixture of assets composed of stocks, bonds, and money market funds. • stocks of companies that are fundamentally sound, higher dividend paying.

23. Asset Allocation

24. Investment Professionals Custodian: • An agent, bank, trust company, or other organization which holds and safeguards the Foundation’s assets for them. Investment Advisor: • A person or organization employed by the Foundation to provide investment advice and evaluate the managers. (Example: FEG, Mason) Investment or Fund Manager: • The individual responsible for making decisions related to any portfolio of investments (often a mutual fund, pension fund, or insurance fund), in accordance with the stated goals of the fund.

25. Request for Proposal (RFP) The Foundation should periodically review its relationship with its investment advisors/managers to assure optimal investment performance. • Process for selecting investment advisors or managers: • RFP reviewed by legal counsel prior to distribution • Matrix for evaluating RFPs – investment goals, fees, philosophy, client satisfaction • Communication in a timely manner with firms not chosen • Interview process – who is involved • Conflict of interest disclosed before final decision is made

26. Final Thoughts on Investment Oversight • Review current internal financial systems • Review current reporting processes • Think about the Board’s role being stewards of investments • Changes will happen • How will you facilitate the changes? • Who will be on the team?

27. Operational Budget

28. Budgeting • Before a budget is completed the annual work plan of the foundation needs to be completed • Knowing what activities are planned for the coming year will allow for line items to be adjusted based upon the work plan • Reviewing the prior year’s budget is helpful to gain an idea of the various line item expenses based upon the past and current year activities

29. Budgeting Process • When to start? • Calendar vs. fiscal year end • What is anticipated date of final approval? • Work backwards from this date and develop time-line for budgeting process • What is process? • Staff prepares draft for Finance Committee review • After approval by Finance Committee, presented to Board for final approval • It is important that Treasurer or Chair of Finance Committee presents budget to the Board • More meaningful when peer to peer • Staff can be available for detail questions • Important that budget be approved BEFORE beginning of new year • This prevents any delay in new year activity waiting for budget approval

30. Budgeting Revenue When it Comes to Sustainability, Not All Revenue Sources are the Same, Some are Much Better than Others • Best • Administrative Fees on Endowed Funds • Payout from Operating Endowment • Good • Administrative Fees from Pass-through Funds • Annual fundraising for Operating Funds • Not So Good • Grant from Unrestricted Fund • Draw on Operating Reserve

31. Budgeting Expenses • Examples of Operating Expenses: • Personnel • Occupancy and Administrative • Computer software • Staff and volunteer professional development • Donor Services • Marketing & Communications • Grants & Community Leadership • Professional Services – Audit, etc.

32. Budgeting Expenses Capital Expenditures • Office Furniture • Office Equipment • Computers • Buildings • Do you have an operating reserve? • Capital expenditures • General operating How do you budget for these? How do you pay for these?

33. Reporting Know your audience • What is the purpose of the report being prepared? • Internal use by Staff • Committee • Board of Directors • Public

34. Reporting Committee & Board Reports • Reports should be meaningful to the audience • Reports should be used to transfer information into knowledge • Reports should be used to make thoughtful decisions

35. Reporting • How often do you receive prepare financial reports? • Who determines what is included in the financial reports? • Are the reports on your consent agenda or a separate discussion item at board meetings? • What information should be included on financial reports? • What has been your experience with your current financial reports? • What do you believe would make a meaningful financial report? • These are things to think about!

36. Annual Audit Why is This Important? • Required by National Standards • Provides external stakeholders with an independent and objective opinion of the organization’s financial health • Provides Management Letter to the Board of Directors identifying any material weaknesses in internal controls

37. Annual Audit Who is Responsible for the Audit? • Audit Committee of the Board of Directors • An Audit Committee must be designated by the board • Many CFs combine the Audit Committee with the Finance/Investment Committee • At completion of the audit, external auditors are required to meet with the Audit Committee to present the audited financial statements along with the Management Letter • Staff should be excused for a portion of this meeting so that auditors have opportunity to speak freely with Audit Committee about any issues discovered during the audit • After acceptance by the Audit Committee, the final audited financial statements and management letter are recommended for acceptance by the Board of Directors • Acceptance should be documented in the minutes

38. Legal/Accounting Issues

39. Audit vs. Legal Language AUDIT = FASB rules LEGAL = UPMIFA, IRS 990 Financial Accounting Standards Board – FASB • FASB standards, known as generally accepted accounting principles (GAAP), govern the preparation of corporate financial reports and are recognized as authoritative by the Securities and Exchange Commission. Audit • On the Audit, some of your assets will be reported as liabilities. All of your assets may be reported as unrestricted. This is to comply with FASB standards Federal Form 990 and Internal Reporting • All gifts that are made to the community foundation are irrevocable gifts and the community foundation’s assets. Each fund has a fund agreement that is the legal document for the community foundation, which describes the donor’s intent, as well as how the fund will be administered. On the tax return, all gifts, investment activity, and grants will be included. These numbers will be different from the audit due to the FASB standards.

40. Audit vs. Legal Language(confused? Join the club) • FASB 136 – Agency Funds • Gifts from agencies into an agency endowment are liabilities on the Audit Balance Sheet (donor same as beneficiary) • No legal impact on the ownership of these assets; reported as assets on IRS Form 990 and internal statements • Materiality can be taken into account • FASB 116 – Donor Intent • Donor intent – endowment fund (permanent) • FASB 117 – Reporting Requirements • New reference FASB ASC 958-205 • Variance power allows for all assets to be classified as unrestricted • FASB 117-1 – Reporting Requirements – UPMIFA • UPMIFA allows for use of permanent portion in certain economic environments • Does not remove the fiduciary duty even though it removed the explicit requirement to maintain historic gift value (permanently restricted • Three classifications of asset – permanently restricted, temporarily restricted, unrestricted (spendable)

41. Audit vs. Legal Language(confused? Join the club) • Board interpret the FASB rules to determine policy • Donor intent most important consideration • Fund agreements state, “principal portion may be committed, granted, or expended pursuant to distribution (or spending) policy” • Consult attorney • Be consistent with interpretation

42. Tax Compliance • Federal Form 990 • Required to be filed 5 ½ months after year end • Information only return • No tax due unless Unrelated Business Income Tax (UBIT) • Most important part of Form 990 is Public Support Test • Must be at least 33 1/3% or more • Form 990 must be reviewed by Board of Directors prior to filing • State Form NP-20 • Required to be filed 5 ½ months after year end • Information only return • No tax due unless Unrelated Business Income Tax (UBIT)