Published: September 06, 2008 12:00 am            

OU endowment keeps donors' money in circulation

The University of Oklahoma's billion-dollar endowment allows it to maintain programs and scholarships through changing economies.

The total endowment of $1.15 billion seems a mind-boggling number. Surely if OU has that much money on hand, it can afford to keep tuition down and hire new faculty members?

But endowments don't work like that. Instead, they're governed by a set of policies and restraints that keep them working for the university without being able to bail it out.

Endowment funds aren't just available for withdrawal at will. Each endowment is given by a private donor for a specific project with the goal of maintaining it in perpetuity.

Endowment example

The University of Oklahoma Foundation controls much of OU's endowment.

One of the oldest endowments the foundation administers shows how endowments are used throughout the years.

The fund was established with about $3,500 in 1945 to provide scholarships for students focused on mathematics, OU Foundation President and CEO Guy L. Patton wrote in an e-mail. The scholarship amount was originally $100 to $300 a year per student, which was a significant amount at the time.

Since it was established, the scholarship has been awarded to more than 200 OU students. The scholarship is still active. Today, it is awarded to two to three students per year studying mathematics, but now the award amount is $1,500 to $2,500 a year.

"So, 63 years after the original gift, this donor is still having a lasting impact on students' lives each and every semester here at OU," Patton said. "I would say that is truly leaving a legacy."

In order to keep the endowment's payouts up to speed with inflation, the principal amount has had to increase over the years.

"This, of course, is what has allowed the scholarship amounts to have similar impact in meeting the student's financial need in 2008 as it did in 1945," Patton said.

How it works

To this end, the organization administering endowments has a complicated task ahead of it.

When a donor creates an endowment, it is with the intention of supporting a project forever, Patton said in an interview at his office last month. The idea, he said, is "to be able to put back a sum of money -- think of it as a retirement account -- that will secure the future of a given organization."

The OU Foundation administering the endowment must determine the best long-term investment for the principal gift. Then it must decide how much to pay out each year so that the goal of the donor is accomplished while the principal continues to grow to keep up with inflation.

The OU Foundation, which administers about $693 million of OU's endowment, paid out about $35 million from endowments this past year, Patton said. It administers about 11,000 individual accounts, about 4,500 of which are endowed gifts, he said. The foundation developed a standard procedure to answer these challenges. It's really an extension of modern portfolio theory, Patton said.

"The philosophy in terms of how endowments are invested and produce earnings has changed dramatically in the last 30 years," he said.

Decades ago, the idea was to retain the principal precisely as it was originally given. Whatever money was made from that was used that year. So endowment money was invested in areas that produced income, which often constrained the gifts to lower rates of return, Patton said.

About 30 years ago, people began to question that line of thinking and began to try different investment strategies that would create higher rates of return. Now the OU Foundation -- along with most other foundations -- invests endowments in a blended portfolio of stocks, bonds and money markets, Patton said. The average return of those investments has been established to be in the low 6 percent rate.

About 1 percent of that is used to pay management costs, leaving the foundation's payout policy at 5 percent, similar to most other institutions.

To determine how much to pay out of the endowments, the OU Foundation figures out the average asset balance in all foundation accounts (endowment funds) for the past three years. Then it takes 5 percent of that and distributes it among the endowment projects annually, Patton said.

Taking an average of the past three years makes payouts more predictable. It also is intended to guard the endowment from short-term jumps or dips in the stock market, Patton said. But in the event of a long-term recession or depression, the principal paid out would decrease as the foundation continued to protect the principal sum for future generations.

In that case, scholarships or other programs funded through endowments would decrease along with the funding. But that wouldn't stop the university from moving forward with its general purpose, Patton said.

The university's regular operations are funded through state appropriations and tuition, so the state of the stock market will never shut down OU.

How OU uses endowments

Endowments at OU can be used for a variety of purposes. OU has endowments to support resources for the University Libraries, to care for paintings in the Fred Jones Museum of Art, to support computer labs and to fund faculty or student awards, Vice President of University Development Tripp Hall said in an e-mail.

OU fundraisers don't necessarily focus on raising funds for endowments because one-time donations can be used at the discretion of university administrators to fulfill immediate needs, Hall said.

Fundraisers do focus on endowments for two specific areas, however, he said. One of those is scholarship endowments.

"Of the $131 million raised by our Campaign for Scholarships, $112 million is for endowed scholarships, which will provide scholarships for generations to come," Hall said.

Endowments can be helpful when creating a scholarship, Hall said. For example, he said, donors wanting to create a $2,000 scholarship have two options: They can make a $2,000 gift each year, or they can provide a one-time $40,000 endowment gift, which would generate $2,000 a year at the current 5 percent rate.

The other area that fundraising has focused on endowments is faculty positions. This past year especially, OU fundraisers encouraged donors to establish endowed faculty positions because it was the final year of the State Regents' matching program. As a result, for fiscal year 2007-2008 endowments represented 59 percent of total gifts to the university, Hall said. Last year, when the university was not pushing for endowments for faculty positions, endowments were 32 percent of all donations.

Where the money goes

OU's endowment is administered by several bodies. Almost all private donations go to the nonprofit OU Foundation, which holds about 60 percent of the total endowment, according to figures released by OU's Public Affairs.

The money donated to the State Regents' endowed faculty matching program is held by the state, about 21 percent of the total as of the end of the past fiscal year, June 30.

"The matching money is held and managed by the State Regents, with the interest earnings going to OU," Vice President of Public Affairs Catherine Bishop said in an e-mail.

The OU Regents hold some of the endowment, about 8 percent. That's money that was willed the university for an endowment, but didn't specify the OU Foundation, so must be held by OU.

The state Commissioners of the Land Office also hold 11 percent of OU's endowment, according to Public Affairs. That endowment is the original OU endowment in the form of land grants given to OU that produce interest for the university.

The size of OU's endowment has grown significantly since that first land grant.

"OU alumni and friends have embraced the university's goals and responded to President (David) Boren's leadership by providing unprecedented support to OU during the past 14 years," Hall said. OU is now one of 76 U.S. universities with an endowment of more than $1 billion.

In the year before Boren arrived at OU, $26.4 million in gifts were donated to OU, he said. This year, gifts totaled $199.4 million. In addition, the university's donor base grew during that time from 18,000 to 108,000 donors.

Those donors can give to OU in general or with a specific goal in mind. OU commits to use the money the way the donor intended it. And in the case of endowments, the university commits to use the money the right way forever. And that's a responsibility OU and the OU Foundation take very seriously.

"Long after everyone in the transaction is gone, we can go back ... and make sure we're following what the donors wanted us to do," Patton said.

Julianna Parker 366-3541 jparker@normantranscript.com

        

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