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May 31, 2012

Endowment distribution okayed

Trustees last week authorized the income distribution amount from the consolidated investment pool of Pitt’s endowment fund for fiscal year 2013. The action taken by the trustees investment committee means Pitt in FY13 is projected to distribute about $106 million of its endowment assets, representing an income percentage of 4.45 percent of the three-year average fair market value of those assets.

Trustees also agreed at their May 21 public meeting that no changes in the endowment investment policy are needed for FY13.

The University’s endowment is a diversified pool of assets, consisting of individual funds, which provides support for designated purposes such as scholarships, fellowships and faculty chairs. Money donated for such purposes typically is invested as part of Pitt’s consolidated investment pool, with the individual endowed funds “purchasing” a number of shares in the pool — similar to an individual’s investment in a mutual fund. Share values are computed monthly and income is distributed as an amount per share.

In fiscal year 2011, which ended last June 30, the University ranked No. 26 nationally in endowment value, according to the most recent National Association of College and University Business Officers (NACUBO)-Commonfund Study of Endowments.

Pitt’s endowment grew 24.3 percent, rising from its FY10 total of $2.03 billion to nearly $2.53 billion in FY11. The increase is not a measure of investment returns, but reflects the net impact of investment gains and losses as well as gifts and contributions, withdrawals and payment of management and investment fees.

Under University bylaws, the trustees investment committee has been delegated to approve endowment spending policy. The primary objective of the spending policy is to distribute a reliable stream of income to programs and departments supported by the endowment in perpetuity, while providing for growth and preservation of the endowment fund’s real, inflation-adjusted market value.

That policy stipulates that the income distributed from the endowment each year be equal to the greater of two formulas: either 4.25 percent of the three-year average fair market value of the assets determined on a per share basis, or the prior fiscal year’s income distributed per share — provided that any such income distributed not be less than 2 percent nor more than 7 percent of the three-year average fair market value of the assets.

In addition, University policy stipulates a “floor” that ensures that recipients of endowment funding will not receive less than in the previous year. That floor will be invoked for FY13 because the trustees investment committee approved the amount of income to be distributed based on 4.45 percent of the three-year average fair market value of the endowment assets, which is $3.63 per share.

However, a background statement released at the meeting said: “Because such per-share basis is less than the income distribution amount of $3.80 per share in effect for fiscal year 2012, the spending policy requires that the income distribution amount remain at $3.80 per share for fiscal year 2013.”

Trustees noted that the distribution amount is within the percentage range permitted under Pennsylvania Act 141, the law that governs how not-for-profit organizations can invest and spend the income from permanently restricted endowment funds.

Arthur G. Ramicone, chief financial officer, told the University Times, “This will be the third year that the per-share distribution has been $3.80. The only bad implication is that the share owners — the schools primarily — are not receiving an increase in a difficult budget environment. Best practices are employed in every area of the investment environment. Although none of those efforts guarantee ‘healthy returns’ we believe the endowment is well positioned to support the University’s mission currently and in perpetuity.”

—Peter Hart

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