Agenda
Board of Regents
Finance Committee
Wednesday, February 18, 2009; *9:00 a.m. – 9:30 a.m. and 10:00 a.m. – 10:30 a.m.
Treadwell Room, Baranof Hotel
Juneau, Alaska
*Times for meetings are subject to modifications within the February 17-19, 2009 timeframe.
Committee Members:
Carl Marrs, Committee Chair
Mary K. Hughes, Committee Vice-Chair
Timothy Brady
I.
Call to Order
II.
Adoption of Agenda
Fuller Cowell
Erik Drygas
Cynthia Henry, Board Chair
MOTION
"The Finance Committee adopts the agenda as presented.
I.
II.
III.
IV.
V.
VI.
VII.
Call to Order
Adoption of Agenda
Full Board Consent Agenda
A.
Approval of the Spending Allowance Rate for the Land Grant
Endowments
B.
Acceptance of the Foundation’s Proposed Endowment Fee for
the Land Grant Endowments
C.
Approval of FY09 Supplemental Budget Request
D.
Approval of Receipt Authority for FY10
Ongoing Issues
New Business
Future Agenda Items
Adjourn
This motion is effective February 18, 2009."
III.
Full Board Consent Agenda
A.
Approval of the Spending Allowance Rate for the Land Grant
Endowments
Reference 15
The President recommends that:
MOTION
"The Finance Committee recommends that the Board of Regents
approves a reduction in the spending allowance rate from 5.0% to
4.5% for the Land Grant Endowments effective for FY2010 and
Finance Committee Agenda: Page 1 of 6
Agenda
Finance Committee
February 18, 2009
Juneau, Alaska
subsequent periods and directs the administration to update Policy
05.07.010 for the decrease in the spending rate from 5.0% to 4.5%.
The motion is effective February 18, 2009.”
POLICY CITATION
Regents Policy 05.07.010.E states, “Withdrawal of earnings in any fiscal
year will be limited to the unexpended accumulated earnings, both
realized and unrealized, of the endowment as of the preceding December
31, up to a maximum amount equal to 5 percent of the average of the
December 31 market values of the investable resources of the funds for the
immediately preceding five years, …”
RATIONALE AND RECOMMENDATION
Background
The spending rate allowance is utilized to determine the amount of
earnings that will be withdrawn from the Land-Grant Endowments for the
support of university programs and activities. The spending rate
allowance is a mechanism to help the board meet its responsibilities to
current beneficiaries by providing fair and reasonable distributions and to
future beneficiaries by maintaining the purchasing power of the
endowment. It is also a mechanism to smooth the distribution of earnings
over time in order to mitigate the impact of market and earnings volatility
on program distributions.
Discussion and Analysis
The UA Foundation Investment Committee reviews the endowment
spending rates every year and recommends changes to the rate when it
determines that a change is appropriate. Since the bear market of 2001,
the general consensus of endowment administrators has been that, except
for a few outliers, the probable earnings for endowments will not support a
5% distribution rate over long periods of time.
Reference 15 includes a graph prepared by the Association of Governing
Boards that reflects difficulty of maintaining the purchasing power of an
endowment at a 5% spending rate. Reference 15 also includes an
estimate the earnings requirement necessary to support a spending rate at
the current spending level of 5.0% for the Land Grant Endowments and
4.5% for the Foundation’s Pooled Endowments.
The source of the earnings and inflation estimates is the Commonfund
Asset Planning Model which is used by the Investment Committee to help
establish the asset allocation targets for the portfolio. The earnings
requirement needed to support the current spending and expense structure
is 9.98%, which is 48 basis points higher than the projected earnings.
Finance Committee Agenda: Page 2 of 6
Agenda
Finance Committee
February 18, 2009
Juneau, Alaska
Because the probability of achieving average earnings of that magnitude
going forward is low, the Investment Committee is recommending a
reduction in the spending allowance rate from 5.0% to 4.5 % for the LandGrant Endowment Funds and from 4.5% to 4.00% for the Foundation’s
Pooled Endowment Funds.
The Foundation Board of Trustees is scheduled to address the spending
rate for Foundation Pooled Endowments on February 19, 2009. The
Investment Committee will reassess its assumptions, asset allocation,
earnings projections and spending rates when the current market
conditions stabilize and provide the board with revised recommendations
for FY2011 and subsequent years, if changes are warranted. A spending
plan or budget consistent with your decision will be presented to the board
for approval in June.
Associate Vice President Jim Lynch will be available to answer any
questions the Committee may have about the endowments or spending
rates. Please note that a motion for Acceptance of the Foundation’s
Proposed Endowment Fee for managing the endowments is also on the
agenda for this meeting.
B.
Acceptance of the Foundation’s Proposed Endowment Fee for the Land
Grand Endowments
The President recommends that:
MOTION
“The Finance Committee recommends that the Board of Regents
accepts the UA Foundation’s proposed annual Endowment Fee for the
Land-Grant Endowment Funds at .50% of the December 31, 2008
market value of the endowments. This motion is effective February
18, 2009.”
POLICY CITATION
Regents’ Policy 05.07.010.E states: “Withdrawal of earnings in any fiscal
year will be limited to the unexpended accumulated earnings, both
realized and unrealized, of the endowment as of the preceding December
31, up to a maximum amount equal to 5 percent of the average of the
December 31 market values of the investable resources of the funds for the
immediately preceding five years, …”
Finance Committee Agenda: Page 3 of 6
Agenda
Finance Committee
February 18, 2009
Juneau, Alaska
RATIONALE AND RECOMMENDATION
Background
The Board of Trustees and the Board of Regents (the board) reached
agreement last year on establishing an annual endowment fee for the
Land-Grant Endowment Funds at .50% of the value of the subject
endowments as of the preceding December 31.. At the time, the board was
concerned that the services provided to the Land-Grant Endowments are
significantly less than those provided for the Foundation’s Pooled
Endowments and that the Land-Grant Endowments do not benefit from the
development activities that are supported by the general endowment fees.
The board also wanted to limit the fee to a modest level because the law
regarding allowable charges is not clear and the fee appeared to exceed the
incremental costs of providing the services.
As a result, the board
reserved the right to review and accept the proposed endowment fee
annually.
Discussion and Analysis
Both boards authorized the respective board chairs to execute an
endowment fee agreement between the Board of Regents and the Board of
Trustees. The agreement, which is actually in the form of an amendment
to the current memorandum of understanding, has been drafted and is
pending resolution of a couple of minor issues prior to execution. Due to
the severe instability of market conditions today, the staff believes that the
analysis conducted last year is probably more reflective of the long-term
environment than an analysis that might be conducted in the midst of the
crisis we are currently experiencing.
Associate Vice President Jim Lynch will be available to answer any
questions the Committee may have about the endowments or the
endowment fee.
C.
Approval of FY09 Supplemental Budget Request
Reference 16
The President recommends that:
MOTION
"The Finance Committee recommends that the Board of Regents
approves the FY09 general fund supplemental request to cover
catastrophic workers’ compensation claims $746,200; athletic travel
increases $416,000; and FY09 projected cost increases for utilities
$1.27 million. This motion is effective February 18, 2009."
Finance Committee Agenda: Page 4 of 6
Agenda
Finance Committee
February 18, 2009
Juneau, Alaska
POLICY CITATION
Regents' Policy 05.01.01.A. – Budget Policy, states, "The budget of the
University of Alaska represents an annual operating plan stated in fiscal
terms. All budgetary requests shall be adopted by the board prior to
submittal to the Office of the Governor or the legislature."
RATIONALE AND RECOMMENDATION
The University of Alaska is requesting $746,200 in FY09 supplemental
funding for two catastrophic workers’ compensation claims which are in
excess of $300,000. Claim #2000179 for $25,000 and claim #2005056 for
$721,200.
The university is also requesting supplemental funding to cover athletic
travel increases. Both UAA and UAF have experienced increased athletic
travel expenses and are requesting a supplemental in FY09 for $120,000
and $296,000 respectively. Intercollegiate athletic teams are required to
compete in a fixed number of competitive events as well as subsidize
travel expenses incurred by teams traveling to Alaska.
The university continues to make improvements to its facilities designed
to improve energy efficiencies, thus reducing energy consumption.
Unfortunately, most campuses continue to see utility cost increases due
mostly to utility provider rate increases and colder than usual
temperatures. Examples include, Anchorage and Mat-Su campuses
received a 22% natural gas increase beginning in January 2009 and UAF
rural sites are still being impacted by last year’s high fuel/heating oil costs.
As part of UA’s FY09 budget request, $1.3 million general fund was
requested to cover utility cost increases, with an additional $1.3 million to
be covered by the campuses through university receipt authority.
However, the FY09 appropriation for UA did not include any general fund
for utility cost increases, only funding contingent on the fuel trigger
mechanism. The fuel trigger mechanism provided $4.8 million in
additional funding for utility increases, but with base funding still at the
FY06 level, UA still requires an additional $1.27 million for utilities in
FY09.
Reference 16 provides a graph of UA’s utilities cost trend and associated
funding since FY05. Reference 16 also provides the university’s request
to the Office of Management and Budget (OMB) for FY09 supplemental
funding. Given the legislative timing, the request was submitted to OMB
on January 13, 2009 and revised on January 27, 2009, to include updated
projections. This request was submitted contingent on Board of Regents’
approval.
Finance Committee Agenda: Page 5 of 6
Agenda
Finance Committee
February 18, 2009
Juneau, Alaska
D.
Approval of Receipt Authority for FY10
Reference 17
The President recommends that:
MOTION
“The Finance Committee recommends that the Board of Regents
approves the revised FY2010 Capital Budget Request to include
additional federal receipt authority in the amount of $24 million. This
motion is effective February 18, 2009.”
POLICY CITATION
Regents’ Policy 05.01.010.A states: The budget of the university
represents an annual operating plan stated in fiscal terms. All budgetary
requests shall be adopted by the board prior to submittal to the Office of
the Governor or the legislature.
RATIONALE/RECOMMENDATION
The rationale for this recommendation is included in Reference 17.
Michelle Rizk, associate vice president for Budget, will be available to
answer any questions regarding this request.
IV.
Ongoing Issues
V.
New Business
VI.
Future Agenda Items
VII.
Adjourn
Finance Committee Agenda: Page 6 of 6