Treasury Operations
Internal Procedures
III. INVESTMENT COST ALLOCATION
IV. ATM OPERATIONS
V. CONSTRUCTION REIMBURSEMENTS
The University rebalances the total endowment portfolio to external fund manager and asset class targets during the quarter following the quarter ended whenever the allocations fall outside of the allowable target ranges. When rebalancing, it is anticipated that there would not be withdrawals or additions to a manager or asset class of funds until such time that the allocation fell outside the target range. The objective is to rebalance to the target. Depending upon the dollar magnitude, the adjustment to target may be done in incremental steps during a quarter.
Before the end of each quarter, funds are withdrawn for purposes of distributing earnings to individual endowment spending accounts. New funds are also added the beginning of each quarter. Both circumstances provide some level of opportunity to rebalance the total portfolio. The University is guided by the following in determining the dollar amount of specific withdrawals from external fund managers.
- Adjusting any allocations where target ranges have been exceeded.
- Costs of liquidation relative to each manager portfolio – type of securities and total dollars held.
- Dollar magnitude of the withdrawal relative to the external managers total portfolio
In some instances, the portfolio may be relatively balanced and no allocations are outside target ranges. In those cases, the quarterly withdrawal is made from one or more external fund manager accounts where the current allocation exceeds the target. The major asset class allocation targets also become an important factor in the rebalancing decision making. To a great extent, when the portfolio is relatively balanced, the quarterly withdrawals result in a rebalancing to target among all the funds.
The University of Iowa Foundation is the University’s preferred arm of giving, however, from time to time there are gifts and often bequests that designate the funds be directed to the University. In those cases, every attempt is made to determine whether the donor had any prior affiliation with the University. For example, the registrar is contacted to determine if the individual or a close family member attended the University, and whether any particular degrees were awarded. This type of information and any other relevant information is forwarded to the President along with the amount of gift or bequest. The President determines how the funds are to be designated or invested.
a. Portfolio Asset Allocation. The allocation of unrestricted fund balances to external fund managers is dependent on operating cash needs. While there are no specific Board of Regent Policies regarding asset allocation, it is anticipated that at least half of the unrestricted fund balances be invested with external fund managers.
b. Benchmark. The following indices will be the benchmark for the portion of operating funds under internal management.
91-Day Treasury Bills
Merrill Lynch 1-3 yr. Government
Merrill Lynch 1-3 yr. Gov’t/Agency
The University restricts internal operating fund investments to obligations of the United States government, its agencies and instrumentalities. Working capital cash balances required to meet expected operating needs are held in money market accounts. At the request of the University, the Board of Regent’s investment advisor periodically reviews the money market accounts, and any recommended changes are approved by the Banking Committee.
While there is no specific Board of Regent Policies regarding portfolio turnover, it is anticipated that longer term performance will results from conservative investment strategies, not trading strategies. Therefore the University has held to a “buy and hold” strategy for the internally managed portion of the operating funds.
Although infrequent, whenever circumstances call for a liquidation of securities, the University reviews any cash balances of similar operating fund accounts and evaluates the merits of an internal trade versus an external sale of a security. This is consistent with the overall “buy and hold” strategy of the University.
The University has developed and continues to maintain an effective working relationship with Board approved brokerage firms through regular and active communications. The Board of Regent Policies requires competitive bidding except for certain exempted securities. For all transactions requiring competitive bids, the University has a rigorous solicitation process of seeking three or more bids before executing transactions. This helps to ensure that individual brokers exercise their best efforts in proving the most competitive prices.
II. DISTRIBUTION OF INVESTMENT INCOME
The University has established an endowment spending policy that attempts to balance the long-term objective of maintaining the purchasing power of the endowment with the goal of providing a reasonable, predictable, and sustainable level of income to support current needs. Spending is derived from interest, dividends, and capital appreciation on the portfolios.
Since 7/1/98, the spending rule has been has been 5% of market value calculated and distributed quarterly, based on a three year rolling market average. Each quarter, the market value of endowment and quasi-endowment accounts is computed. Based on a 12 quarter rolling market average, 1.25% of the market value is distributed quarterly to the respective income accounts and is available for spending.
If at December 31 the market value of any endowments is less than the original gift amount, the endowment file will be reviewed for applicable donor restrictions and spending will be suspended where appropriate.
There is a periodic review all endowment and quasi endowment accounts that are restricted as to purpose. Administrators are reminded of the importance of ensuring that disbursements are in accordance with expenditure policies of the University and consistent with donor intent. Each administrator is asked to review and sign off on the endowment account activity. When necessary, future distributions are suspended pending the completion of an administrative review.
Where the University is named as a beneficiary of a trust, periodic disbursements are made by the trustee to the University. The trust statements are periodically reviewed for compliance with the original trust document, accuracy of distribution calculations, and prudent investment practices including asset allocation, investment and administrative fee assessments, and fund returns.
Market values and returns are calculated and reported net of fees. An administrative fee also is assessed each investment pool in relation to the cost of managing oversight of that pool. In the case of the long-term endowment investment pool, the administrative fee will also cover donor-related activities and development costs incurred by the University.
Income earned on invested operating fund balances is distributed monthly by Accounting Services to those accounts that participate in the Treasurer’s Temporary Investment pool.
Periodically during the fiscal year, dollar income projections are calculated by Treasury Operations. Accounting Services utilizes this dollar projection and estimates of TTI participant account balances to develop a distribution percentage that is applied monthly for income distribution purposes. Depending upon market conditions, the dollar projections and income distribution rate are recalculated and sometimes reset during the year. At year-end, there is the opportunity to “true-up” the accounts to reflect actual income for the year.
III. INVESTMENT COST ALLOCATION
Banking and investment costs and a portion of internal operating expenses are funded through an administrative charge. Some costs, such as fund manager fees, are charged directly to the respective investment pool, while other general administrative costs are allocated among the three investment pools – the Long-term Endowment Pool, the Quasi-Endowment Pool (Quasi Pool), and Treasurer’s Temporary Investment Pool (Temporary Pool).
All investment advisor, fund manager, and bank custody fees are charged directly to the three University investment pools. General bank service fees are also charged directly to the University’s Quasi Pool and the Temporary Pool in proportion to the two pool’s market values.
Allocated costs represent general operating expenses including salaries for Treasury Operations and an allocated portion of Business Office and Accounting Office salaries, and certain Treasury Operations administrative costs for software and training. These charges are allocated among the three investment pools.
All requests for ATM service are reviewed and approved by Treasury Operations. The evaluation of new service is primarily based on cost considerations. As a general rule, a minimum volume is required to breakeven on full service ATM’s, and this is due to the additional servicing required for machines accepting deposits. Any requests for full service machines without the minimum volume results in an additional cost of $10,000 under the University’s current ATM contract.
Revenue sharing is limited to auxiliary enterprises, which includes Residence Halls, the IMU, and UIHC. Revenues are allocated based on volume. In the case of requests for full service ATM’s, revenues will be reduced by any additional costs under the current contract. Starting in FY 2002, all ATM’s with daily transaction volume of over 100 will earn $.25 per transaction (withdrawal or deposit).
Revenues will be distributed to Residence Services, the IMU, and UIHC quarterly, based on actual or estimated transaction volumes. At year-end, accounting adjustments will be processed to reflect actual fiscal year volume.
Any undistributed revenue is maintained centrally and under the direction of the President, be utilized to fund services for those generating the revenues, i.e. student and employee benefit. These funds can be utilized for financial aid, refurbishing of public areas, and other student and employee benefits.
V. CONSTRUCTION REIMBURSEMENTS
All requests to the bond trustee for reimbursement of construction expenses are reviewed, signed by the Controller or his designee, and forwarded to Treasury Operations. Fund transfer instructions to the trustee are reviewed by Treasury Operations and must include a second signature of an authorized signer before transmitted to the trustee for processing. Transfers are only authorized to State University of Iowa bank accounts.
Treasury Operations is a department within the Finance and Operations organization
