Duke's response to congressional inquiry regarding endowment

8/18/2019 Duke's response to congressional inquiry regarding endowment

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Endowment Management

1. What categories of assets are included in your college or university’s endowment? For each

category, please indicate the amount of funds that are:

a. Unrestricted;

b.

Permanently restricted by donors;c. Temporarily restricted by donors;

d. Permanently restricted by your college or university (quasi-endowments); and

e. Temporarily restricted by your college or university.

f. For each restricted asset, please describe the uses for which the funds are restricted and

the amount of the fair market value of the endowment apportioned to each use. How

and why were the restrictions put into place?

June 30, 2015 ($ in millions)

Endowment purpose

(1.a.)

Unrestricted

(1.b.)

Permanent

Res tricted -

Donors

(1.c.)

Temporarily

Res tricted -

Donors

(1.d.)

Permanent

Restricted -

University

(1.e.)

Temporarily

Res tricted -

University Total

Instruction, research,and professorships - 618 1,014 147 266 2,045

Student financial aid - 717 735 32 53 1,536

General operations - 172 442 238 632 1,485

Special programs - 61 139 122 215 537

Libraries - 24 63 13 10 110

Duke University Health System - 11 13 - - 24

Operation and maintenance of plant - 9 11 2 3 24

Other designated - 115 92 235 269 710

Interests in perpetual trusts held by others - 824 - - - 824

Totals - 2,552 2,509 789 1,447 7,297


Endowment purpose

(1.a.)

Unrestricted

(1.b.)Permanent

Res tricted -

Donors

(1.c.)Temporarily

Res tricted -

Donors

(1.d.)Permanent

Restricted -

University

(1.e.)Temporarily

Res tricted -

University Total

Instruction, research,and professorships - 592 1,010 146 276 2,025


General operations - 159 441 233 628 1,461

Special programs - 61 141 124 215 541

Libraries - 24 62 13 10 109





Totals - 2,423 2,519 642 1,452 7,037


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For assets permanently restricted by donors, the donor and the university determine the

restrictions subject always to final approval of the university; these restrictions are codified in

a legal agreement between the donor and the university (see response to question 10, below).

Agreements creating restricted permanent endowment funds always provide for an alternative useif the original restricted purpose no longer exists or is no longer necessary, legal or possible.

Specifically, the standard endowment agreement provides that if the stated purpose of the fund no

longer exists or is no longer necessary, legal or possible, then at the direction of the Duke University

Board of Trustees (the “trustees”), distributions may be used for a substantially similar purpose or for

such purposes as will further the objectives and purposes of the university, giving due consideration

to the original intent of the donor(s).

Assets which are temporarily restricted by donors are representative of the unexpended net

appreciation on assets which are permanently restricted by donors.

For quasi endowment funds, “permanently restricted by your college or university”, the assetrestrictions may arise from a donor designation associated with a restricted gift, not designated

for a donor-established endowment. In most instances, however, the restriction is proposed by

the administration in support of initiatives of the deans. Depending on the level of funding,

each quasi endowment proposal is reviewed either by the Executive Vice President of the

university or by the trustees. For those quasi endowments approved by the Executive Vice

President, the trustees receive a list of these approvals for their review.

It should be noted that quasi-endowment funds held by Duke University (“Duke”), referred to in

question 1.d. above as “permanently” restricted, are not permanently restricted, but are subject to

invasion (use) upon approval by the trustees. Assets which are temporarily restricted by the

university are representative of the unexpended net appreciation on those assets which are permanently restricted by the university.


Endowment purpose

(1.a.)

Unrestricted

(1.b.)

Permanent

Res tricted -

Donors

(1.c.)

Temporarily

Res tricted -

Donors

(1.d.)

Permanent

Restricted -

University

(1.e.)

Temporarily

Res tricted -

University Total

Instruction, research,and professorships - 562 800 146 227 1,736


General operations - 142 363 220 511 1,235 Special programs - 61 116 126 170 472

Libraries - 23 51 13 6 94





Totals - 2,220 2,000 637 1,184 6,041


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2. Does your college or university hold any investments that are not included in the

endowment?

Yes.

If so, what are they, and what are their fair market values and basis?

Duke University (the “University”) utilizes investment pools known as the University’s Long

Term Pool (LTP) and the Health System Pool (HSP) to make University and Duke University

Health System, Inc. (a controlled affiliate of Duke University that operates a health system,

referred to herein as “DUHS”) investments in diversified portfolios of debt, equity, and other

investments. The HSP is structured to provide more liquidity for DUHS than is available within

the LTP. The investments outside of Duke’s endowment consist of the following:

How are they used to further the educational purpose of the college or university?

The Long Term Pool investments outside of the endowment consist of university reserves,the income from which is used to provide funding for university operations, includingscholarly research, academic support, student support (need-based grants and scholarships),and strategic initiatives.

The Health System Pool investments consist of unrestricted working capital, the income offwhich is used to support health system operations as well as academic support of theclinical missions of the university’s School of Medicine.

3. What is your endowment size, as measured by total fair market value of its assets? What

has been the net growth and net investment return on your endowment each year?

($ in millions)

($ in millions) 2015 2014 2013

Long Term Pool 2,340 2,093 1,698

Health System Pool 2,201 2,337 2,051

Non-pooled 215 368 329

Non-endowment investments 4,756 4,797 4,077

Year

Ending

Market Value

Net

Growth

Investment

Return

FY15 7,297 260 4.4%

FY14 7,037 996 20.1%

FY13 6,041 486 13.5%


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%

Given investment cycles, and to put the investment return of the last three years into context, a

longer term perspective is important; therefore, a 10 year history has been provided below:

($ in millions)

4. How much has your college or university spent each year to manage the endowment, and

how many staff and contractors are employed to manage the endowment? For any fees

paid to nonemployees for investment advice, asset management, or otherwise, please

provide detail on the amounts paid, to whom, and the fee arrangement.

The university’s and DUHS’ investment assets are managed by DUMAC, Inc. (DUMAC).

DUMAC is a separate, nonprofit support corporation organized and controlled by Duke

university that, in addition to managing the investment assets of the university and DUHS, also

manages the investment assets of the Employees’ Retirement Plan of Duke University and TheDuke Endowment (a charitable trust that provides substantial support to the university and also

has other beneficiaries). As of June 30, 2015, the investments managed by DUMAC included:

($ in billions)

The majority of the university’s endowment assets, along with an additional $2.3 billion of

reserves, are invested in the Long Term Pool (LTP).

Year

Ending

Market Value

Net

Growth

Investment

Return

FY15 7,297 260 4.4%

FY14 7,037 996 20.1%

FY13 6,041 486 13.5%

FY12 5,555 (192) 1.0%

FY11 5,747 924 24.5%

FY10 4,824 383 13.2%

FY09 4,441 (1,683) -24.3%

FY08 6,124 213 6.2%

FY07 5,910 1,413 25.6%

FY06 4,498 672 20.2%

Investments:

University investments, including endowment 9.0$

Health System invesments 2.5

Employees' Retirement Plan 1.6

The Duke endowment 3.4

Total Investments Managed by DUMAC 16.6$


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The cost of managing the LTP over the past three years is as follows:

*FTEs manage all investment noted above

5. If your endowment is required to file a Form 990 separately from your college or

university’s Form 990, please provide the endowment entity name(s) and Employment

Identification Number.

Duke University’s endowment does not file a separate Form 990.

Endowment Spending and Use

6. How does your college or university determine what percentage of the endowment will be

paid out each year?

The spending policy (payout) is expressed in terms of dollars per unit or share of the university's

Long Term Pool. The endowment spending rate per unit is calculated as 5.5% of the average of

the Long Term Pool unit market values for the previous three calendar year ends, subject to a

10.0% maximum annual growth in per unit spending. The Board of Trustees, through the

Business and Finance Committee, reviews the spending policy annually in the spring. Any

deviation from the policy requires this committee’s approval.

On February 29, 2008, the university’s trustees approved a higher spending rate for permanent

and quasi endowment funds that support financial aid programs. This initiative increased the

resources from endowment funds available for financial aid while retaining the existing spending

rate for endowment funds that support non-financial aid purposes.

The financial aid endowment spending rate per unit is calculated as 5.75% of the average of the

Long Term Pool unit market values for the previous three calendar year ends, subject to a 10.0%

maximum annual growth in per unit spending. The Board of Trustees, through the Business and

Finance Committee, review the spending policy annually in the spring. Any deviation from the

policy requires this committee’s approval.

If any, what has been the target endowment payout as a percentage of the endowment’s

beginning balance each year?

The university does not target a payout percentage of the endowment’s beginning balance.

If that answer differs from the percentage paid out, please explain why.

Not applicable.

Year Internal ($M) External ($M) Total Cost ($M) FTEs* Contractors

2015 11 27 38 47.5 80

2014 9 24 33 45.5 72

2013 8 19 27 44.0 67


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Please attach any payout policies or guidance.

Attached as Exhibit 1– Duke University Long Term Pool Spending Policy Board of Trustee

Resolution dated May 12, 2000.

Attached as Exhibit 2 – Duke University Spending Policy for Endowment Funds

Supporting Financial Aid Board of Trustee Resolution dated February 29, 2008.

7. Does your college or university have policies regarding spending the endowment principal?

Duke, as a North Carolina nonprofit corporation, is subject to Chapter 36E. of the North Carolina

General Statutes, the statute that governs the management of endowment funds (excluding quasi

endowments) owned by North Carolina charitable institutions. A copy of that statute and an

executive summary is attached as Exhibit 3. That 2009 statute, entitled the Uniform Prudent

Management of Institutional Funds Act (“UPMIFA”), permits (but does not require) charitable

institutions to invade the principal of endowment funds under certain circumstances. When

UPMIFA became law in 2009 permitting principal invasion of endowment funds, the Board ofTrustees considered the possibility of changing its policy which had always prohibited such

invasion. The decision was made to continue the policy of prohibiting principal invasion with

the following limited exception: for undergraduate need-based scholarship endowment funds, a

minimal $1,000 per fund invasion would be made if the market value of those funds were

reduced below book value by the customary trustee-approved spending distributions.

A copy of the trustee resolution dated May 8, 2009 is attached as Exhibit 4.

Has your college or university ever spent endowment principal?

Yes

If so, under what circumstances?

In accordance with the authority of the Board of Trustees resolution attached as Exhibit 4,Duke spent principal from certain need-based scholarship endowment funds in fiscal year2009 by up to $1,000 per fund when the market value of those funds was reduced below

book value in order to maintain financial aid for students on endowed scholarships.


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8. How much and what percentage of the endowment’s beginning balance has your college or

university spent each year? How much and what percentage of the endowment’s return on

investment has your college or university spent each year?

($ in millions)

Duke’s spending policy is designed to provide stable annual funding amounts by smoothing the

impact of short-term fluctuations in investment market values. Adding an additional seven years

to the schedule above and looking at a full ten year period shows how this has worked.

($ in millions)

The effective spending rate shown above is a blend of the rates for financial aid endowments and

non-financial aid endowments, which have had separate payout rates since fiscal 2008, as

described in our response to question 6 above. The graph below provides the effective spending

rates for financial aid (FA) and non-financial aid (NFA) endowments. Since the market

improvement experienced in fiscal 2011, the effective spending for financial aid endowments has

been higher than the effective spending rate for non-financial aid endowments and the blendedspending rate.

Year

Endowment

Spending

% of Be g

Market Value

% of Investment

Returns

FY15 307 4.9% 115.7%

FY14 285 5.3% 26.7%

FY13 295 6.0% 45.3%

Year

Endowment

Spending

% of Be g

Market Value

% of Investment

Returns

FY15 307 4.9% 115.7%

FY14 285 5.3% 26.7%

FY13 295 6.0% 45.3%

FY12 270 5.3% 651.1%

FY11 280 6.6% 27.3%

FY10 246 6.3% 48.3%

FY09 251 4.7% -19.0%

FY08 233 4.5% 74.4%

FY07 149 3.9% 14.2%

FY06 132 4.1% 14.7%


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)

Note that in fiscal 2009, the effective spending for financial aid endowments trailed the average;

many of the financial aid endowments had been recently funded as a result of the Financial AidInitiative, a three year campaign (2005-2008) to raise $300 million for financial aid. These new

financial aid endowments experienced market declines in 2008-2009 which negated their ability

to distribute income without invading the endowment principal.

In addition to endowment distributions, the University also derives operating support from the $2

billion of invested reserves (referenced in response to question 2 above). This related investment

income provides between $75-$100 million of annual support.

9. What percentage of your endowment does your college or university devote to financial aid

for student tuition? How much for other forms of student financial aid? Please specify the

types of non-tuition aid provided.

($ in millions)

Duke University meets full demonstrated financial need for every undergraduate student. For

U.S. citizens and permanent residents, Duke’s admissions policy is “need blind,” which means

that applicants are accepted based on merit, regardless of their ability to pay tuition and fees.

Duke does not make the distinction between tuition and other forms of financial aid; rather,

total cost of attendance is the methodology used to award financial aid. Total cost of

attendance includes: tuition and fees, room, board, books, transportation, and personal

expenses.

Year

Market Value

of

Endowment

Market Value of

Endowment

supporting Financial

Aid

% of Endowment

devoted to

Financial Aid

FY15 7,297 1,536 21.1%

FY14 7,037 1,507 21.4%

FY13 6,041 1,288 21.3%


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*

It is important to note that endowment income is only one source of support for financial aid.

The university provides in approximately $130 million in financial aid each year, over half of

which comes from unrestricted resources. The graph below demonstrates the university’s

commitment to financial aid over the past eight years and the sources of that support.

10. Does your college or university have policies regarding whether it is allowed to accept funds

restricted to a specific purpose?

Yes. Duke will only accept restricted gifts that support the educational, research, and health

care purposes of the institution while preserving the integrity of those purposes. For example,

the educational purpose of Duke is supported by over 2,000 permanent endowment funds

restricted to student financial aid.

Has your college or university ever declined a donation because it was restricted to a

certain purpose?

Yes

If so, please describe those specific scenarios in which your school rejected a donation.

Rejected because purpose of gift not a priority for Duke. Certain gifts may propose support for

one of the core purposes of Duke; however, if the proposed gift would support a program or

effort that is not a priority for the academic leadership of Duke, then the donor would be asked

$72

$130

$86

$100$109

$120

$128 $129


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Please list and describe your college or university’s real estate holdings, including real

estate held by the college or university, the endowment, and all related parties.

If the college or university has made any Payments in Lieu of Taxes, please provide the date

and amount of the payment.

The university does not make Payments in Lieu of Taxes. It does, however, provide voluntary

support to regional and local governments for a number of purposes including public

transportation and fire protection.

The table below shows the support provided to Durham County over the past three years.

In addition, the university leases over 4 million square feet of space in various counties within

North Carolina and indirectly pays approximately $8 million in property taxes annually. This

space is used to further our missions of instruction, research, and patient care and could be

exempted from taxation; however, the university pays the taxes in support of the localgovernment.

Lastly, Duke contributed $7.5 million toward the construction of the Duke Performing Arts

Center (DPAC), which has further enhanced the downtown Durham economy.

Building Use # of Buildings Net SF

Net Book

Value

($ millions)Hospital / Clinical / Medical Care 57 5,036,941 529

Academic 77 3,177,915 121

Research 42 2,410,441 118

Housing / Residential 98 1,719,829 7

Administrative 56 1,060,740 1,099

Athletics / Fitness 23 681,751 118

Parking 11 167,421 16

Auxiliary 16 136,062 89

Utilities 10 121,569 362

Miscellaneous Support 18 86,298 247

Totals 408 14,598,967 2,707

FY15 FY14 FY13

Fire protection 400,000$ 400,000$ 400,000$

Durham Area Transit Authority 350,000 350,000 350,000

Total 750,000$ 750,000$ 750,000$


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Donations

12. Does your college or university grant naming rights to donors based on certain donation

levels? If so, please describe the naming rights program, including how much and what

percentage of any naming rights donations your college or university has used for tuition

assistance.

Duke does not have a formal naming rights program; however, there is Board of Trustee

approved policy, attached as Exhibit 5. Efforts to raise funds to support Duke and its charitable

endeavors are enhanced by donor recognition. The name of the university was changed from

Trinity College to Duke University to recognize the contributions of the Duke family to create

Duke University.

Donors to Duke are currently recognized:

• as members of certain giving societies (for example, the “Barrister Donor Society”

recognizes annual giving at $2,500 and above to support the School of Law),

• by listing in various Duke publications as giving at certain levels,

• by having endowment funds named for the donors (for example, a permanent scholarship

endowment fund may be named for the donor(s) for a minimum gift of $100,000); a

permanent endowment fund for a full professor may be named for the donor(s) for a

minimum gift of $2,500,000),

• by naming new buildings and spaces within buildings for donors (for example, a new

building may be named for the donor(s) if the gift is equal to one-half of the estimated

total cost of construction),

• by naming renovated buildings and spaces within for donors, and

• by naming a constituent part of the university for donors (for example, an institute,laboratory, or school).

If so, please describe the naming rights program, including how much and what

percentage of any naming rights donations your college or university has used for

tuition assistance.

Donors establishing endowments select the purpose of the endowment (subject to universityapproval) and may choose the endowment name, which may include the donor’s nameand/or the purpose of the fund. The table below shows the total gifts given to permanentendowment funds supporting student financial aid and the percentage those gifts representof total endowment gifts for the fiscal years ended June 30, 2015, 2014, and 2013.

For Endowment-Related ($ in millions) FY15 FY14 FY13

Total Endowment Gifts 106 97 76

Total Financial Aid Endowment Gifts 43 40 32

% of Endowment Gifts Directed to Financial Aid 40% 41% 42%


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Conflicts of Interest

13. What conflict of interest policies does your college or university have in place to address

financial interest in endowment investments (including potential conflicts of interest among

and between governing boards, trustees, executives, internal employees tasked with

overseeing the endowment, and external asset managers of endowment assets?)

Duke University has adopted a conflict of interest (“COI”) policy for its Board of Trustees

(attached as Exhibit 6) and a COI policy for officers and employees with administrative

responsibilities (attached as Exhibit 7).

The Duke University Board of Trustees does not make investment decisions. The management

of Duke’s investment assets, including the assets of permanent endowment funds, is entrusted to

DUMAC, Inc. (“DUMAC”), a controlled affiliate of Duke University. The COI policy of

DUMAC is attached as Exhibit 8.

How do you vet board members’ potential conflicts of interest?

Members of the governing board of DUMAC (the DUMAC Board of Directors) are required to

comply with the DUMAC COI policy and are required to file an Annual Statement of

Compliance with the Chief Compliance Officer (“CCO”) of DUMAC. The CCO of DUMAC

administers this annual disclosure process and reviews the disclosures.

What are your policies if a conflict arises with a member of the board of trustees?

The Audit Compliance and Risk Management Committee of DUMAC (chaired by a member of

the Board of Directors) reviews any potential conflicts disclosed and receives recommendations

by the CCO regarding the implementation of conflict management plans when applicable. The

COI policy of DUMAC, and a conflict management plan, requires that the subject Director

“…refrain from participation in, discussion of, or voting on the matter and should take no action

which would create the opportunity for private benefit until the conflict is resolved.”


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Duke's response to congressional inquiry regarding endowment

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