Archive for the ‘Newsletter’ Category

Nonprofits gird for tough new tax rules

03 / 13 / 2019
by Charles Skorina | Comments are closed

We aren't lawyers, so you won't catch us opining on important lawyerly stuff like detinue, replevin, trover; or even desuetude (especially desuetude). We'll leave all that to the learned barristers.

But, in our daily conversations with investment heads in the nonprofit investment world, we’ve been getting an earful about the latest Congressional tax edicts which will make hiring senior executives much more expensive.

The Bare Bones

The 2017 Tax Reform Act fills 500 pages of small print, and it has some good points and bad points.

On the micro-level, under “good,” it lowers the excise tax on beer to $16 per barrel.  It also changes the IRS definition of “mead” (which we have urged for years).  No problem there.

And, at the macro level, also under “good,” it seems to have worked pretty much as advertised. 

The Act kicked in on January 1, 2018.  Over the rest of FY2018, GDP and personal income rose nicely, at least partly due to the stimulus of tax cuts.

What’s more, even with significant cuts in the rates for both individual and corporate filers, business expansion caused total U.S. tax collections to rise slightly year-over-year, by 0.05 percent.  Win-win.

Under “not so good,” are two sections pertinent to endowment managers and their bosses.

The first (Code Section 4968) imposes a 1.4% excise tax on the net investment income of certain private colleges and universities.  We had our say about this elsewhere.

The Yale Tax, as it might be called, will raise a risible $1.8 billion over ten years when and if the lawyers figure out how to apply it.  Calling this a drop in the bucket would be an insult to drops and buckets.  It’s $180 million annually in a $3.8 trillion U.S. budget.

The second section (Code Section 4960) motivates today’s sermon.  

We recruit investment heads and advise boards on compensation and performance, so any tax that makes hiring CIOs more expensive gets our attention.

This recent law imposes an excise tax on “excess” executive compensation at tax-exempt organizations, including 501c3s.  The latter include virtually all private colleges and (probably) many public ones. 

Congress seems to have intended to include state universities in the sticky embrace of 4960, not just their parallel foundations; but they may have to fix the language in the bill they actually passed.

The IRS has decreed that any non-profit compensation exceeding $1 million is “excess.”  Apparently, because it’s a nice, round number; and also because congresspersons make only $174K per year.

The tax will amount to 21 percent of the “excess” compensation, and it will pertain only to the five highest-paid employees.

Chief investment officers – and presidents, and football coaches – will be relieved to know that the tax will be levied on their employers, not on the employees.  But it will obviously have a knock-on effect on how much they can afford to pay new hires, or how big a raise they can offer high-performing incumbents.

Some wag has referred to this as the Nick Saban Tax, in honor of the redoubtable Alabama football coach.  Mr. Saban is said to be the highest-paid college coach in the country at $8.3 million in 2018. 

They picked Mr. Saban because he’s well-known, and so is his comp.  But the more obscure nonprofit Ascension Health CEO Anthony Tersigni, earns $17.5 million, and a few other nonprofit healthcare execs were also up in the 8-digit range.

In our latest report on endowment CIO compensation, we estimate that Mr. Swensen at Yale is currently making about $6 million.  And we think the average CIO among big endowments now makes about $2 million.

Let’s do the math for Mr. Saban: 8.3 minus 1.0, times 0.21, equals 1.5.  So, Alabama will have to budget for at least an additional $1.5 million yearly.  A budget item they hadn’t even thought of just a year ago.

The Wall Street Journal has counted 2,700 nonprofit employees (not just at colleges) who were paid over $1 million in 2014.  But the typical excise tax will be far less than Mr. Saban’s.

Total take to the feds from the Saban tax might be $9.2 billion over 10 years (per the Joint Tax Committee).  That’s more than the $1.8 billion for the Yale tax.  But even the total $11 billion (1.1 billion per year) is still an absurdly minuscule number in the context of federal budgeting.

To get $0.92 billion in tax per year for 2,700 people implies that the average employee in that cohort makes around 2.5 million.  Or, about $1.5 million of “excess” comp per employee, as Congress looks at things.



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Latest 5-year Endowment Performance

02 / 07 / 2019
by Charles Skorina | Comments are closed

Five-year endowment performance:

Behind the NACUBO numbers

This February has been a rough one for weather in much of the USA, but two events this month should bring a little sunshine our way.

First, NACUBO rolled out their annual endowment study: the semi-official league tables for endowment investors.  Then, next week, NACUBO and TIAA will host their conference in New York where presenters and attendees will ponder the numbers.

In between, we have Nancy Szigethy's always engaging NMS Investment Forum in Scottsdale, Arizona.  It's at the Hyatt Regency Gainey Ranch, February 9-12, 2019 - an event which draws top endowment and foundation leaders for camaraderie and Arizona sunshine.

Scottsdale is only a quick drive up the I-10 from our new home in Tucson.  So, if you're planning to attend NMS, shoot me an email at skorina@charlesskorina.com and say hello.  You never know which Hyatt lounge I might find myself in this weekend.

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Endowment performance: a few observations

Our SEER report (Skorina's Enhanced Endowment Report) is enhanced because we disclose performance of individual endowments, which NACUBO is not permitted to do.

This update offers 5-year investment returns for 61 endowments for FY2018.  We consider the 5-year return the most meaningful for comparing the performance of endowments and their chief investment officers.

We'll publish our complete list of CIOs and more detailed commentary when all the returns are in and computed by our clever but overworked staff.

We recruit chief investment officers for a living, so we avidly follow all the US universities and colleges with AUM over $1 billion (and many with less) - and we advise board members, families, and management on investment performance and executive compensation.

Where are the women?

Considering the number of highly-qualified female investment professionals we encounter every day, they are still a distinct minority in the top jobs.  Something is obviously not working in the hiring and promotion process.

Our SEER list below includes 15 women among the 58 individual (non-OCIO) chief investment officers.

That's 26 percent, which doesn't sound too bad.  But the picture is much worse in the larger universe of big-endowment CIOs.  There, the percentage is only about 15 percent, and that's down over recent years.

But we can at least highlight those 15 in their own list, which we've added down below.



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Five-year endowment performance: no bed of roses

12 / 19 / 2018
by Charles Skorina | Comments are closed

Five-year endowment performance: no bed of roses

Chief investment officers at endowments, foundations, and family offices are the top guns of the institutional investment world.  They have an infinite investment horizon, a global playing field, and can invest in anything anywhere - within the broad policy limits set by their institution.

We, and many others, regard the CIOs at major American universities and foundations as the best of the best.

We lean heavily on university endowments for our performance studies and benchmarks because that's where the data is.

Foundations, family offices, and Wall Street firms employ top investment professionals, but it's difficult to extract meaningful data from opaque sources.  So, we go with what we can get.

A five-year return: the Goldilocks number

Institutions go on forever, but chief investment officers unfortunately don't.

Five-year returns give us a good -- albeit imperfect - picture of how CIOs are doing their jobs.  A longer timeframe would blur the responsibility for results as CIOs come and go.

In our chart below, the median tenure of CIOs happens to be exactly 5 years.  (The mean is higher, tipped by a handful of very senior CIOs.)

In our SEER reports (aka: Skorina's Enhanced Endowment Reports) we use the five-year rankings for our own headhunting purposes, and we let you look over our shoulders.

Boards and investment committees set broad policies.  Executing those policies in the day-to-day scrum of the markets -- especially in the hiring, firing and monitoring of external managers -- is the province of the CIO and his/her staff.  As recruiters, we try to understand who's doing it well, or not so well.

Risk versus return – it’s personal

We know that nominal returns don't reflect the different risk-appetites of different investors; and ranking doesn't tell the whole story.

There may be good reasons why one institution prefers a more, or less, conservative risk-return trade-off versus its peers.  We'll say more on that point down below.  But five-year nominal return is our starting point.

Our dataset consists of 34 big, over $1 billion AUM, North American endowments reporting as of early December.

That's only about a third of the whole big-endowment roster.  It leaves about 50 who have yet to be heard from, and another dozen or so who disdain to report their returns at all, even when we ask politely.

But our gang of 34 is big enough to show us how the whole league has performed, and it includes many of the brand-name schools and all the traditional Ivys.



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A Family Office Home Companion

11 / 21 / 2018
by Charles Skorina | Comments are closed

Honey, We're Rich!

Say what, dear reader?  You have just been blessed with a humongous liquidity event?

After decades of work and a bit of luck you "suddenly" have millions, perhaps even tens or hundreds of millions of dollars in investible wealth after selling your business or going public.

You are now officially rich, and it feels great.

But wait.  What's that?  Obscure family members you never knew existed are beseeching you for "loans"; allegedly good causes from Missoula to Mozambique are demanding donations; sketchy financial "advisors" are bombing your email and phones with "once-in-a-lifetime opportunities."

First things first

We've recruited family office investment heads and advised on selecting wealth-management firms.  But it works both ways.  We listen very carefully to our clients and learn a lot from them.

Here is some advice from clients who have been through it.

1. The very first thing.  Hire a tough, experienced lawyer who is used to dealing with wealth managers, brokers, and solicitors.  (Not just the firm who helped you with routine legal chores on the way up.)  It will be money well spent and you won't regret it.  You will need a real pro to run interference for you against the sharks.

2. The very next thing.  Hire a reliable and reputable accountant who understands the complexities of wealth-management.  You will need financial controls and a voice of caution.  Dollars can slip away fast without an experienced check on your newly-rich exuberance.

3. Take your time.  No sudden moves.  Think about how to organize your affairs, your objectives, impact on family-members and upcoming generations.

4. Establish a realistic spending rate.  And stick to it.  One rashly-purchased yacht, jet, or hobby-ranch can punch a surprisingly big hole in your seemingly-unsinkable new fortune.

Fortune and fate

Entrepreneurs and business titans mostly made their money from shooting the lights out on a single venture.  Dell, Brin, Gates, Zell, Zuckerberg, went "all in" and won big.  Their recipe?  Highly-concentrated investments, risk-taking, innovation, and sheer audacity.

But here’s the nub.  Wealth is created by entrepreneurs, but maintained by diversification, sophisticated risk-management, and prudence.

And that's the dilemma.  People good at wealth-creation have had little time or experience with wealth-maintenance, where capital preservation is paramount, and diversification is the key.  It's a different mind-set and a different set of skills.

Family wealth management: build or buy?



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Compensation and chief investment officers

11 / 04 / 2018
by Charles Skorina | Comments are closed

Who are the best-paid endowment CIOs?

Compensation is a delicate issue; but recruiters need to keep track of it.  And, we see no reason why we shouldn't share some of that bounty with our readers.   (See our complete compensation chart just below.)

Most of it is publicly available, anyway; as long as you're willing to scrounge for it.  Private schools and some publics disclose it in IRS filings.  The hitch is the long time-lag -- more than two years -- before the data is publicly available.  The corresponding data for most public schools is often fresher, but it's scattered among various and often quirky databases in various jurisdictions with various disclosure rules.

It's ironic that data for public colleges has sometimes been the least public.  But that's changed somewhat in recent years as more states adopt sunshine laws for public-employee pay generally.  Or, you can file a FOIA request.  But it's been like pulling teeth in many places.

And, even when public-school CIO comp is published, it can't always be trusted.  Clever college administrators have sometimes found (or constructed) loopholes in those sunshine laws which let them conceal part of the CIO pay-package.

A recent and noisy case in point arose in Michigan.  The official University of Michigan salary-disclosure listing (page 447) for 2017 showed CIO Erik Lundberg's total comp as $720,000.

We've been skeptical of that number for a while, but the U was eventually prodded into disclosing that Mr. Lundberg actually made $2 million in 2017.

Although the gross number had become public, the Detroit Free Press still sued the University to obtain details about how it was calculated.  

The judge sided with the Freep, but the university argued that they had legitimate reasons for keeping them private.

"Despite the court's ruling, we believe disclosure of the ... Incentive Plan will put U-M at a competitive disadvantage," a school spokesman said.  "Because there are very few public universities in our endowment peer group, virtually no comparison [sic] schools will ever have to make their plans public.  These are the employers against which the university competes for talent recruitment and retention."

The fact that a major university would go to some trouble to avoid disclosing that information does speak to the highly competitive market for top CIOs.  If you have a good one (and Mr. Lundberg is very good), there's always anxiety that someone with deeper pockets will whisk him or her away.   And, if you're crafting a competitive offer, it certainly helps to know exactly what you have to beat.

As the Lundberg case confirmed, these pay packages are complex.  In our chart below, we can only offer the bare numbers.



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