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The Uniform Prudent Management of Institutional Funds Act (abbreviated UPMIFA) is a uniform act that provides guidance on investment decisions and endowment expenditures for nonprofit and charitable organizations. As of October 2010, UPMIFA is now the law in the District of Columbia and all states except Pennsylvania, Florida and Mississippi. The major change in UPMIFA compared to the previous model law (the Uniform Management of Institutional Funds Act) is that it replaces a requirement that nonprofits cannot spend below the original value of contributions or “historic dollar value” (HDV) with a new requirement that their investing and spending will be at a rate that will preserve the purchasing power of the principal over the long term.
The predecessor to UPMIFA, called the Uniform Management of Institutional Funds Act (UMIFA), was approved by the National Conference of Commissioners on Uniform State Laws (NCCUSL) in 1972 and was enacted by 47 states. Under UMIFA a charity could spend from an endowment fund up to the amount of appreciation above the historic dollar value (HDV), but could never spend below HDV.
As of March 2009, the North Carolina Symphony had $6.9 million in its endowment but was unable to touch a penny because North Carolina law, at that time based on the UMIFA model, said that money could not be touched because the market value of the endowment was below HDV because of the slump on Wall Street. North Carolina has since adopted UPMIFA.
The NCCUSL on July 13, 2006 approved UPMIFA as a replacement to UMIFA, adding the P for “prudence”, which emphasizes the perpetuation of the original purchasing power of the fund, not just the original dollars contributed to the fund.
A key provision of UPMIFA states that: “Subject to the intent of a donor expressed in the gift instrument an institution may appropriate for expenditure or accumulate so much of an endowment fund as the institution determines is prudent for the uses, benefits, purposes, and duration for which the endowment fund is established.
This uniform law is adopted state by state, and therefore the law may be slightly different in each state. For example, on September 20, 2010, Gov. David Paterson signed into law the New York version of UPMIFA called the New York Prudent Management of Institutional Funds Act or NYPMIFA.
The major impact of UPMIFA on nonprofits is that they are now allowed to spend from an underwater endowment if the governing board determines it is prudent to do so based on seven specific factors. Many states have adopted an optional provision to limit the spending to 7%. This board-approved spending policy must be based on the average market value of the endowment investments over the 12 quarters (or more) immediately preceding the calculation. UPMIFA applies only to permanent restricted endowments, which are restricted by the donor or law.
In addition, UPMIFA contains several standards of prudence regarding investing decisions and delegation of investment management.
In March and April 2009, the Association of Governing Boards of Universities and Colleges (AGB) conducted a survey of colleges, universities and affiliated foundations in states in which UPMIFA has been enacted to learn how institutions have been managing endowment spending under UPMIFA. The survey found that:
Harvey Dale, director of the National Center on Philanthropy Law at New York University, said changing the law is long overdue. “There are a lot of more recent funds that have gone underwater because of the current financial tsunami,” Dale said. “So what do you do? If you’re in a state that still has UMIFA, you’re screwed.”
Rebeka Mazzone, CPA, recommends: “[Today’s boards] ... need to consider what spending rules would be reasonable and appropriate in relation to the assets available, the wishes of the donor, the role that each investment or course of action plays within the overall investment portfolio, and the needs of the institution and the fund to make distributions and to preserve capital.”