If you are a Non-Profit, You Need to Know UPMIFA

Prior to 1972, nonprofit endowments were subject to the same rules that governed income distribution trusts. The crux of this was that only the income generated from the assets could be spent. Problems arose, because interest rates and therefore income can be volatile, which can wreak havoc on nonprofit budgets that are dependent on that income. Furthermore, this reliance on income incentivized nonprofits to invest exclusively in interest-bearing vehicles like bonds, which ignored long-term purchasing power. Fortunately, the Uniform Law Commission (ULC) helped put this antiquated approach behind us.

The ULC, founded in 1892, is a nonpartisan, nonprofit group of volunteer attorneys that are appointed by each state. This group drafts template laws, which each state may adopt at its discretion. The ULC’s work promotes uniformity of laws throughout the union for ease of interstate business and legal matters.

In 1972, the ULC passed UMIFA, or the Uniform Management of Institutional Funds Act, which was subsequently adopted by 47 states. Among other things, and in contrast to the previously imposed trust rules, UMIFA permitted nonprofits to invest their endowments with a focus on total return; and further, to spend based upon a spending rate tied to the portfolio value as opposed to income, so long as the endowment remained above its “historic dollar value.”

With further advancements in finance theory came the next generation of UMIFA – named UPMIFA – the Uniform Prudent Management of Institutional Funds Act, which was passed by the ULC in 2006, and has subsequently been adopted by 49 states – why Pennsylvania is holding out is anyone’s guess. UPMIFA, which is still in place today, addresses how nonprofits should invest their endowments (the “Investment Policy”), how nonprofits can spend their endowments (the “Spending Policy”), and how nonprofits can modify restrictions on their endowments.

Before we dive into UPMIFA’s standards, there are two overarching items of note:

1. UPMIFA applies to endowments, which are funds that a donor has restricted to being spent over time.  Some endowments are intended to be maintained in perpetuity, while others are intended to be spent down over a specified term. Board-endowed funds or quasi-endowed funds are not considered endowments for the purpose of UPMIFA.
2. To simplify matters for nonprofits, UPMIFA permits the delegation of the management of its endowments to an “agent,” but must act in good faith and with prudence in selecting, directing, and overseeing the agent. By doing so, the nonprofit is not liable for the decisions and actions of the agent.

Investment Policy

• A nonprofit has a duty to comply with a donor’s written instructions.
• Each person responsible for investment oversight must do so with a duty of loyalty, and act in good faith.
• A nonprofit must consider the purpose of the nonprofit and its endowments.
• A nonprofit may incur only reasonable costs with respect to endowment management.
• A nonprofit must make a reasonable effort to verify facts relevant to the investment of its endowments.
• A nonprofit may pool endowments for investment purposes.
• Subject to a donor’s written instructions, a nonprofit must consider the following
  • Economic conditions
  • The impact of inflation
  • Tax consequences
  • The role each investment plays within the overall portfolio
  • The expected return
  • Other resources of the nonprofit
  • A nonprofit’s need to spend vs. preserve capital
  • An asset’s special value to the purpose of the nonprofit
• A nonprofit may invest in any type of investment so long as it is consistent with all other considerations herein.
• A nonprofit must diversify its endowments unless it is determined that its endowments are better off by not diversifying.
• Within a reasonable period after receiving gifted property, a nonprofit must retain or dispose of and diversify the property to ensure the endowment’s compliance with its own terms and UPMIFA. The likelihood of further contributions from the donor may be taken into consideration.
• Any person with relevant skills or expertise has a duty to use those skills or expertise in investing the endowments.

Spending Policy

UPMIFA states that a nonprofit must consider the following when determining how to distribute or accumulate its endowments:

• The duty of the nonprofit to comply with a donor’s written instructions
• The mandated time period of the fund
• The purpose of the nonprofit and its endowments
• Economic conditions
• The impact of inflation
• The expected return
• Other resources of the nonprofit
• The nonprofit’s Investment Policy

Arguably, the most significant update from UMIFA is the ability to spend endowment funds even if the endowment is below its “historic dollar value.” This allows nonprofits to smooth spending from endowments rather than potentially needing to cut off spending during a market downturn. To protect prudent spending in light of this new latitude, UPMIFA noted that:

• Spending in a given year in excess of 7% of a fund’s average value over the prior three-year period would be presumed to be imprudent, although exceptions might be justifiable in some circumstances, however
• Keeping spending below 7% would not provide a prudence safe harbor.

While this new approach may be more ambiguous and open to judgment than the cut and dry “can’t go below the principal” concept, it leaves more room for effective management of endowment assets in the interest of the nonprofit organization’s purpose.

Modifying Endowment Restrictions

UPMIFA states the restrictions of endowments may be modified in either of the two ways below; however, if modified, the funds may only be used by the same nonprofit and for a charitable purpose.

1. With written donor consent
2. With an approved application to the state’s attorney general
   • If the fund is less than $25,000, has existed for more than 20 years, and the funds are used in a manner consistent with the donor’s written instructions, giving notice to the state’s attorney general is adequate

From the founding of country’s first nonprofit in 1736, the Union Fire Company in Philadelphia, until 1972, nonprofit endowment management was restricted in ways that we now know were detrimental to the greater good. The advent of UMIFA in 1972, and later, UPMIFA in 2006, introduced significant improvements, which although more administratively arduous, have greatly benefited nonprofits and their causes, and enhanced donor impact.

If you are curious about your UPMIFA compliance, we encourage you to seek the advice of your delegated agent (investment manager), auditor, or attorney, and if you are curious to learn more about UPMIFA, you can find the template act here: UPMIFA, or see your state’s specific act, which may have modifications.

The information provided herein is for educational purposes only, and should not be construed as advice, including, but not limited to tax, legal, insurance, investment, or retirement advice. For your specific planning needs, please seek the advice of Integris Wealth Management, your tax accountant, attorney, insurance agent, or other professional as appropriate. Investing involves the risk of loss.