UNIFORM LAW COMMISSION Uniform Prudent Management of Institutional Funds Act (

1
Webinar UPMIFA June 30, 2009
2
Non-Profit Endowments MasteringStaff
Position FAS 117-1Uniform Law Commission,
Uniform Prudent Management of Institutional
Funds Act(UPMIFA) and FSP FAS 117-1

• Barry C. Hawkins, Shipman Goodwin LLP,
  bhawkins_at_goodwin.com

3
Introduction

• 1. UPMIFA (2006) Replaces UMIFA (1972)
• (which was the law in 48 states) as the primary
  source of law governing the investment,
  management and expenditure of donor generated
  dollars.
• 2. Economic Impact
• A. 1.4 Trillion Dollars in 2004
• B. 5.2 of G.D.P. in the U.S.
• C. Employment Significance
• D. Types of NPOs and Endowment Funds

4
Common Misconceptions

• 1. Board restricted or quasi-endowment
• This money is set aside for investment and is
  to be used for the construction of a new library
  after it reaches 10,000,000.
• 2. Pooled investments vs. separate use,
  restrictions.
• 3. Creditor reliance, borrowing capacity and
  insolvency risk. The types of donor restrictions
  are highly significant to those who read and rely
  upon the financial reports of any NPO.

5
Legal Obligations of the Board of an NPO

• 1. Prudently manage and invest the funds to
  maximize the return of assets (at least for
  endowment funds).
• 2. Spend a portion of return on investment for
  current needs of the NPO and retain the balance
  in investments to provide for future needs, being
  mindful of inflation and the long term viability
  of an endowment fund.
• 3. Abide by the restrictions imposed by the
  donors on a separate fund by fund basis.
• 4. Follow state law (UMIFA/UPMIFA) which supplies
  standards if not specified by donor.

6
Examples of Endowment Restrictions

• 1. This money should be kept intact and the
  income from it is for Bowdoin College.
• True endowment No use restriction
• 2. This money should be kept intact and the
  income from it is for the purchase of books for
  the Bowdoin College Library.
• True endowment, combined with use restriction
• 3. This money should be kept intact for the
  period of 10 years, during which the income from
  it should be used only for the purchase of books
  for the Bowdoin College Library, and thereafter
  the money may be used for the general use of
  Bowdoin College.
• Endowment for a term of years, and thereafter
  the money has no time or use restriction.
• Almost any combination is possible in this
  highly flexible concept of restriction.

7
UMIFA

• Allowed pooled or total return analysis of the
  portfolio.
• Allowed investment in equity and other
  alternative investments.
• Allowed NPOs to delegate investment authority to
  professional managers.
• Allowed NPOs to adopt spending plans that
  recognized and spent both realized and unrealized
  appreciation.
• Required spending plan to be prudent but required
  maintenance of historic dollar value as a legal
  requirement.

8
The Creation Process for UPMIFA

• 1. 2001 Study Committee Uniform Law Commission
• 2. The prior adoption of Uniform Prudent Investor
  Act in 46 states clearly indicated need to extend
  modern trust standards to NPOs organized as
  corporations.
• 3. Drafting Committee 2002-2006
• A. Timing
• B. Process
• 4. Since July 2006, UPMIFA has been adopted in 35
  jurisdictions, a near record pace, with 10 more
  adoptions in process and expected in the next two
  months. Six of the remaining eight jurisdictions
  are likely to have such legislation in 2010,
  leaving only Pennsylvania and Puerto Rico without
  UPMIFA. Neither of them ever adopted UMIFA.

9
The New LawWhat Does UPMIFA Do?

• 1. Prudence is adopted as the articulated
  standard for investment management and
  expenditure. UPIA standards for the trust world
  are extended to charitable corporations.
• 2. Elimination of HDV and substitution of
  multi-faceted prudence standards become the
  linchpin of legal authorization for endowment
  expenditures. A prudent spending policy must be
  adopted by each NPO.
• 3. Greatly improved standards for modifying or
  eliminating restrictions imposed by donors, which
  have become outmoded, wasteful or impracticable.

10
The Elimination of HDV As A Bright Line
Restriction

• Boards may now adopt spending policies that will
  go below (invade) HDV if it is prudent to do so.
• The Standards to be considered
• 1. Duration and preservation of endowment fund
• 2. Purposes of the institution and the fund
• 3. General economic conditions
• 4. The possible effect of inflation/depletion
• 5. Expected total return from income and
  appreciation
• 6. Other resources of the institution
• 7. The investment policy of the institution
• The key is to maintain long-term viability and
  short-term flexibility.

11
Other Possibilities Within Endowed Spending
Authorization.

• 1. The bracketed 7 presumption of
• imprudence in Section 4d
• A. Available if bright line is still desired
• B. Limited acceptance
• C. Three-year rolling average determination
• D. No presumption of prudence below 7
• 2. The small fund exception in comments
• A. under 2 million
• B. 60 days notification to regulator
• C. Will they know about the requirement?

12
(No Transcript)
13
Release Or Modification Of Restrictions

• What is new?
• Clearer, more articulated language. Under UMIFA
  it was unclear that would happen if a court
  released a restriction because it was
  impracticable or wasteful. Under UPMIFA modern
  cy pres and deviation concepts from trust law are
  mandated to NPOs.
• Section 6(d) allows a new departure for small
  (less than 25,000), old (more than 20 years)
  60 days prior notice to charitable regulator.

14
UPMIFAAccounting Rules And FSP FAS 117-1

• 1. Section 4A of UPMIFA specifies that unless
  donor specifically provides to the contrary in
  the gift instrument, the assets in an endowment
  fund are donor-restricted assets until they are
  appropriated for expenditure by the institution.
• 2. Note This does not require the institution to
  determine what portion of the endowment is
  permanently restricted, which is an accounting
  concept, not a legal requirement.
• 3. Note Legally, endowment funds are always
  restricted, either for time, purpose or for both,
  and become unrestricted only when appropriated
  for expenditure by the institution.

15
UPMIFAAccounting Rules And FSP FAS 117-1 (Cont.)

• 4. Reconciliation of FSP FAS 117-1 with Sect. 4a
  of UPMIFA?
• (a) They apply different concepts
• (b) The law (enactment of UPMIFA by state
  statute) trumps a contrary interpretation by FASB
• 5. To the extent that FSP FAS 117-1 requires
  strict adherence to HDV or changing other asset
  classifications to restore HDV level, the two
  are essentially in conflict and cannot be
  reconciled.

16
UPMIFAAccounting Rules And FSP FAS 117-1 (Cont.)

• 6. What are the options available to a NPO?
• (a) Contest the FSP FAS 117-1 requirements, by
  court action, persuasion or regulatory
  interpretation
• (b) Live with FSP FAS 117-1 by acting as though
  it governs instead of statutory law and adopt a
  spending policy which identifies what portion of
  endowment the NPO believes it is obligated to
  retain permanently.
• (c) Take concerted action to have FASB adopt a
  new classification scheme for non-profit
  accounting for endowment funds.

17
Concluding Concerns and Issues

• 1. Remember overarching rule This is a default
  statute. Donor restrictions govern.
• 2. How to draft around UPMIFA
• 1099781 v.1

18
Thank you!
Save the Date July 23rd webinar Raising Money
in Challenging Times 900am 1000am Speaker
Lawrence Henze, Blackbaud RSVP today
events_at_foundationccc.org