UPMIFA has been enacted to update and replace Ohio’s current version of the Uniform Management of Institutional Funds Act (UMIFA; Ohio Revised Code §§ 1715.51-1715.59) with the modern provisions of UPMIFA (new, amended Ohio Revised Code §§ 1715.51-1715.59). UMIFA and UPMIFA both are designed to provide clear statutory rules to govern management and investment of endowment funds controlled by charitable institutions. UPMIFA complements Ohio’s Institutional Trust Funds Act (ITFA; Ohio Revised Code §§ 5813.01-5813.07), which provides statutory rules governing wholly-charitable trust funds managed by trustees other than the charity or charities for which the trust funds are held.
Effective June 1, 2009, with respect to decisions made or actions taken on or after that date, the Ohio version of UPMIFA will change and improve Ohio’s current version of UMIFA in the following three important ways:
- Modern Portfolio Investing Principles. Uniform Prudent Investor Act (UPIA) factors and principles of modern portfolio-investing will apply under the new Ohio UPMIFA. These detailed factors and principles will replace the general “ordinary business care and prudence under the facts and circumstances” standard now contained in UMIFA, and will harmonize the fiduciary investment standards and duties generally applicable to private trust funds since 1999 (under UPIA) with the investment duties and standards applicable to the investment of endowment funds (under UPMIFA). See Ohio Revised Code § 1715.52 (as amended, effective June 1, 2009).
- Solving the “Underwater” Endowment Fund Problem by Applying a Percentage-of-Fund-Value Distribution Standard, Replacing UMIFA’s “Net Appreciation over Historic Dollar Value” Standard. Ohio’s version of UPMIFA will establish a “safe-harbor” five percent-of-fund-value annual spending rule for charity-managed endowment funds, similar to the five percent safe harbor already contained in Ohio’s ITFA (the ITFA would continue to apply to charitable trust funds managed by third party trustees). See Ohio Revised Code §1715.53(D) (as amended, effective June 1, 2009). Such a safe-harbor spending rule will eliminate the problem of so-called “underwater” endowment funds—under Ohio’s old/current version of UMIFA, distributions may be made only out of “net appreciation” (both realized and unrealized) in the value of the assets of the endowment fund over the “historic dollar value” of the fund.
UPMIFA abolishes the old “historic dollar value” standard in favor of the more flexible approach of budgeting endowment fund expenditures as a percentage of average fair market value of the endowment fund (using a trailing average over a period of at least twelve quarters). Given Ohio’s favorable experience with the five percent safe harbor under the ITFA, the Ohio legislature enacted a similar five percent safe harbor spending rule under UPMIFA. If a charity chooses to spend at a rate higher than the five percent safe harbor (perhaps for an unusual capital expenditure or in a high-interest-rate economic environment), there would be neither a presumption of prudence nor a presumption of imprudence. See Ohio Revised Code § 1715.53(D)(2) (as amended effective June 1, 2009).
Thus, under UPMIFA, on and after June 1, 2009, endowment fund spending/appropriation decisions should utilize the “percentage of average fair market value” approach, as the “historic dollar value” rule will no longer apply.
Easing Administrative Burdens for Modification or Release of Restrictions. Ohio’s version of UPMIFA also includes a new provision to permit charitable institutions to modify or release a donor-imposed restriction on endowment funds with a value of less than $250,000, without resort to judicial procedures. See Ohio Revised Code §1715.55(D) (as amended, effective June 1, 2009). Ohio’s current UMIFA has no provisions allowing for nonjudicial modifications except with the donor’s consent (impossible to obtain if the donor is deceased). Allowing relatively small endowment funds to modify impractical restrictions while avoiding costly judicial proceedings will be a helpful change.
To qualify for such a nonjudicial modification, an endowment fund would have to be in existence for at least ten years, and the restriction or condition to be modified must (if not so modified) be unlawful, impracticable, impossible to achieve or wasteful. As a further safeguard, the Attorney General’s office must be notified by the charity at least 60 days before any such nonjudicial modification is implemented by the charity.
As finally enacted (with input from the Attorney General’s office), any such request for a nonjudicial modification or waiver of restrictions for an endowment fund under $250,000 must be submitted for review by the Attorney General’s office on a form prescribed by the Attorney General’s office, and the Attorney General’s office may request an additional 60 days to review any such nonjudicial application made under division (D) of Ohio Revised Code §1715.55. See Ohio Revised Code §1715.55(E) (as amended, effective June 1, 2009).
As under UMIFA, for endowment funds that do not qualify for the new, nonjudicial approval procedure (those in existence for less than ten years or having a value of $250,000 or more), UPMIFA would continue to require that the Attorney General be a necessary party in any judicial proceedings that seek to modify or release restrictions on such endowment funds. See Ohio Revised Code §1715.55(C) (as amended, effective June 1, 2009).