The Indiana General Assembly is considering uniform state legislation that would replace prior uniform law regarding the management of institutional funds. The new Uniform Prudent Management of Institutional Funds Act (“UPMIFA”), which was drafted by the National Conference of Commissioners on Uniform State Laws and released in final form in July of 2006, was introduced as Indiana House Bill No. 1505 on January 23, 2007. The House Committee on Financial Institutions included the bill on its hearing schedule for Wednesday, February 14.
Although UPMIFA would grant greater flexibility to charitable institutions with respect to spending from endowment funds, some of the proposed provisions may negatively affect general charitable endowments, community foundations, and private foundations. For example, the Indiana version includes an optional section of the uniform law (proposed IC 30-2-12-9(e)) that creates a rebuttable presumption of imprudence for spending in excess of 7% of the value of an endowment fund (averaged over three years). Charities that develop spending policies focusing only on this 7% figure may spend too much, or too little, considering actual investment performance, changing needs, donor intent, and other matters.
Similarly, proposed IC 30-2-12-13(e) has a procedure for modifying restrictions placed on a fund by its donor if (i) the fund is less than $25,000, (ii) the fund is at least 25 years old, “or” (iii) the institution uses the fund in a manner consistent with the charitable purposes expressed in the gift instrument. The corresponding provision of the uniform law uses the connector “and,” meaning all three must be present, not just one of three. This is a huge difference.
Particularly troubling is the impact that the proposal could have on many private foundations. Under the old version of the uniform law (recommended in 1972 and adopted in Indiana in 1989), donated assets may be retained without triggering prudent investment questions. See current IC 30-2-12-10(2) (the governing board of an institution generally may “[r]etain property contributed by a donor to an institutional fund as long as the governing board considers it advisable”). The ability to retain gifted assets was an important factor for many private foundation founders, and the IRS recognized this when enacting regulations implementing the private foundation jeopardy investment rules under Internal Revenue Code section 4944. (“Section 4944 shall not apply to an investment made by any person which is later gratuitously transferred to a private foundation.” Treasury Regulations section 53.4944-1(a)(2)(ii)(a).) UPMIFA and the Indiana proposal do not expressly authorize retention of gifted assets (as in the past), and it is a matter of interpretation whether the “special circumstances” referred to in proposed IC 30-2-12-14(e)(4) might be used to resolve the matter.
The full text of the legislation is available at http://www.in.gov/legislative/bills/2007/IN/IN1505.1.html.