Charities in California need to be aware of a new law that affects their endowments – the Uniform Prudent Management of Institutional Funds Act (“UPMIFA”). Charities should expect to be asked by their auditors how they intend to comply with Financial Accounting Standards Board (“FASB”) Rule 117-1, which provides guidance on financial statement classification of endowment funds subject to UPMIFA. UPMIFA applies, as did UMIFA, to charities organized as nonprofit corporations and to charities organized as trusts, but only if the trust has a charity as a trustee.
UPMIFA’s predecessor, the Uniform Management of Institutional Funds Act (“UMIFA”) focused on the prudent spending of the net appreciation of an endowment fund. Under UMIFA, a charity could spend from an endowment fund the amount of appreciation above the fund’s historic dollar value (“HDV”) – i.e., contributions – that the charity deemed prudent, after considering the charity’s purposes, but could never spend the HDV. In contrast, under UPMIFA, a charity can spend the amount it deems prudent after considering the donor’s intent that the endowment fund continue permanently, the purposes of the fund itself, and relevant economic factors. UPMIFA discards the HDV concept and emphasizes the purchasing power of the fund, preserving principal while spending according to a reasonable spending rate. Seven criteria guide the charity in its spending: (1) the duration and preservation of the endowment fund; (2) the purposes of the institution and the endowment fund: (3) general economic conditions; (4) the possible effect of inflation or deflation; (5) the expected total return from income and the appreciation of investments; (6) other resources of the institution; and (7) the investment policy of the institution. California adopted one of the “optional” provisions of the uniform law, creating a rebuttable presumption of imprudence for spending more than 7% of the value of an endowment fund in one year (based on a three-year rolling average), but including a reminder in the statute that spending below 7% does not create a presumption of prudence.
UPMIFA creates a new concept – “donor-restricted funds” and “board-restricted funds.” The new rules apply to donor restricted funds, not to money set aside by a board as an endowment. Any donor restrictions agreed to by a charity will govern the endowment fund; absent a donor restriction, UPMIFA will apply. Under FASB 117-1, an auditor will be asking the charity’s board to determine the portion of a donor-restricted fund that is classified as permanently restricted, temporarily restricted, or unrestricted under UPMIFA. Because FASB 117-1 will require significant new disclosures on charities’ financial statements, the FASB decided to delay the effective date of this new rule to years ending after December 15, 2008.
UPMIFA applies to charitable funds created both before and after enactment, but provides rules for modification of donor restrictions that clarify how obsolete restrictions may be changed: A donor may release a restriction; a court may permit deviation under a cy pres doctrine, but the change must be consistent with the charitable purposes of the original gift; and in the case of a small (less than $25,000), old (more than 20 years) fund, the charity may apply the cy pres doctrine without court approval, but with notice to the California Attorney General.