Ohio’s law governing the management of funds held by charitable organizations underwent a significant change on June 1, 2009. As of that date, Ohio charitable organizations became subject to Ohio’s version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which replaces the Uniform Management of Institutional Funds Act that was adopted in 1975 (the Old Act). UPMIFA is codified at sections 1715.51 through 1715.59 of the Ohio Revised Code.
UPMIFA, like the Old Act, sets forth a framework for the management and investment of funds that a charitable organization holds exclusively for charitable purposes, which UPMIFA refers to as “institutional funds”. Further, with respect to those funds that a donor has required be held in perpetuity and not spent all at one time (i.e., “endowment funds”), both Acts provide detailed rules regarding how such funds may be expended.
Significant Changes in UPMIFA
The newly-enacted UPMIFA effects three primary changes to Ohio law. First, the investment decisions of charitable organizations must now be made in accordance with the standards of modern portfolio theory, which generally requires that funds be invested for total return. This change conforms the investment standards for institutional and endowment funds to the investment standards that have controlled the investment decisions of trustees of private trusts for the last 10 years.
Second, UPMIFA changes the rules for making expenditures from endowment funds. Under the Old Act, a charitable organization could spend only from the net appreciation of the historic dollar value of a gift. Such approach created problems where a fund suffered losses that reduced its value below the original value of the gift. In such cases, the charitable organization could not make any expenditure from the fund.
UPMIFA changes the standards by allowing charitable organizations to expend amounts from an endowment fund based on what is prudent, acting in good faith with the care that an ordinarily prudent person in a like position would exercise under similar circumstances and after considering a variety of factors. Further, UPMIFA provides a safe harbor for charitable organizations in determining what is prudent. If the amount appropriated for expenditure in a given year is 5 percent or less of the fair market value of the endowment fund, such appropriation is irrebuttably presumed to be prudent.
Third, UPMIFA makes it easier for charitable organizations to obtain a release or modification of restrictions that a donor has imposed on a fund. Under the Old Act, the release of a restriction required the consent of the donor or, if the donor was unavailable, the decision of a court. Under UPMIFA, a restriction can be modified by donor consent, by the decision of a court (regardless of whether the donor is available), or, in certain circumstances, by advanced notice to the Ohio Attorney General. Modifications or releases that are made by notice to the Attorney General are available if the particular fund has a value less than $250,000, if the fund has been in existence more than 10 years, and if the charitable organization plans to use the property in a manner consistent with the charitable purposes expressed in the original gift instrument.
Charitable Organizations Need to Respond
While the adoption of UPMIFA is intended to improve the management and investment of institutional funds for charitable organizations, it poses a number of immediate challenges for such organizations. For one, organizations will need to review their investment and spending policies to ensure they are satisfying the new duties under UPMIFA. Further, organizations will need to review and modify the manner in which they account for endowment funds. Indeed, the Financial Accounting Standards Board has proposed a new set of standards for funds that are subject to UPMIFA that are effective for fiscal years ending after December 15, 2008. Among other provisions, these new standards will require a disclosure of the governing board’s interpretation of the laws underlying the net asset classification of donor-restricted endowment funds, the organization’s policy for appropriating endowment assets for expenditure, and the organization’s endowment investment policies.
These changes will require a fair amount of thought and energy, and charitable organizations are encouraged to begin addressing them as quickly as possible, if they have not done so already. Charitable organizations should consider contacting their attorneys and accountants for guidance in ensuring that they are complying with this newly-modified law.