Charitable organizations will enjoy more flexibility in endowment spending policies under the Uniform Prudent Management of Institutional Funds Act (UPMIFA) signed into law on April 10, 2008, by Minnesota Governor Tim Pawlenty. The law will take effect on August 1, 2008, replacing Minnesota's Uniform Management of Institutional Funds Act that has been in place since 1973.
UPMIFA applies to investment funds held by charitable organizations or government entities for charitable purposes, but not to board-designated endowments or funds held by separate trustees.
Spending Rules
The most dramatic change brought by UPMIFA relates to endowment spending. UPMIFA eliminates the concept of "historic dollar value." Historic dollar value is the total of all contributions made to an endowment fund, in absolute dollars. Under the current law, institutions generally are not permitted to spend from an endowment fund that is at or below its historic dollar value, unless the donor has authorized it. This constraint has caused many organizations to stop spending from their endowments, particularly newer ones, during down market years, depriving beneficiaries of this assistance when it is most needed.
Under UPMIFA, an institution may spend or accumulate as much of the endowment fund as it determines to be prudent, taking into account the intended duration of the fund, the fund's purposes, economic conditions, expected inflation, investment returns, other resources of the institution and the investment policy. If a donor does not wish to give the institution this much latitude, the donor must expressly limit it in the gift instrument.
Investment Standards
UPMIFA adopts several concepts from the Uniform Prudent Investor Act, which applies to trusts and has been adopted in more than 40 states, including Minnesota. Managers of charitable investment funds must use the care of an ordinarily prudent person in a like position under similar circumstances. The charitable institution is obligated to make a reasonable effort to verify the accuracy of information relevant to the management and investment of the fund.
Institutions are expressly required to diversify their investment portfolios, absent special circumstances. An institution that receives a non-cash gift is obligated to consider promptly whether to retain or sell the asset, and to rebalance its portfolio if necessary to bring the portfolio into compliance with its investment policies.
UPMIFA updates the rules regarding delegation of management and investment functions, requiring the institution's board or managers to use reasonable care in selecting the agent, defining the scope and terms of the delegation, and reviewing the agent's performance.
Donor Intent
The new statute requires that an institution comply only with those donor-imposed restrictions that are set forth in writing, including any purposes identified in written materials soliciting the gift.
While UMIFA allows a board to release donor restrictions with the donor's consent, the new UPMIFA provides more flexibility by allowing the release or modification of restrictions with the donor's consent. Where the donor is not available, UPMIFA preserves the option of obtaining a court's consent to a change in the restrictions if it is no longer possible or practicable to comply with them.
For smaller funds whose donors are no longer living, consent is not an option and court approval may not be cost-effective. UPMIFA allows an institution to adjust donor-imposed restrictions on funds of $50,000 or less that are at least 20 years old, if the institution determined on its own that the restrictions have become unlawful, impracticable, impossible, or wasteful. The institution is required to notify the attorney general 60 days prior to making the change.
Implications for Minnesota Charities
In response to the new law, Minnesota charities that hold endowment funds should review their endowment spending policies; in many cases new approaches will be available under UPMIFA that previously were not possible, particularly with regard to limits on spending below historic dollar value. Every Minnesota charity with investment assets should become familiar with the modified factors to be considered in managing and investing such funds; in many cases a review of the investment policies will be appropriate. Finally, charities with a restricted fund having a balance of less than $50,000, that is more than 20 years old, with donor-designated purposes that are unlawful, impracticable, impossible to achieve or wasteful, should consider modifying or releasing the restrictions.
