On March 25, 2010, the Commonwealth of Kentucky adopted the provisions of the Uniform Prudent Management of Institutional Funds Act (UPMIFA).  This is designed to replace to existing Uniform Management of Institutional Funds Act (UMIFA).  What does this mean for you?

In 1972, UMIFA was adopted.  UMIFA was the first act of its kind and was designed to provide uniform and fundamental rules for investment of funds held by charitable institutions and the expenditure of funds donated as “endowments” to those institutions.  Essentially UMIFA supported two general principles: 1) that assets would be invested prudently in diversified investments that sought growth as well as income, and 2) that appreciation of assets could prudently be spent for the purposes of any endowment fund held by a charitable institution.  UPMIFA was enacted to build on those principles based on the experience gained in managing endowments over the past 35 years.

Investing Funds

UMIFA allowed endowments to invest in any kind of assets, to pool endowment funds for investment purposes, and to delegate investment management to other persons, as long as the governing board of the institution exercised ordinary business care and prudence in the investment related decisions.  UPMIFA builds on that original principle and provides stronger guidance for investment management to these governing boards.  It requires each person responsible for managing and investing an institutional fund to make investment related decisions “in good faith and with the care an ordinary prudent person in a like position would exercise under similar circumstances.”  It requires prudence in incurring investment costs.  Factors to consider in making investment decisions are expanded to include the following:

• general economic conditions;
• possible effects of inflation or deflation;
• tax consequences;
• how each decision plays into the entire portfolio strategy;
• the expected total return from income and appreciation;
• other resources of the institution; and
• current and future needs of the institution

UPMIFA requires that an investment portfolio be diversified, unless special circumstances dictate otherwise.

Expending Funds

UMIFA brought about the concept of total return expenditure of endowment assets for charitable program purposes.  It permitted prudent expenditure of both appreciation and income.  In essence, asset growth and income could be appropriated for program purposes, subject to maintaining the “historical dollar value” of the fund.  Again, UPMIFA has built upon this concept and has eliminated the “historical dollar value” rule.  Because UPMIFA provides better guidance on the concept of prudent spending, it makes the need for a spending floor unnecessary.  UPMIFA states that “an institution may appropriate for expenditure or accumulate so much of an endowment fund as the institution determines is prudent for the uses, benefits, purposes and duration for which the endowment fund is established”.  UPMIFA set forth the following criteria to guide an institution in its yearly expenditure:

• the duration and preservation of the endowment fund;
• the purposes of the institution and the endowment fund;
• general economic conditions;
• the possible effect of inflation or deflation;
• the expected total return from income and the appreciation of investments;
• other resources of the institution; and
• the investment policy of the institution

As you can see, these criteria mirror the criteria discussed in the “expending funds” section above.  The purpose of this is to unify investment and spending policies and decisions.

Release or Modification of Restrictions

The provisions of UMIFA only allowed for the release of restrictions on donations.  UPMIFA recognizes that donor intent exists and protects that intent more broadly than UMIFA.  UPMIFA provides a more comprehensive treatment of modification or release of restrictions on donated funds.  The reason for this is that history has shown us that sometimes restrictions imposed by a donor can become impracticable or wasteful or may impair the management of the fund.  UPMIFA allows multiple avenues to release or modify these restrictions.  The first and most obvious would be to have the donor consent to this release or modification.  UPMIFA also authorizes a modification that a court determines to be in accordance with the “donor’s probable intent”.  If a charitable institution in Kentucky has endowment funds that fall into this situation, you must file an application with the courts and the Attorney General must be notified and they may participate in the proceedings.

In the Commonwealth of Kentucky, if an institution determines that a restriction contained in a gift instrument on the management, investment, or purpose of an institutional fund is unlawful, impracticable, impossible to achieve, or wasteful, the institution, 60 days after notification of the Attorney General, may release or modify the restriction, in whole or part if the following criteria are met:

• the fund subject to the restriction has a total value less than $50,000;
• more than 20 years have elapsed since the fund was established; and
• the institution uses the property in a manner consistent with the charitable purposes expressed in the gift instrument

As you can see above, UPMIFA has brought about significant changes in how endowment funds are to be managed, invested and expended.  It should greatly assist governing boards in successfully managing these funds and properly expending in accordance with their institutions mission and donor intentions.  The enactment of UPMIFA also has brought about new reporting requirements for those institutions that issue annual financial statements.  Please discuss these changes with your accountant.  If you are interested in reading more about UPMIFA you can visit www.UPMIFA.org. 

Sources for this article: www.upmifa.org and “KY SB 76 – AN ACT relating to management of institutional funds”.

For more information please contact,
Lance Mann, CPA
lmann@ddfky.com
859.425.6705