Of course, those in the not-for-profit sector know that “UPMIFA” is not a text acronym. Uniform Prudent Management of Institutional Funds Act (UPMIFA) policies help charitable entities manage investments and control expenses so that they have more money available for program initiatives. UPMIFA’s principle components are similar to the total return approach for investing:
- Invest at a rate that will preserve the purchasing power of the principal over the long-term.
- Spend at a rate that over the long-term reflects the donor’s intentions.
Below are four recommendations for not-for-profit organizations and their boards related to UPMIFA.
Recommendation #1: Establish a Solid Investment Policy.
The governing board should adopt a written investment policy to provide the guidelines for adequate financial management. In developing the policy, the board should be mindful of the organization’s mission and purposes of the fund. Additional points to consider include:
- The intent of the donor
- Effects of inflation, deflation, and general economic conditions
- Expected tax consequences, if any, of investment decisions and strategies
- Reasonable and appropriate costs
- The role that each investment or course of action plays within the overall investment portfolio
- Expected total return from income
- Appreciation of investments
- Needs of the organization and the fund to make distributions and to preserve capital
Delegation of management and investment functions is a possibility. However, a board cannot simply transfer those responsibilities and walk away – there are explicit standards addressing the oversight and management of a third-party investor. UPMIFA requires the organization to act under a prudent investor standard to manage and invest its funds in good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.
Note: UPMIFA generally applies to all “institutional funds,” which with only a very few exceptions, are defined as “funds held by an institution exclusively for charitable purposes.” Because each state adopts its own version of UPMIFA, it is important to check the specific provisions of your state’s UPMIFA.
Recommendation #2: Determine an Endowment Fund Spending Policy.
Unless otherwise stated in the gift instrument, the assets in an endowment fund are donor-restricted until appropriated for expenditure by the organization. Organizations should act in good faith, with the care that an ordinarily prudent person in a like position would exercise under similar circumstances. Additionally, they should consider the following factors:
- Duration and preservation of the endowment fund
- Purpose of the organization and the endowment fund
- General economic conditions
- Potential effects of inflation or deflation
- Expected total return from income and the appreciation of investments
- Other resources of the institution
- The investment policy of the institution
Also, the organization should identify all endowments that are subject to explicit donor intent which limits the ability of the organization to apply its total return spending formula.
For a gift instrument to limit the authority of the organization to appropriate for expenditure, the instrument must specifically state the limitation (e.g. “income,” “interest,” “dividends,” or “to preserve the principal intact”).
Recommendation #3: Establish an Underwater Endowment Policy.
An endowment whose market value has fallen below the amount restricted by the donor is considered “underwater.” UPMIFA allows nonprofits to spend from an underwater endowment, if the governing board determines it is prudent to do so. As a best practice, the board should define how far underwater they are willing to go and thoroughly document the reasons for decisions where such spending is allowed to take place.
Also, keep in mind the effect of FASB’s ASU No. 2016-17, Interests Held Through Related Parties That Are Under Common Control, on how endowments, specifically underwater endowments, are treated on your organization’s financial statements.
Recommendation #4: Call CRI.
While that’s not a text, it is a call to action. Please call CRI for guidance on UPMIFA requirements. CRI’s not-for-profit CPAs can help your board establish effective spending and investment policies that ultimately allow your organization to fulfill its intended mission (without using too many acronyms).