California AG: Charity Governance During the COVID-19 Pandemic

Earlier this month, the California Office of the Attorney General (“AG”) published Charity Governance During the COVID-19 Pandemic. Here are some excerpted highlights from the publication applicable to California nonprofit corporations with some comments:

Emergency Provisions

Unless prohibited by the nonprofit’s emergency bylaws, the following actions can be taken to conduct the corporation’s ordinary business operations and affairs during an emergency:

  • Notice of director meetings can be given in any practicable manner.
  • For quorum requirements one or more of the officers present at a board meeting can be deemed a director, in order of rank and within the same rank in order of seniority, as necessary to achieve a quorum.

Comments: Most nonprofit corporations likely do not have emergency bylaws (provisions in the bylaws that apply only during an emergency), but boards may want to consider such provisions to allow for more specific rules to come into play during an emergency, which is defined to include any of the following events or circumstances as a result of which, and only so long as, a quorum of the corporation’s board of directors cannot be readily convened for action:

(A) A natural catastrophe, including, but not limited to, a hurricane, tornado, storm, high water, wind-driven water, tidal wave, tsunami, earthquake, volcanic eruption, landslide, mudslide, snowstorm, or drought, or, regardless of cause, any fire, flood, or explosion.

(B) An attack on this state or nation by an enemy of the United States of America, or upon receipt by this state of a warning from the federal government indicating that an enemy attack is probable or imminent.

(C) An act of terrorism or other manmade disaster that results in extraordinary levels of casualties or damage or disruption severely affecting the infrastructure, environment, economy, government functions, or population, including, but not limited to, mass evacuations.

(D) A state of emergency proclaimed by a governor or by the President.

Modification of Endowment Funds to Tackle Emergencies

Many nonprofit organizations have endowment funds, which are donor-restricted funds that are intended to be invested and used in perpetuity to support the nonprofit’s charitable programs. Endowments are subject to the requirements of the Uniform Prudent Management of Institutional Funds Act (UPMIFA).

Nonprofits need to be cautious on how much they spend from their endowment funds. Spending more than 7 percent of the fair market value of an endowment fund may create a presumption of imprudence.

While your organization may be tempted to look to endowments as a means of addressing unanticipated costs and budget shortfalls, before your organization decides to invade principal or borrow against the principal, which is not permitted, the board should contact the donors to inquire whether they are willing to release or modify restrictions to allow for more spending authority.

Charitable organizations that hold endowment funds that are more than 20 years old, and the total value of the funds is less than $100,000, may release or modify the restrictions on the endowment funds after 60 days’ written notice to the Attorney General and the donor’s last known address.

For endowment funds over $100,000, charitable organization may seek court approval to modify restrictions in endowment funds. The Attorney General must be given notice of the petition. The organization should be prepared to demonstrate either the purpose of the restriction has become unlawful, impracticable, impossible to achieve or wasteful, or that restrictions in the gift instrument regarding management or investment have become impracticable or wasteful, or that due to circum- stances not anticipated by the donor, a modification on the restriction will further the purposes of the fund.

Comments: UPMIFA includes a number of factors that must be considered in managing and investing an institutional fund (generally, a fund held by an institution exclusively for charitable purposes but not including non-investment program-related assets). UPMIFA also includes a number of factors that must be considered in spending from an endowment fund (generally, an institutional fund that, under the terms of a gift instrument or a solicitation for such gift, is not wholly expendable by the institution on a current basis). The spending provisions include the more than 7 percent presumption of imprudence described above.

While the AG publication describes the endowment fund spending limitations and notes some exceptions, it would have been nice to see an example of where spending more than 7 percent of an endowment fund would be considered not imprudent and how the presumption of imprudence might be rebutted where there are circumstances like a global pandemic and the greatest number of unemployed persons since the Great Depression.

Where the existence of a nonprofit with an endowment fund is seriously threatened, there would certainly be cases where it was reasonable to spend some amount more than the 7 percent without obtaining court approval (which could take significant time and cost) and organizational leaders could build up such case for rebutting the presumption of imprudence if raised by the AG. But what about the case in which the existence of the nonprofit might not be threatened, but the need for the nonprofit’s essential services has substantially elevated while its fundraising and income have substantially declined, due to the COVID-19 crisis?

If raising endowment spending to 10 percent had the impact of saving a program and providing some level of service to the expanded charitable class of beneficiaries, couldn’t that be prudent? Under what circumstances would the AG not intervene for spending more than 7 percent of an endowment, which likely contemplated more “normal” times? Hopefully, we’ll see more thoughts on these questions in the near future to allow more charities and foundations to respond adaptively without fear of adverse regulatory actions.