On January 14, 2009, Jill S. Dodd of Manatt, Phelps & Phillips, LLP and Bert W. Feuss of the Silicon Valley Community Foundation presented "UPMIFA: One Year Later" for the Northern California Planned Giving Council. UPMIFA is the acronym for the Uniform Prudent Management of Institutional Funds Act, which California adopted effective January 1, 2009, and which replaced the Uniform Management of Institutional Funds Act (UMIFA). UPMIFA provides rules about how an endowment fund can be invested and spent.
Under UPMIFA, an endowment fund is generally defined as a fund not wholly expendable on a current basis under the terms of a gift instrument. An endowment fund does not include either a fund that the institution's board itself designates as an endowment ("quasi-endowment"), or a program-related (exempt function) asset. A gift instrument may be any written record from the donor or from the institution so long as both parties were, or should have been, aware of its terms.
UPMIFA provides the following spending restriction from an endowment fund: "so much … as the institution determines to be prudent for the uses, benefits, purposes, and duration for which the endowment fund is established." The factor to consider in making this determination are:
- Duration and preservation of fund
- Purposes of institution and the fund
- General economic conditions
- Possible effect of inflation or deflation
- Expected total return from income or appreciation
- Other institutional resources
- Institution's investment policy
In California, spending more than 7% of the average fair market value of the endowment fund (averaged over the last three or more years) creates a rebuttable presumption of imprudence. Spending less, however, does not create a presumption of prudence. So, institutions should evidence their consideration of the 7 factors listed above. Finally, the spending rules under UPMIFA will not apply if the gift instrument explicitly sets forth contrary spending criteria (e.g., 10% each year).
Dodd and Feuss identified the following implementation issues regarding decision of whether to spend or accumulate:
- What are your organization's policies?
- Spending policy should support the needs of both current and future beneficiaries
- Spending policy should be aligned with investment policy
- Interpreting donor gift instructions
- Past solicitations of endowment gifts
- Commingling of "true endowments" with "quasi endowments"
- Determining a spending rate
- Treatment of underwater funds (lower market value than original/historical gift value)
- What is a prudent amount of time to recover historical gift value while also preserving purchasing power for a fund that is intended to last in perpetuity?
- Reduce spending by variable amounts based on the amount each fund is underwater
- What is operationally feasible? How many variables can you manage?
- What other resources can be tapped to close funding gap?
- Is the donor willing to modify the terms of the gift instrument?
In addition, the presenters listed a number of variables in the spending equation (e.g., investment return expectations, investment expenses, smoothing formulae) and marketing/donor considerations. And they emphasized that it was most important for boards to go through the process of considering these issues, factors, and variables in coming up with appropriate policies. Such actions would go a long way in protecting board members against a charge of breaching their duty of care, even if the endowment funds perform poorly.
For additional information on UPMIFA:
Uniform Law Commission – UPMIFA website (including state law comparisons)
UMIFA and UPMIFA: The Law of Endowments by Erik Dryburgh
UPMIFA: New Law Affects Lawyers Advising (and Serving on) Charity Board in California by Paul J. Dostart, Barbara A. Rosen & Patrick B. Sternal – California Tax Lawyer (Fall 2009)