Here are twelve points on how to avoid endowment confusion. These points are in no particular order.
(1) UPMIFA is a uniform law. Each state has adopted their own version of this law (except for Pennsylvania). See upmifa.org for more information.
(2) If a permanent endowment goes underwater, the negative amount in unrestricted net assets is considered to be temporary.
(3) Being prudent under UPMIFA requires consideration of specific issues which are listed in the Act. Board and investment committee members should be aware of these considerations and should document any discussions on them.
(4) UPMIFA says that a spending policy of more than 7% is not considered to be prudent.
(5) Donor specifications trump UPMIFA and the organization’s policies. For example, if a donor specifies that exactly $5,000 must be spent annually from the permanent endowment they established, then that is what must be spent and the organization’s spending policy would not be applied to that particular endowment fund.
(6) The Board of Directors can release a permanently restricted endowment fund if it is less than $50,000 and more than 20 years old by submitting a plan to the Attorney General.
(7) Use of the word “endowment” does not necessarily imply a permanently restricted endowment fund. Clear communication with the donor is extremely important.
(8) Quasi-endowments (board-designated) should be tracked like permanently restricted endowment funds, but they will always be classified as unrestricted net assets.
(9) Board designated net assets should not be confused with quasi endowments (Is the money set aside by the board with the intention of only spending the earnings?).
(10) For endowments, permanently restricted net asset balances only include original donation amounts to that fund.
(11) You cannot net underwater funds with “over” water funds.
(12) The spending and investment policies should periodically be reviewed by the Board and/or the Investment Committee and the policies should be established based on long term goals.
By Colette Kamps, CPA