The 501 S(c)ene

The latest view on not-for-profit accounting issues

What is UPMIFA?

If your nonprofit has an endowment fund, you have probably heard of UPMIFA. But what exactly is UPMIFA? UPMIFA is the Uniform Prudent Management of Institutional Funds Act which was approved by the National Conference of Commissioners on Uniform State Laws in 2006 and replaced the Uniform Management of Institutional Funds Act (UMIFA) of 1972. UPMIFA was created to provide authoritative guidance to charities organized as nonprofit corporations (including charitable trusts) on the prudent management of investment funds and endowment spending, as well as imposing duties on individuals involved in the management of these funds.

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Endowment funds are created by gifts received from donors with the intent that the funds will be held in perpetuity and the investment earnings will be used to support the organization as described by the donor. UPMIFA defines the prudent management of these investments is to ensure “the preservation of the endowment fund”. Examples of how this would be accomplished is to make sure the organization is honoring the intent of the donor, the investment portfolio is properly diversified to reduce excessive risk, and that the administrative and investment fees are reasonable to name just a few. This can be done by creating and following a written investment policy that specifically identifies types of investments and allocation between the types of investments that management and those charged with governance considers reasonable and prudent to ensure the preservation of the donor’s gift.

UPMIFA also provides guidance on endowment spending and focuses on ensuring that management is focusing on prudent spending to preserve the funds for the long term. UPMIFA considers spending of more than 7% annually from the fund to be imprudent. It also recognizes that there are market fluctuations which can result in investment balances being below the original corpus that the donor provided on occasion. When this happens, the endowment funds are considered to be underwater. UPMIFA allows spending from underwater funds with the assumption that the spending is prudent and focuses on the long-term growth to preserve the donor’s gift rather than just at a point in time.

UPMIFA recommends that organizations create a written spending policy that clearly identifies the percentage of total endowment assets that can be spent each year, which should be less than the investment earnings. Additionally, the annual spend percentage should be calculated based on a rolling average rather than at just one point in time to account for significant fluctuations in market conditions. Even though UPMIFA allows for spending when endowment funds are underwater it is recommended that the spending policy specifically address how and if the organization will spend during these times. Many organizations will reduce the annual percentage or simply not allow spending at all when the endowment fund is underwater.

UPMIFA also provides guidance on how organizations can go about modifying or removing the restriction of endowment funds. Many states have adopted their own version of UPMIFA. Arizona’s version of UPMIFA is the Arizona Management of Charitable Funds Act (AZ MCFA) which was adopted in 2008.

If you have any questions, contact your Henry+Horne advisor.

Karen Doyon Lord, CPA

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