The State of Texas adopted the Uniform Prudent Management of Institutional Funds Act (UPMIFA) effective September 1, 2007.  UPMIFA replaces the Uniform Management of Institutional Funds Act (UMIFA) which was approved by the National Conference of Commissioners on Uniform State Laws in 1972 and adopted by the State of Texas in 1989.

UPMIFA was developed to improve the protection of donor intent with respect to expenditures from endowments and applies to charities organized as charitable trusts or as nonprofit corporations and trusts managed by charities. The Act does not apply to funds managed by trustees that are not charities or trusts managed by corporate or individual trustees. UPMIFA provides guidance and authority to charitable organizations concerning the management and investment of funds held by those organizations and imposes additional duties on those who manage and invest charitable funds to provide additional protection for charities and also protect the interests of donors who want to see their contributions used wisely. The Act updates the rules governing expenditures from endowment funds, whether donor restricted or board designated, to provide stricter guidelines on spending endowment funds and to give institutions the ability to cope more easily with fluctuations in the value of the endowment.

In addition to identifying factors that a charity must consider in making management and investment decisions, UPMIFA requires a charity and those who manage and invest its funds to 1) give primary consideration to donor intent as expressed in a gift instrument, 2) act in good faith, with the care an ordinarily prudent person would exercise, 3) incur only reasonable costs in investing and managing charitable funds, 4) make a reasonable effort to verify relevant facts, 5) make decisions about each asset in the context of the portfolio of investments, as part of an overall investment strategy, 6) diversify investments unless due to special circumstances, the purposes of the fund are better served without diversification, 7) dispose of unsuitable assets, and 8) in general, develop an investment strategy appropriate for the fund and the charity.

Has your organization adopted an investment policy that complies with your state’s version of UPMIFA? Review your state’s requirements and make sure your policies conform to the prudent management of funds.

For additional information see http://www.upmifa.org.

For the State of Texas version of UPMIFA see http://www.statutes.legis.state.tx.us/SOTWDocs/PR/htm/PR.163.htm

An endowment investment can be a great benefit to any charity or non-profit. These are set up using funds from generous donors that want to see their money supporting the mission many years into the future, and possibly in perpetuity. Generally, an endowment investment account is set up with funds for which the donor restricts so that only the interest and earnings can be used. This means that the original endowment amount or “corpus” must always stay intact.

When the endowments are earning interest and capital gains during the year, this is relatively easy. The corpus stays intact as permanently restricted and the earnings are recognized as increases to unrestricted net assets. However, during adverse economic times, such as now, it’s very possible that investments lose value during a fiscal year. In this case the original amount of the endowment, or corpus, must remain intact. Any losses must be recognized as unrestricted net asset changes and the permanently restricted corpus should remain whole on the financial statements.

Unfortunately, this is a grim reality in the current economic conditions and widespread investment losses. The amount of the donor’s original endowment must remain whole and any changes in value, good or bad, will affect unrestricted net assets.

Is your organization experiencing difficulties in allocating investment losses between unrestricted and restricted net assets? Post a comment.