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 Know the New Rules for Managing Your Charity’s Charitable Assets?

Sharron J. O'Donnell, CPA
Senior Manager and Director, Not-for-Profit Services

May 18, 2009

It's been more than 35 years since Washington State, along with 47 other states, enacted the Uniform Management of Institutional Funds Act (UMIFA). The Act provided a uniform set of rules to guide charitable institutions in managing and investing their funds, as well as in spending funds donated to them as endowments.

To provide charities with updated guidance and authority, more than 30 states have recently enacted new legislation based on the model Uniform Prudent Management of Institutional Funds Act, or UPMIFA. By modernizing investing and spending rules, UPMIFA provides an even more sound and unified basis for charitable fund management and new flexibility in determining spending from endowment funds in the absence of specific guidance from donors.  

Last week, Governor Gregoire signed Substitute HB 1119, the Uniform Prudent Management of Institutional Funds Act (UPMIFA) into law for Washington State charities, with implications for local charities and their charitable donors. The legislation―based on a model act adopted by more than 30 other states―provides updated guidance for investing, managing, and spending funds .

Washington's new UPMIFA rules take effect on July 1, 2009, however charities can choose to immediately apply the rules to existing funds if their governing bodies so elect.

UPMIFA applies to charities―including social service agencies, religious and arts organizations, hospitals, and colleges and universities―whether they are organized as nonprofit corporations, as charitable trusts, or as another entity. It does not apply to funds managed by trustees that are not charities―for example, trusts managed by corporate or individual trustees.

The primary provisions of UPMIFA govern the following:

 management and investment of funds

 spending from endowment funds

 modifying restrictions on charitable funds

Because of the breadth and depth of these new rules, charities should evaluate and revise their policies and procedures, as necessary, to conform to new UPMIFA requirements. All investing and spending decisions should be well documented in order to demonstrate that decisions were prudent under the circumstances and that mandated policies and procedures were, in fact, followed.

There are also implications for charitable donors, who may wish to establish additional spending restrictions for their donated funds in light of UPMIFA's more flexible spending policies.  

Provisions for Management and Investment of Funds
UPMIFA provides guidance and authority to charities regarding managing and investing their charitable funds. It also imposes additional duties on the persons who manage and invest those funds in order to protect the charities as well as the interests of donors naturally concerned that their contributions are used wisely.

Under Washington's UPMIFA legislation, the charity and those responsible for managing and investing its funds must consider both the purpose of the charity and the fund, and must act "in good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances."

The charity is also subject to the following rules:
 It may only incur reasonable investment and management costs.

 It must make a reasonable effort to verify facts relevant to managing and investing the fund.

 It may pool two or more institutional funds for purposes of management and investment.

 It must make decisions about individual assets in the context of the fund's portfolio of investments as a whole, and as part of an overall investment strategy with objectives that are reasonably suited to the fund and the charity.

 It must diversify the fund's investments unless, because of special circumstances, the purposes of the fund are better served without diversification.

 It must, within a reasonable period of time, make decisions regarding retention or disposal of property and rebalancing the portfolio.

The new law provides charities with more precise standards to guide their investment decisions. In managing and investing charitable funds, those responsible must consider the following:

 general economic conditions

 possible effect of inflation or deflation

 expected tax consequences, if any, of investment decisions or strategies

 role that each investment or course of action plays within the overall investment portfolio of the fund

 expected total return from income and the appreciation of investments

 resources of the charitable institution

 needs of the charitable institution and the fund to make distributions and to preserve capital

 asset's special relationship or special value, if any, to the charitable purpose of the institution

According to the National Conference of Commissioners on Uniform State Laws (NCCUSL), authors of the model act, the result of adopting UPMIFA "should be more money for programs supported by charitable funds, including endowments."

Provisions for Spending from Endowment Funds
UPMIFA modernizes the rules governing endowment funds to provide more strict spending guidelines and to enhance charities' abilities to cope with fluctuations in the values of their endowments.

The new law abolishes previous spending limitations based on the historic dollar value of the fund. Instead, it requires that a charity consider the following factors, if relevant:

 duration and preservation of the endowment fund

 purposes of the institution and the endowment fund

 general economic conditions

 possible effect of inflation or deflation

 expected total return from income and the appreciation of investments

 other resources of the institution

 investment policy of the institution

Provisions for Modifying Restrictions on Charitable Funds
UPMIFA updates provisions that govern the release and modification of restrictions on management, investment, or purpose of charitable funds to provide for more efficient management. Charities can release or modify restrictions with the written consent of the donor or with court approval.

Under certain circumstances―generally when a restriction relates to an older fund (more than 20 years old) with a relatively small dollar value (currently, less than $75,000)―a Washington charity may be able to release or modify the restriction without the approval of the donor or the court. In doing so, the charity must determine that the restriction is unlawful, impracticable, impossible to achieve, or wasteful and it must notify the attorney general at least 60 days in advance of releasing or modifying the restriction.

For More Information
To review the full text of Substitute House Bill 1119 as passed by the legislature and signed by Governor Gregoire, refer to http://apps.leg.wa.gov/documents/billdocs/2009-10/Pdf/Bills/House%20Passed%20Legislature/1119-S.PL.pdf.



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