UPMIFA, the Uniform Prudent Management of Institutional Funds Act of 2006, has been adopted by 33 states. The purpose of UPMIFA is to provide nonprofit organizations with greater freedom in managing their endowment portfolios and spending from the endowment subject to an “overall standard of prudence”. The primary advantage of UPMIFA is that it permits spending from underwater funds, which are investments that have fallen below the original value when they were set up. In the past, endowment spending was constrained by the rule that spending was not permitted when the fund fell below its historic dollar value.

Some colleges see UPMIFA as a miracle tool to either reduce the impact of the declining value of investments or to avoid a low Department of Education (DOE) financial responsibility score. In the first case, a college could ameliorate declines by reclassifying investments so that they could take larger draws from the endowment. In the second case, the reclassification of investments meant that they could increase the value of one or more DOE ratios, thus improving their overall score keeping off the list of financially weak colleges published by DOE. Some senior administrators believe that being on that list will reduce the attractiveness of the college to lenders or other stakeholders.

However, UPMIFA is not a simple process of lopping off some percent from restricted endowment funds and transferring those moneys to another less restrictive fund. Colleges and universities must be very prudent about transferring funds from a restricted endowment funds by following a set of precisely defined rules, which are listed below:

1. UPMIFA transfers are subject to FAS 117-1 (Financial Accounting Standards), which requires institutions to provide the following disclosures:
   • The Board’s interpretation of the law regarding the organization’s net asset allocation;
   • Endowment spending policies;
   • Investment policies:
     • Return objectives and risks
     • Relationship of the objectives to spending policies
     • Strategies for achieving objectives
   • Endowment composition by net asset classification;
   • Endowment report on additions and deductions by net asset class;
   • Formal disclosure of any underwater funds.
   • The Board’s fiduciary duty remains that “when considering the purposes and duration of the fund the institution will give priority to the donor’s original intent that the fund be maintained permanently”.
2. Endowment assets cannot be unrestricted until appropriated for expenditure.
3. Absent donor restrictions on gains on the fund, the original donor restrictions are assumed to gains. Therefore, if the fund is restricted so also are the gains.
4. Reclassification procedures:
   • Reclassification is done on a fund-by-fund basis by identifying the amount that is:
     • Permanently restricted;
     • Temporarily restricted, which is subject to a time limit that funds and appreciation are restricted until appropriated for expenditure.
   • Reclassification is restricted to the amount of appreciation of the funds (net long-term increase in value) that is declared as appropriated for expenditure. (This requires a very careful and precise list by fund of original gift values and appreciations.);
   • Reclassification in consort with FAS 117-1 should include a statement to “maintain the donor’s original gift permanently”.
5. UPMIFA requires that any modification of fund restrictions should:
   • Notify the Attorney General sixty (60) days in advance for minor changes; or
   • Make a cy pres petition to the courts for larger or newer funds.

Senior administrators cannot simply take a fixed amount from restricted endowments and transfer the funds to temporarily restricted funds. The plan must follow the strictures of the law; otherwise the plan could be voided and audits may have to be restated. Before any action is taken with an UPMIFA plan, the president, trustees, and chief financial officer must consult with the auditors and legal counsel for the institution. They should also seek advice from other reliable sources on how to implement the strictures of the plan.

The UPMIFA plan should be thoroughly documented by: a) citing the law, b) listing Board policies, c) giving the reason for making the reclassifications, d) listing specific endowment funds and the amounts to be reclassified, and e) including any statements from the auditor or other sources indicating that they have reviewed and are in agreement with the plan.

Questions for our readers:

1. Are you planning to use UPMIFA in your financial strategy? If so, what is driving your interest in UPMIFA?
2. Does your institution have “underwater” funds? What has been your strategy to deal with this situation?
3. Do you have a strategic plan to rebuild funds lost to the endowment?

Note 1: The author and Stevens Strategy do not claim that this commentary on UPMIFA fully explains all aspects of UPMIFA. They do not take responsibility for any decisions that are taken based upon the preceding commentary. As noted in the commentary, any institution that intends on developing a reclassification plan under UPMIFA should consult with their auditors, legal counsel, and other authorities on the subject.

Note 2: Information for this blog was derived from Moody’s Investment Service in a special report published in Spring/Summer 2009 and a second report published in April 2009.

Originally posted January 27, 2010