Since 1976, KRS have included provisions of the Uniform Management of Institutional Funds Act (UMIFA), which provided guidance concerning the management and investment of the donor restricted endowment funds of charitable organizations. Effective today, July 15, 2010, the Commonwealth enacted new legislation and KRS now include provisions of the Uniform Prudent Management of Institutions Funds Act (UPMIFA).
Some of the highlights of the new legislation include the following:
- UPMIFA abolishes the historic dollar value rule included in UMIFA.
- More flexibility in endowment payouts – the organization may deem amounts appropriate for expenditure or accumulate for endowment as it determines to be prudent for the uses, benefits, purposes and duration of the fund.
- Increased investment freedom – portfolio managers are not limited in the kind of assets that may be included in a portfolio.
- Costs must be managed prudently in relation to the assets and purpose of the fund.
- The ability to release restrictions on an endowment fund less the $50,000 and more than 20 years old for which the restricted purpose is now impractical.
Though the Act establishes increased flexibility and freedom, it also comes with the responsibility of increased prudency in decision making related to the organization’s endowment funds. Factors to be considered in decision making for both investment and expenditure include general economic conditions, the effect of inflation or deflation, the purposes of the organization and the endowment fund, the duration and preservation of the fund, the expected return from income and the appreciation of investments and other resources of the institution.
As with UMIFA, donor provisions or stipulations included in a gift instrument continue to take precedence over the provisions of UPMIFA. The new legislation applies retroactively to all endowment funds in existence at the time of enactment not just to new funds received after the law’s effective date.
The following are steps your organization should consider in relation to the new legislation:
- Assess your current investment position in conjunction with your organization’s mission statement, vision statement and strategic plan. Evaluate the organization’s cash flow needs.
- Determine an appropriate spending policy that considers how much will be spent currently versus how much will be invested to provide for future spending.
- Document your fiduciary process by establishing or reviewing your written investment policy, including asset allocation strategy, selecting appropriate investments and managers, monitoring investments and periodically rebalancing the portfolio, as well as developing a spending policy.
Your Board’s interpretation of UPMIFA and the policies in effect at your organization will have an impact on the proper accounting for your endowment transactions. Do not hesitate to contact us if we can assist you in further understanding these implications. We look forward to bringing you more information via an educational seminar scheduled for October 7, 2010 – Be sure to hold the date!
Becky Phillips, CPA, CFE, CFF
Partner, Not-for-Profit Services Director