Underwater endowments in New York and other places

Anyone following a really important issue for non-profits with permanent endowments, particularly in New York? Assuming you have "underwater" permanent endowment funds - which are effectively frozen - haven't you been wondering if there will be a change in the law to open up distributions?

Well, over 30 states have already enacted UPMIFA, the updated version of UMIFA (the law that originally let you use a spending rate irrespective of principal for permanent "income only" funds as long as your fund principal was over its original gift amount). This was the "modern" approach started in the 1970s but that last caveat reared is ugly head this past year in a big way. Currently, only three states have not even proposed UPMIFA - so with more than 30 on board, and up to 47 states potentially enacting, this new law should be the standard (see below for more about it).

What about New York? Well, not yet! It was proposed for the first time this past April but passing laws in NY is not that simple. Bottom line, these things usually take a few goes around and anything effecting charities needs the AG to support it. And, they break by July 4th weekend for the year! Not looking good for this year.

The new law though adds the letter P - for Prudent to UMIFA. In other words, underwater/frozen endowments will be a thing of the past - Prudent decisions will reign and let's hope charities learn how to be prudent.

Here is a short summary of UPMIFA. Annual distributions from permanent funds should be based a series of “prudent” factors: 1. the duration and preservation of the endowment fund; 2. the purposes of the institution and the endowment fund; 3. general economic conditions; 4. the possible effect of inflation or deflation; 5. the expected total returns of investments; 6. other resources of the institution; and 7. the investment policy of the institution.

For more information or to confirm if your state has enacted this important law, go to: http://www.upmifa.org/DesktopDefault.aspx.