Endowment Fund Spending in a Challenging Economy
 
June 23, 2009
 
Meghan D. H. Walsh- Boston

In today’s economic climate many schools and other nonprofit organizations are faced with the prospect of having less funding than in previous years to support their routine operating budgets and having no cushion for unanticipated events. Even institutions that have endowment funds, which are restricted funds that the institution cannot currently wholly expend because of conditions imposed when the funds were established, have seen the amounts available for annual withdrawal decline precipitously. The combination of diminished donations and lesser withdrawal amounts presents challenges to many institutions striving to maintain quality services and programs.

State Laws Govern Withdrawals

Endowment fund withdrawal limits are a function not only of the documents that govern donated funds but also of state law. Examples of these limits include the following:

• When a gift is made to an institution, there may be restrictions on how the gift can be spent. These restraints may be created by the donor according to the terms of a gift agreement, or a grant from another charitable organization, will or trust. The restraints may also be created by the recipient organization based upon the content of a solicitation sent by the institution to potential donors. The restrictions often limit how much of the gift may be spent in any given year.
• An institution may have created its own policy regarding how much it may withdraw from each of the endowment funds that it holds each year.
• Eighteen states¹ currently regulate the appropriation of endowment funds under some form of the Uniform Management of Institutional Funds Act (UMIFA). UMIFA restricts spending of the historic dollar value of an endowment fund, which is the sum of the original values of each gift made to an endowment fund. The default rule under UMIFA is that only the appreciation on an endowment fund’s historic dollar value may be withdrawn. Even then, withdrawals must only be made if they are prudent according to certain factors provided in UMIFA. In some states, institutions are presumed to have acted imprudently if they spend in any one year an amount of the appreciation that is greater than 7 percent of the endowment fund’s value. This presumption may be rebutted with evidence of prudence, as described below.
• Thirty states² and Washington, D.C. have adopted a version of the more recent law, the Uniform Prudent Management of Institutional Funds Act (UPMIFA). The default rule under UPMIFA is that a withdrawal may place an endowment fund below historic dollar value as long as it is deemed prudent based upon the consideration of certain factors. Some of the states that have adopted UPMIFA have included a provision that spending more than 7 percent of the fair market value of each gift in the endowment is presumed imprudent. Of the 20 states that have not yet adopted UPMIFA, 15³ have introduced it.

In light of these possible withdrawal restrictions, an institution should consider the following:

• A state’s version of UMIFA or UPMIFA may permit a gift instrument or an institution’s charter to provide different withdrawal limits than those set forth under state law. In such a state, the terms of the gift instrument or charter control withdrawal limits.
• An institution may hold many different endowment funds. It may hold special purpose endowment funds with different annual spending allowances than the institution’s general endowment fund. The terms of each fund must be respected, and a state’s version of UMIFA or UPMIFA may need to be applied with respect to each fund.
• Institutions may ask a donor for the release of a restriction. An institution may also consider soliciting additional donations to fund key programs until the market improves and the value of a previous gift recovers.
• If a donor is not living, is incapacitated, cannot be identified, is unavailable, or will not consent to a restriction change, a state’s statute and/or the doctrine of cy pres may allow an institution to work with the state’s charities regulator, and if necessary, the local court, to have the restraint altered.
• Depending upon a number of circumstances, spending at a level that is “presumed imprudent” may not actually violate state law. An institution may be able to rebut the presumption of imprudence by demonstrating that careful consideration of the factors outlined in its state law indicated that the spending level was prudent. Governing board and subcommittee meeting minutes, financial plans and other analyses must support the spending decision. Prior to taking this course of action, however, an institution should consult with an attorney who can assist the institution in assessing whether state charities regulators may find a spending decision imprudent.
• All appropriation of endowment funds should be reviewed to be sure that they are consistent with the governing instrument, the state’s version of UMIFA or UPMIFA and any other state laws that govern nonprofit entities, including without limitation, general corporate or trust law.
• Finally, an institution should review any solicitation documents, standard terms used in helping donors to draft gifts, and general spending rate policies. An institution may consider the use of terms that will, in a responsible manner, avoid withdrawal restraints that may limit its mission in the future.

For more information, contact:

Meghan Hely
617.305.2135 | meghan.hely@hklaw.com

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¹ Florida, Hawaii, Illinois, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Missouri, New Jersey, New York, North Dakota, Rhode Island, Vermont, Washington and Wisconsin.

² Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Georgia, Idaho, Indiana, Iowa, Kansas, Minnesota, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, Ohio, Oklahoma, Oregon, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia and Wyoming.

³ Alaska, Hawaii, Illinois, Kentucky, Maine, Maryland, Massachusetts, Michigan, Mississippi, New Jersey, North Dakota, Rhode Island, Vermont, Washington and Wisconsin.

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