As markets tumbled in late 2008, many charities feared North Carolina’s “Uniform Management of Institutional Funds Act” (“UMIFA”), which then governed their endowments, would not permit them to disburse any money from endowments that had lost significant value. The market disruption made it imperative for the General Assembly to act quickly, and it did. On March 19, 2009, the “Uniform Prudent Management of Institutional Funds Act” (“UPMIFA)” became effective in North Carolina. Many charities, especially those budgeting for academic scholarships, were greatly relieved. UPMIFA also makes other welcome improvements.
The “Endowment Spending Rule”
Prior to March 19, North Carolina law appeared to limit disbursements from most endowments to “the net appreciation” of the endowment over its “historic dollar value.” Charities usually believed they could spend only their endowment’s earnings (dividends and interest) or gains (increases in the value of investments). When the worldwide economic meltdown caused earnings and gains to plummet, it appeared charities might not be able to fulfill their missions until endowment values had again appreciated – which might take years.
The “historic dollar value” concept was a burdensome and awkward limitation even before the market drop, and modern standards were sorely needed. UPMIFA eliminates the “historic dollar value” concept and provides that a charity may disburse money from an endowment based on prudent consideration of the “uses, benefits, purposes, and duration” of the endowment. In determining what spending is prudent, a charity must consider, to the extent relevant, these factors:
- duration and preservation of the endowment;
- purposes of the charity and of the endowment;
- general economic conditions;
- effects of inflation and deflation;
- expected total return from earnings and gains;
- the charity’s other resources; and
- the charity’s investment policy.
An instrument making a gift may provide rules for disbursements from the gifted funds other than the statutory rules, but it must do so with specific language. A charity may treat a general statement in a gift instrument such as “use only income” or “preserve principal” as a recognition that the endowment is intended to be permanent rather than as an absolute restriction against spending the principal of the gift.
Other Improvements
UPMIFA makes other improvements that, though less dramatic than the spending provisions, are quite important for charities and those who serve on their boards.
Investment Standards: UPMIFA modernizes the standards charities must meet when investing their endowment money to make it clear that charities may apply “modern portfolio theory” by investing on a diversified basis but accepting the risk of some losses. UPMIFA standards are very similar to the “prudent investor rule” North Carolina has adopted for trustees. This change was long overdue, but is particularly welcome now when investment innovation is especially important.
Liability Standards: Market downturns make non-profit volunteers nervous about board service. UPMIFA adopts the philanthropic equivalent of the “business judgment rule” for non-profit boards, providing that board members are expected to act only “in good faith and with the care an ordinarily prudent person in a like position would exercise in similar circumstances.”
UPMIFA also makes it clear that a charity or board that delegates investment or other functions to an investment manager or other agent is not liable for the manager’s or agent’s acts if the charity or board:
- selects the manager or agent with due care;
- makes the scope and terms of the delegation clear and consistent with the charity’s and the endowment’s purposes; and
- periodically reviews the manager’s or agent’s actions.
North Carolina’s version of UPMIFA also makes it clear that unpaid volunteers with specialized expertise are not to be held to a higher standard of care than other board members. So, financial officers, accountants, investment managers, and lawyers may serve as volunteers on charitable boards with less fear of claims that they should have used their specialized professional knowledge to recognize and address issues. Other states which have adopted UPMIFA have not made this protection as clear. Therefore, any professional serving on a foundation board in another state which has adopted UPMIFA (or who is being paid for service on a North Carolina board) would be wise to require that the board’s minutes recite the board’s conclusion that the professional “does not have special skills or expertise applicable to the charity, and was not selected for service on the board in reliance on any representation about any special skills or expertise.”
Outdated Fund Restrictions: Changes in circumstances often make it critical to modify a gift’s restriction on an endowment. UPMIFA improves the procedures for modifying such restrictions. Under the old law, a charity was required to obtain either the consent of the gift’s donor or a court order to modify the restriction. However, donors are not always available and the legal costs of court orders can be prohibitively expensive when a charity is dealing with a smaller gift. Under UPMIFA, a North Carolina charity now may modify a restriction on a gift that is (a) worth less than $100,000 and (b) at least 10 years old, provided the North Carolina Attorney General does not object within 60 days of receiving notice of the proposed modification.
Conclusion
UPMIFA’s updated and flexible spending rules were adopted on a “just in time” basis. Those rules and the other improvements made by UPMIFA should be welcomed by charitable foundations, by people who serve on their boards, and by their beneficiaries.
For further information regarding the issues described above, please contact E. Knox
Proctor V.
