By John E. Kent, Jr., CPA, Partner | Not-for-Profit Team
Considering the recent market performance for investments, the issue of underwater endowments will likely become a factor for many in the not-for-profit sector. Most states and the District of Columbia have adopted the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which allows for organizations to spend income generated by underwater endowments provided that the organization has adopted a prudent endowment spending policy. It also eliminates the historic dollar limitation.
However, it is important for not-for-profits to understand how both donor restrictions and applicable laws effect how much their organization can spend from an underwater endowment. Keep in mind that rules differ by state. In many instances, underwater endowments must be “made whole” by transferring temporarily restricted or unrestricted net assets to the permanently restricted endowment. This leads to an erosion of unrestricted net assets and potentially presents liquidity issues.
For not-for-profits in both UPMIFA and non-UPMIFA-compliant states, addressing underwater endowments requires significant analysis. Some steps to take if your organization’s endowments are underwater include:
- Ensure the fair value of your donors’ original endowment gifts has been accurately tracked
- Understand your donor endowed restrictions
- Review applicable governing documents, applicable state laws, endowment investment and spending policies, articles of incorporation and bylaws to determine any limitations on your ability to disburse investment income, accumulated appreciation or corpus
- Consider any modifications that may be needed to your spending policies
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