4 Steps to Take if your Not-for-Profit Endowments are Underwater

By John E. Kent, Jr., CPA, Director

4 Steps to Take if your Not-for-Profit Endowments are Underwater

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:

  1. Ensure the fair value of your donors’ original endowment gifts has been accurately tracked
  2. Understand your donor endowed restrictions
  3. 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
  4. Consider any modifications that may be needed to your spending policies

Question about your not-for-profit organization’s underwater endowments?  We can help. Contact us. | 804.747.0000

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About the Author

John E. Kent, Jr.

John E. Kent, Jr., CPA, Director

John is the Quality Control Director at Keiter and has more than 30 years of experience in public accounting providing auditing and business consulting services to clients in the retail, manufacturing, construction, and not-for-profit industries. During his tenure, he specialized in benefit plan audits, mergers and acquisitions, business planning, and financing. His experience includes designing and implementing cost accounting and inventory control systems for multi-industry companies, conducting LIFO inventories, conducting quality of earnings reviews, and assisting clients with adopting new accounting standards. Read more of John’s insights on our blog.

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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.


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