Nonprofit Financial Management: Managing Endowments with UPMIFA

Posted by Matthew Thomas

matthew-thomas-2Endowments often have an image problem: to outsiders, they look like a lot of money sitting around doing very little. To those inside the organization, they look somewhat untrustworthy, since they typically fluctuate with market conditions. Nevertheless, endowments can be very helpful instruments at building an organization's capacity to carry its mission far into the future. Whether the organization is a community service organization, a symphony orchestra, a university, or a religious organization, endowments can support core operations either through general endowments or through endowments tied to specific designated areas of need or interest. Prudent financial management of endowments requires a basic understanding of the law relating to them. The purpose of the law is to maintain the long-term buying power of intitutional endowment funds in the face of inflation.

In 49 states, the District of Columbia, and the US Virgin Islands, the funds held in endowments are covered by each state's version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA). You can find the full text of the uniform version of the law here. Only Pennsylvania and Puerto Rico have not enacted some version of this law, and as of the time of writing, do not appear to be inclined to do so. 

What does UPMIFA cover? UPMIFA_Purpose-1

  • Uniform standards of conduct for managing institutional funds: how donor intent must be considered, and then the charitable purpose of the institution;
  • What prudence looks like in managing individual and pooled funds;
  • Diversification;
  • What fund restrictions apply and when;
  • What level of expenditure, under what circumstances, constitutes prudence;
  • The requirement to maintain the buying power of the fund (and not just historical dollar value) over the intended duration of the fund;
  • Delegation of agents and managers; and,
  • Release or modification of restrictions on specific funds.

UPMIFA helps organizations manage funds in a way that protects the longevity of the funds they manage. Any organization that holds endowments (or funds that have been treated like endowments by the board of directors) must manage these funds according to the version of UPMIFA passed in its home state.

Management of endowments gets particularly exacting in volatile and down markets, as we wrote about previously. Nevertheless, endowments are a strong way for donors who value your organization to leave a legacy that can sustain your cause, mission, and operations for generations to come!

+Matt Thomas


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Topics: Matthew Thomas, financial management, UPMIFA, endowments, Endowment

Nonprofit Financial Management: Sustainability in a Volatile Market

Posted by Matthew Thomas

Even small nonprofits often have endowment funds invested to sustain long-term work toward the cause for which they were founded. Large nonprofits typically have a significant source of their annual revenue generated by earnings off of investments. So when the market begins to jump around, as it has done since the middle of the summer, nonprofit leaders begin to get nervous about what downward market trends might do to their revenues. This induces some to pull their funds from the markets, or hesitate putting funds into the markets. 

matthew-thomas-2Downward markets trends tend to cause no small amount of panic. However, sound financial management suggests that there are four things we can do intentionally, and four others we can avoid, that will strengthen our organizations' financial health, and ride out downturns in the markets.

  • Do: Follow your Investment Policy Statement (IPS), even in a market downturn. An IPS specifies the investment objectives, who is responsible for achieving those objectives (and who is responsible for monitoring), asset allocation, diversification, rebalancing, and so forth. Rebalancing should typically take place on a regular, predetermined basis, rather than at the whim of the managers. 
  • Don't: Try to time the market. In the moment, it's never clear where the market bottom is, or its top. In the long term, markets show trends; in the short term, they're a little (a lot?) crazy. If people could predict where the market was going to go in the short term, a lot of people would be making a lot of money. Most people want to sell during a downturn and buy as the wave rides higher. The problem is, that for most people, this means buying high and selling low, which is just the opposite of what would create a strong return. The best option is to buy and sell on a regular basis, according to the IPS, as the budget dictates, taking advantage of the lows to buy more shares, and taking advantage of the highs to gain more appreciation. 
  • Do: Maintain a cash reserve large enough to sustain your organization through a short-term dip in the market, to prevent having to sell securities low, if at all possible. Once the markets rebound, replace the cash reserve.
  • Don't: Focus too much investment in one type of security, or one sector of the market. Diversify. Chasing hot stocks does not typically work for funds that expect to remain in perpetuity. 
  • Do: Allocate assets based on risk tolerance and goals. Can your organization handle the risks associated with the potential rewards of investing? Remember, too, that inflation is a risk - and that securities that offer returns below the rate of inflation are actually losing buying power. 
  • Don't: Rebalance based on short-term swings in the market. Set a time window, and asset allocation variance window, and stick to it.
  • Do: Make sure your organization maintains compliance with the Uniform Prudent Management of Institutional Funds Act (UPMIFA) in a down market. UPMIFA requires that the long-term purchasing power of a fund be maintained, not just its historical dollar value. Prudence (the P in UPMIFA) requires sound judgment in a market downturn. The law requires a seven-point test for prudence. (Ohio's version is here, which matches UPMIFA Section 4(a), applicable in all states (and DC, and USVI) with the exception of Pennsylvania.) We have helped organizations implement UPMIFA. We'd be glad to help. 
  • Don't: Panic. Take a deep breath. This, too, shall pass.

These do's and don't's will help sustain your organization's financial health in a market downturn. Taking a step back from the day-to-day headlines, looking at the long-term trends, and focusing on your organization's mission will help get you through the days when the market seems crazy. We're in this with you!


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This article is for informational purposes only and does not constitute an offer or solicitation to sell shares or securities. Design Group International and its associated consultants are not brokers, dealers or registered investment advisors and do not attempt or intend to influence the purchase or sale of any security.

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Topics: nonprofit management, Matthew Thomas, financial management, Financial Health,, UPMIFA