Endowments 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?
- 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;
- 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!