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UPMIFA: The Changing Parameters of Endowment Management

By Ada Meloy

In this time of economic crisis, many colleges and universities across the country are faced with financial distress, forcing them to cut costs as well as manage challenges to their endowments. Though it is a difficult environment, recent changes to endowment management law could help institutions plan for the future and effectively achieve their goals.

The Uniform Prudent Management of Institutional Funds Act (UPMIFA) provides colleges and universities the ability to change their endowment spending and investing practices to maximize both the public benefit and long-term success of the fund. It allows institutions to more easily distribute funds from depleted endowments, which can benefit the organization in the short term by effectively "unfreezing" underwater endowments. It also encourages colleges to rethink investment policies with longer-term goals in mind. The law applies to charitable institutions both large and small, including private college and university endowments and separately incorporated charitable foundations, which often hold endowment funds for public institutions.

Introduced in 2006, the legislation has been adopted in 43 states and the District of Columbia over the last three years,1 with 22 states introducing or enacting it in 2009 alone. Developed by the National Conference of Commissioners on Uniform State Laws, UPMIFA replaces the Uniform Management of Institutional Funds Act (UMIFA) in states where it has been adopted. UMIFA, introduced in 1972 and never updated, represented the first move toward the use of a modern portfolio strategy for investing endowment funds, rather than exclusively using trust law standards. UPMIFA expands on that approach, offering additional flexibility in managing charitable endowment funds. (Of course, this legislation applies only in the absence of investment instruction by the donor in the gift's instrument.)

Although UPMIFA was promulgated in a time of burgeoning endowments, it has important ramifications for colleges and universities in a down economy, specifically with respect to underwater funds. Several key provisions allow institutions to fashion long-term investment plans in an individualized way that will best serve the organization. . . .

Excerpted from the winter 2010 issue of The Presidency. To subscribe to the magazine, please call (301) 632-6757, or order online.