Using Endowment Funds in a Crisis: What NY Nonprofits Need to Know
As a result of COVID-19 many NFPs are having a hard time generating contributions or program income and are looking for additional sources of liquidity to help fund their programs. Many have identified their endowment funds as a potential solution. In New York State, this option comes with its own unique set of rules.
The New York Prudent Management of Institutional Funds Act (NYPMIFA) took effect on September 17, 2010 and governs how not-for-profits (NFPs) in New York are required to manage their endowment funds. NYPMIFA is New York’s adoption of the federal Uniform Prudent Management of Institutional Funds Act (UPMIFA) which replaced the Uniform Management of Institutional Funds Act (UMIFA) of 1974.
Unlike UPMIFA, NYPMIFA allows an NFP to spend from their endowment funds, or make an appropriation, even if that results in the endowment’s fair value dropping below its original dollar amount (sometimes referred to as “historic dollar value” or “corpus”), without court approval or attorney general review, as long as the board of directors or trustees deems it prudent.
When released, NYPMIFA allowed for NFPs to provide notice to donors of endowment funds, informing them of the adoption of NYPMIFA, notifying them of this allowance, and giving the donor the option to opt out of that provision. If notification was not provided, endowments received prior to September 17, 2010 are still subject to UPMIFA rules, however, spending below historic dollar value is not allowed. In addition, if the endowment agreement explicitly states a spending formula, the endowment will be subject to that restriction, unless the donor agrees otherwise.
Prudent vs. Imprudent
Under NYPMIFA, there’s a rebuttable presumption of imprudence for appropriations in excess of 7% of the endowment fund’s fair value (to be calculated at the lesser of the average of the fair value over the preceding five years or the life of the fund).
This does not mean that you cannot appropriate more than 7% in a given year, if the board deems it prudent; however, the NFP should maintain a detailed documentation of how the amount was deemed prudent.
This also does not mean that an appropriation of less than 7% is automatically deemed prudent. If the NFP adopts a spending rate below 7%, that percentage becomes the floor for the rebuttable presumption of imprudence.
Determining a Prudent Appropriation
Under NYPMIFA, there is an 8-step model to determine what a prudent appropriation consists of:
(1) the duration and preservation of the endowment fund;
(2) the purposes of the institution and the endowment fund;
(3) general economic conditions;
(4) the possible effect of inflation or deflation;
(5) the expected total return from income and the appreciation of investments;
(6) other resources of the institution;
(7) where appropriate and circumstances would otherwise warrant, alternatives to expenditure of the endowment fund, giving due consideration to the effect that such alternatives may have on the institution; and
(8) the investment policy of the institution. N-PCL § 553(a)(1)-(8).
In determining the annual appropriation, an NFP should document how it considered all eight steps in reaching their decision. While the answer to some of these questions may be that the board does not consider them relevant, item #7 tends to create the hardest hurdle to overcome. We believe that in instances where an NFP decides to make an appropriation in excess of 7%, the organization should be sure to document factors such as the cost of obtaining traditional financing and utilizing other board reserves, and the reasons they chose not to utilize them.
An NFP is required to contemporaneously document the consideration they gave to each of the eight factors, as well as how they decided on a spending rate. If an NFP determines that it is prudent not to make an appropriation, it should document that decision as well. The easiest way to comply with this requirement is for the board to adopt a formal, written endowment spending policy going through the eight factors and concluding on what they believe a prudent spending percentage is for an annual basis. On an annual basis, the budgeted appropriation should fall within the prudent appropriation range, with the decision documented within the board minutes.
Other relevant changes as a result of NYPMIFA:
- If an NFP reaches out to a donor requesting their written consent to release or modify a use or restriction, and the donor withholds consent, the NFP can now petition the court to release the funds if the NFP determines the restriction is impossible, impracticable, unlawful or wasteful. N-PCL § 555(C). Notification must still be provided to the donor and the Attorney General to give them the opportunity to be heard.
- If a fund has a fair value less than $100,000 and has been in existence for more than 20 years, and the NFP determines that the restriction is impossible, impracticable, unlawful or wasteful, it can provide written notice to the Attorney General of its intent to modify the restriction or release the funds. If the Attorney General does not notify the NFP within 90 days of an objection, the NFP may proceed with the release or modification. N-PCL § 555(d).
While it is never an organization’s first choice to use endowment funds for reasons other than its intended purpose, sustaining an NFP mission through a crisis often requires creative alternatives. Understanding what is allowed and required under state law is the first step toward determining if this solution is the right one for your organization.
If you have any questions about endowment appropriation in New York or another state, please contact your Grassi Nonprofit advisor or Jaime Rapps, Senior Manager, at firstname.lastname@example.org or 212.223.5072.