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Underwater Endowments

Some nonprofit executives, though concerned about the overall state of the economy, seem relatively unfazed by the impact of the stock market collapse on their endowment funds, perhaps assuming that eventually “whatever goes down must come up.” Their relative complacency may also relate to their endowment income policies, most of which take into operating income a percentage of a rolling three year average of total return. As a result, the full impact of the recent “correction” might not be felt until 2011-2012 and only if there is no intervening bull market rally. In certain states, however, there are laws that limit a nonprofit organization’s ability to spend earnings from donor-restricted endowment funds when the current market value is below the historic value at the time the organization received the funds. The Uniform Law Commission (ULC) is working toward enacting the Uniform Prudent Management of Institutional Funds Act in all 50 state legislatures. The Act governs procedures for the investment, management, and expenditure of endowment funds and, among other changes, removes the historic dollar value limitation. (It also has an optional provision, which presumes a total return policy in excess of 7% to be imprudent.) UPMIFA has been enacted so far in 26 states and introduced into legislation in 2009 in 15 others. Until the new law is passed, however, nonprofit organizations in those 15 states, and the nine others where it has not even been introduced, should monitor compliance with existing state laws regarding use of earnings from donor-restricted funds.

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