Spending Policy
- Uniform Prudent Management of Institutional Funds Act (UPMIFA)
- Ohio UPMIFA
- Ohio UPMIFA Endowment Spending Standards
- Ohio University Foundation Endowment Spending Policy
- Appropriation of Expenditures
- Donor Intent
- Reinvestment or Temporary Suspension of Endowment Distributions
Uniform Prudent Management of Institutional Funds Act (UPMIFA)
UPMIFA replaced the Uniform Management of Institutional Funds Act (UMIFA) which was approved by the National Conference of Commissioners on Uniform State Laws in 1972. UMIFA provided guidance and authority to charitable organizations within its scope concerning the management and investment of funds held by those organizations. The changes UMIFA made to the law permitted charitable organizations to use modern investment techniques such as total-return investing and to determine endowment fund spending based on spending rates rather than on determinations of “income” and “principal.”
Recognizing that prudence norms have evolved since the drafting of UMIFA, the new Act provided modern articulations of the prudence standards for the management and investment of charitable funds and for endowment spending. Specifically, as it relates to spending, UPMIFA modernizes the rules governing expenditures from endowment funds, both to provide stricter guidelines on spending from endowment funds and to give institutions the ability to cope more easily with fluctuations in the value of the endowment.
Ohio UPMIFA
Ohio legislature passed Amended House Bill Number 522 (HB522) and enacted a version of UPMIFA which became effective June 1, 2009 and can be found in Sections 1715.51 through 1715.59 of the Ohio Revised Code. HB522 altered several aspects of law concerning:
- the standards of conduct in managing and investing institutional funds,
- rules that apply to institutional endowment funds including those related to spending,
- the delegation of authority to manage investment funds, and
- the release or modification of restrictions contained in charitable gifts made by donors.
Ohio UPMIFA Endowment Spending Standards
Subject to the intent of a donor expressed in the gift instrument, an institution may appropriate for expenditure or accumulate so much of an endowment fund as the institution determines is prudent for the uses, benefits, purposes, and duration for which the endowment fund is established.
The institution shall act in good faith, with the care that an ordinary prudent person in a like position would exercise under similar circumstances, and shall consider, if relevant, the following factors:
- duration and preservation of the endowment fund,
- purpose of the institution and the endowment fund,
- general economic conditions,
- possible effect of inflation or deflation,
- expected total return from income and the appreciation of investments,
- other resources of the institution, and
- the investment policy of the institution
To limit the authority to appropriate for expenditure or accumulate, a gift instrument must specifically state the limitations.
Ohio’s version of UPMIFA includes a “5% of fund value” annual spending safe harbor rule and replaces the “historic dollar value” standard of Uniform Management of Institutional Funds Act (UMIFA). Ohio UPMIFA states, “the appropriation for expenditure in any year of an amount not greater than 5% of the fair market value of an endowment fund, whether or not the total expenditures from it exceeds 5%, calculated on the basis of market values that are determined at least quarterly and averaged over a period of not less than three years immediately preceding the year in which the appropriation for expenditure was made, creates irrebuttable presumption of prudence.” The safe harbor spending rule eliminates preexisting restrictions related to underwater endowment accounts and provides a threshold by which prudence can be measured.
Ohio University Foundation Endowment Spending Policy
Assuming prudent management helps ensure that endowment funds provide benefits to the University in perpetuity, the spending policy should focus on minimizing reductions in value during periods of poor market performance. To meet this goal, endowment appropriation for expenditures will be limited to the spending rate adopted by the Finance Committee. The spending rate and the administrative fee will be subject to (i) annual review by the Finance Committee and, if necessary, (ii) recommendation for change by the Foundation’s Finance Committee, with input from the Investment Committee, for approval by the Foundation’s Board of Trustees.
Appropriation of Expenditures
During fiscal year 2022, spending authority for endowed accounts whose market value is at least 90% of the historic gift value will be the product of a 4.0% spending rate and the 36-month moving average of fair market value. These accounts will also be subject to a 1.8% administrative assessment. During fiscal year 2023 and annually thereafter, the administrative assessment will be reduced by 0.1% per year until the administrative assessment reaches 1.5% during fiscal year 2025. Additional reductions to the administrative assessment may be considered after fiscal year 2025, should budgetary circumstances permit that change.
For endowed accounts whose market value is at least 80%, but less than 90%, of the historic gift value, spending will be restricted to an amount equal to 3.0% of the 36-month moving average of fair market value. These accounts will also be subject to a 1.0% administrative assessment.
For endowed accounts whose market value is less than 80% of the historic gift value, spending will be restricted to an amount equal to 1.0% of the 36-month moving average of fair market value. These accounts will not be assessed the administrative assessment.
Unless stated otherwise in the gift agreement, all endowed accounts established on or before June 30, 2019 will be subject to the spending formulas described above. All new endowed gift agreements established on or after July 1, 2019 with a gift commitment of less than $5 million will also be subject to the spending formulas described above.
For new endowed gift agreements established on or after July 1, 2019 with a gift commitment of $5 million or more, spending authority will follow the formulas described above, except that endowed accounts whose market value is at least 90% of the historic gift value will be subject to a 1.0% administrative assessment.
For endowed accounts in existence for fewer than 36 months, the calculation of average fair market value shall include zeroes for the months prior to the endowed account’s existence.
Should market performance result in an unsustainable change in available spending, the Finance Committee will address altering the spending rate accordingly.
Exceptions to these appropriation guidelines may be granted by the Finance Committee and, ultimately, approved by the Foundation’s Board of Trustees.
Donor Intent
Donor intent as specifically stated in the gift agreement takes precedence over UPMIFA standards or Foundation spending policies. If the gift agreement uses general terminology such as “retain principal” or “spend only income”, then spending will follow Foundation spending policies that are in compliance with UPMIFA.
Reinvestment or Temporary Suspension of Endowment Distributions
The Foundation understands that consistent and thorough use of annual endowment distributions promotes good donor stewardship and helps to accomplish the endowment’s long-term goal of intergenerational equity. Therefore, unless a gift agreement requires reinvestment, unspent endowment distributions will be carried forward for use in the subsequent fiscal year and will not be reinvested in the endowment.
Rarely, in the event that spending of an account’s endowment distribution is temporarily impossible or impracticable, an exception may be made to allow an account’s endowment distributions to be reinvested or temporarily suspended. When an account’s distributions are temporarily suspended, the administrative assessment will be equal to 1.0% of the 36-month moving average of fair market value, unless the account’s market value is less than 80% of the historic gift value. As noted in the Appropriations of Expenditures section above, these accounts will not be assessed the administrative assessment.
Exception requests will be made by the Foundation’s President and CEO in consultation with the Foundation’s Treasurer and CFO. Exception requests will be presented to the Finance Committee for consideration, then forwarded to the Foundation’s Board of Trustees for approval.