By Erin Stearns

The New Hampshire legislature recently gave charities more flexibility in managing their funds by passing the Uniform Prudent Management of Institutional Funds Act ("UPMIFA").UPMIFA went into effect in New Hampshire on July I, 2008. It is enacted as RSA Chapter 292-B. It replaces its predecessor, the Uniform Management of Institutional Funds Act, in its entirety. UPMIFA applies to all institutional funds managed by charities organized as nonprofit corporations, and provides special rules for the management of endowment funds.¹ This article highlights some of the changes under UPMIFA. 

Under prior law, charities could establish a spending policy for endowment funds and spend a fixed percentage of a fund's fair market value each year, for example, 5%. Institutions were permitted to accumulate income and appreciation in excess of this spending percentage, and add this to fund principal,² Expenditures from an endowment had to meet a statutory standard of prudence (expenditures of more than 7% of the value of the fund assets created a "rebuttable presumption" of imprudence).

The prior law prohibited a charity from making an expenditure from an endowment fund if that expenditure would cause the value of the fund to fall below its "historic dollar value." The historic dollar value of a fund is the sum of the value of the fund at the time of its creation, accumulation (as directed by the donor), and all subsequent contributions to the fund. 

The most significant change under UPMIFA is the abolishment of the historic dollar value limitation on spending from endowment funds. This change resulted from concerns that imposing the historic dollar value spending limitation on "underwater" funds (i.e., whose value has fallen below the historic dollar value) could distort the investment policy and lead to a decline in a fund's value by encouraging institutions to invest for income rather than long-term growth. Under UPMIFA, a charity may now spend a percentage of the fair market value of fund assets even if doing so causes the value of the fund to fall below its historic dollar value. Charities may still accumulate income and appreciation in excess of their spending percentages and to add this to principal under UPMIFA. 

Another change under UPMIFA is that a charity managing an endowment fund worth less than $2,000,000 must notify the Attorney General's Office at least 60 days prior to making an expenditure that would cause the value of the fund to fall below its historic dollar value. During the time between providing notification and the date of expenditure, the Attorney General may require the charity to obtain court approval of the proposed expenditure. This additional requirement does not prohibit spending below the historic dollar value. It is intended to provide additional guidance and oversight to charities with small funds who may have limited experience in managing institutional funds. 

Under UPMIFA, charities managing endowment funds worth more than $2,000,000 must notify the Attorney General's Office that their funds are managed pursuant to UPMIFA. For each fund whose value is more than $2,000,000, the charity should give written notification to the Director of Charitable Trusts at the Attorney General's Office. This notification should include the name and address of the fund, the current market value of the fund, and a statement that the fund will be managed pursuant to UPMIFA. 

UPMIFA also requires charities to apply a multi-factor test in making investment decisions. This test applies to all funds managed by charities, not only endowments. Except as otherwise provided by the gift instrument, an institution should consider: 

1. general economic conditions, 
2. possible effects of inflation or deflation, 
3. expected tax consequences, if any, of investment decisions or strategies,
4. the role that each investment or course of action plays within the overall investment portfolio of the fund,
5. the expected total return from income and the appreciation of investments,
6.  other resources of the institution, the needs of the institution and the fund to make distributions and to preserve capital, and 
7. an asset's special relationship or special value, if any, to the charitable purposes of the institution.

UPMIFA also requires charities to make management and investment decisions about fund assets "in the context of the institutional fund's portfolio of investments as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the fund and to the institution." There is a rebuttable presumption under UPMIFA that spending more than 7% of the value of fund assets is imprudent. 

UPMIFA modernizes the law on management of all charitable funds, and endowments in particular, by establishing clear guidelines for factors charities should consider in investing institutional funds and encouraging them to invest endowment funds for long-term growth.

Erin Stearns is an associate attorney in the Trust and Estate Department at McLane, Graf, Raulerson & Middleton, P.A.

^I Under UPMIFA, funds whose donors specify that "income only" or "interest only" must be spent are classified as endowment funds. 
² Both UPMIFA and the prior law provide a rule of construction under which words such as "income only" do not restrict charities from applying a spending policy, even if this means that income in excess of a set spending percentage will be accumulated and added to principal.