NJ UPMIFA v. NYPMIFA: Day and Night

New York charities, eat your heart out.  Take a look at NJ’s version of UPMIFA:  NJ UPMIFA.

I have been writing about NYPMIFA, NY’s version, for months and finally took a look at my home state’s version for a former client.  Wow.

I can’t believe these are supposed to be essentially the same “Uniform” statutes.

If you are like most people, and might not get to the details, here is a summary of NJ’s UPMIFA:  NJ charities now “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…”   (i.e. spend what you think is prudent!)  And use these 7 factors in your decision making:

  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; and
  7. the investment policy of the institution.

No 7% presumption of imprudence, no requirement of a contemporaneous documentation of the application of the factors, NO NOTICE TO PRE-EXISTING FUND DONORS.  No concerns about old funds under the old scheme v. new funds under the new scheme.

What about the clean-up part of UPMIFA?  NJ gives their charities the option of fixing 20 year old/under $250,000 funds – NO notice to living donors required.  NY says you that it is only for under $100,000, you need to notify living donors, and that their AG’s office is already hinting that they will initially reject all applications and put you through the ringers before letting you merge an old fund.

Ok, NJ charities.  Your legislature just gave you carte blanche, total freedom, to do basically what you want with your endowments funds (even spending down the principal if it can be justified under the prudent factors).

NY charities – you thought endowment management was challenging before NYPMIFA…  Well, it just got worse.

Amazing if you think about it because on the one hand, NJ may have given too much freedom to its nonprofits.  On the other hand, NY created a whole series of issues and challenges with their version of UPMIFA.  Managing endowments under the prior law (UMIFA) was a lot easier!

Have a great weekend!


More NYPMIFA Guidance – Old/Small Funds Provision

This piece is based on grapevine information from the NY AG’s office that was given to a nonprofit which asked for specific guidance on applying NYPMIFA’s old/small fund (>20yrs/<$100K) provision.  (and, of course, there is total deniability by the AG and anyone else if it is too embarrassing)

Before giving you the details, I just want to point out a bit of irony.  The point of this particular provision was to let NY nonprofits easily clean up their small, old and outdated funds WITHOUT need for AG approval (just notice and chance to object) or the need for a cy-pres action.  Apparently, the contact at the AG’s office let it be known that for now, the AG would basically object initially to any of these filing so that the nonprofit would NOT move ahead by default (and obviously give the AG’s office time to review and negotiate if need be).

The irony is that this provision was intended to essentially let these particular applications to go through by default (unless there was a glaring problem, of course).  There is another provision in the statute that addresses changing funds that don’t meet the >20yrs/<$100K criteria.

In other words, the AG’s office – for now – is planning on ignoring a key feature of this particular clean-up provision and treating the requests like other requests for modification of a fund agreement under NYPMIFA.  A little disappointing to hear the AG’s office is planning to essentially rewrite a statute by their own actions.  Maybe it is only short term procedure until they can post more guidance; maybe it will become standard procedure and the clean-up of old/small funds won’t be so easy after all.

OK – here is what we learned.

If you want to use this nifty new provision of NYPMIFA, you should email your request to Carl Distefano, an attorney in the AG’s charities bureau (carl.distefano@ag.ny.gov) in PDF the following:

  1. A copy of the board resolution authorizing the modification.
  2. A copy of any written gift instruments pertaining to the funds.
  3. Any correspondence with donors, if the donor is still alive and was asked about modification.
  4. Any documentary evidence of value and age of the fund to establish that it is less than $100,000 and over 20 years old.
  5. Statements required in the statute regarding how the funds will be used and that the existing restriction is “impracticable, impossible or wasteful.”

Here is a PDF of this provision (with my own highlights and underlines) NYPMIFA release of old fund provision.  I would highly recommend reading the actual statute and, of course, consulting with counsel before attempting this.  Reaching out to the Charities Bureau of the AG’s office isn’t a bad idea either.

New York Charities Waking up to NYPMIFA

Slowly, more and more New York charities are finally waking up to NYPMIFA (see older posts if you are wondering what NYPMIFA or UPMIFA are – see my category listing for Endowments).  By waking up, I don’t mean the joyful hoping out of bed type of waking up.

I know this because of the questions coming in and it is one of most popular “search” terms finding this website.

So, for all of the readers looking for NYPMIFA guidance, here are two questions that have come up consistently and the answers (based on what I am hearing from other attorneys and my own reading of the law – as always, consult your own attorney).

  1. If we don’t ever plan to dip into historic gift principal, do we need to send those NYPMIFA notices to pre-NYMIFA funds?  Answer:  No, you only need to send the notices when your institution intends to utilize the invasion of principal aspect of NYPMIFA to pre-NYPMIFA funds with available donors (i.e. alive and locatable).
  2. If we don’t plan on ever dipping into historic gift principal on pre-NYPMIFA funds, do we still need to apply the 8 factor analysis to those old funds?  Answer:  YES (this is not so clear in the law but after going over this numerous times, it seems to me as well as others that NYPMIFA redefined prudence for endowment management purposes – this point could go either way but it would make sense to use the 8 factor regardless of the fund rather than attempting to have a two types of analyses).

Next week, I should be able to post specific instructions from the NY AG’s office on how to use the 20+ year old/under $100,000 endowment cleanup rules from NYPMIFA.

Underwater Endowments Training In New York

I have to admit that I am a bit of a cynic when it comes to educational programs. Usually, the speakers are going over things I know already and frankly, I am part of the ADD generation with about a 3 second attention span.

So, when I got ready to attend the NYC bar’s 3hr presentation on Underwater Endowments (held last week), I packed plenty of snacks and extra reading material.

I’ve written on the topic, organized several presentations on it. What else can I learn except: when is New York going to pass UPMIFA!?!

I was wrong. I am going to use this opportunity to list some very important facts that I picked up (please go to previous posts on UPMIFA for background). All of these points are specific to New York (especially since New York still maintains the old UMIFA) but I still recommend that non-New Yorkers look over these tidbits because they are definitely food for thought.

1. When does an organization have an affirmative duty to literally restore an underwater endowment to its historic gift value (ie..put real money into the endowment account)?

I used to think this was an accounting canard. Wrong I was – at least partially. In New York, the AG says that if a permanent endowment goes below its historic gift value due to application of the org’s spending-rate policy, then it does have an affirmative duty to replenish the endowment! On the flip side, if you can attribute the drop to market depreciation, you don’t have an affirmative duty.

Wait a second. This doesn’t make sense. You apply your spending rate, there is nothing wrong with that when you are not underwater. Then the market tanks and the fund goes negative. When is it the fault of the spending rate and not the market? A question I should have asked. It seems that the AG takes the position that if the market appreciation generally lagged behind the spending rate, the board should have adjusted the spending rate down to prevent the fund from going underwater. In other words, it’s pretty murky in New York when to blame the spending rate vs. the market decline.

Advice for all boards (in UMIFA or UPMIFA states): watch the funds, know the original funding amounts of each fund, be aware of long term goals of each fund, spend less to extend life of fund of each fund when need be.

2. Have you ever had auditors or accountants claiming that you have bring back the permanent endowments to their historical gift value on your financials (aside from the NY AG’s approach mentioned about but from an accounting point of view)? To me, this was part of the accountant’s canard mentioned above. It turns out that there is some truth to this (and this may or may not apply to apply to UPMIFA states, too).

The accounting principals require that on your books, any underwater permanent endowments must make up the deficit from other assets on your books (ie..unrestricted assets).

Practically, this does not mean transferring funds from unrestricted accounts to the permanent endowment accounts. It means that the books have to allocate unrestricted assets towards the negative balances, all on paper though.

So if its only on paper, what’s the big deal? The big deal is that underwater endowments drag down your bottom line net assets which might violate debt covenants (agreements with lenders to ensure that the organization maintains a certain level of assets).

Two solutions to this problem are: 1. try to make sure debt covenants are drafted to exclude the negative impact of underwater endowments; and 2. your financials should show negative underwater balances as separate and explained items.

3. I know New York is peculiar but the current proposed form of UPMIFA is a real doozy. There was some excitement that NY might include a presumption that greater than 7% spending rates are presumed to be imprudent. Not such a big deal to me but charities should rather do without it (still, my advice is to take the new law regardless of this provision).

The doozy though (for the proposed NY version) is a 90 day check the box provision. What’s this??? UPMIFA, if passed as currently proposed in NY, would require all charities with living permanent endowment donors to send a letter to those donors giving the donors 90 days to decide whether the donor wants his or her fund to follow UPMIFA or to stay with the old UMIFA law. Actually, the wording is really screwy and assuming the law requires charities to use the law’s language in the letter, it will give donors the impression that their choice is between the charity spending their entire fund (new law) vs. maintaining their fund (old law). Yikes for New York charities.

4. Incorporating in Delaware (or wherever) may actually help avoid NY’s insane laws regarding endowments. When I heard this, I made them repeat it. According to the big shot attorneys on the panel at the bar conference, for these purposes only, the state of incorporation would control. This is a good question for your general counsel but some New York charities may already be off the hook in this area if they were incorporated in other states.

5. NY’s proposed law, and included in other state versions, has an escape clause for older, smaller endowments. The uniform version of UPMIFA included a provision for less than $25,000 and older than 20 years permanent funds. It permits charities upon notice to their AG (90 days to protest) to release or modify restrictions if the purposes are unlawful, impracticable, impossible or wasteful. NY’s version increased this old endowment escape clause to $250,000! I know NJ included a $250,000 version of this clause, too! NY’s proposed version requires notice to living donors – not sure if this applies to other state versions.

I would say that if this law gets passed in NY, and certainly the 42 other state that have passed a form of UPMIFA, it would be time to clean up all of those old, out dated endowments.

For non-New Yorkers, check your UPMIFA (if you have it).