Since 2006, UPMIFA (the Uniform Prudent Management of Institutional Funds Act) has guided the way that non-profit organizations use the investment income earned by their endowment funds, effectively giving new life to funds given by a donor in the past. Each state has customized their own version of the law, and only Pennsylvania and Puerto Rico have not adopted it. Following the regulations is a requirement for any organization that has any endowment funds. What does this mean for a local congregation?
First, the UPMIFA rules only apply to permanently restricted funds, also known as endowment funds. The rules are not applicable for unrestricted investment funds, even if the organization calls these “endowment.” Only a donor can permanently restrict a donation, by giving money with the stipulation that it is “permanently restricted” or “held in trust” or that “income only may be spent.” If an organization receives an unrestricted donation, and the congregation decides to “put it in the endowment,” that doesn’t make it endowment. It is absolutely crucial to understand the difference, and to record the gifts and restrictions properly on your books!
- If an organization has total bank account balances of $120,000 but $100,000 of this is endowment funds, then it really only has $20,000 available, and the $100,000 is subject to UPMIFA rules.
- If an organization has $100,000 in an “endowment account” that has no donor restrictions, then all is available as needed.
- If an organization has $100,000 in an endowment, but never touches it, the funds are still subject to UPMIFA, with financial reports distinguishing between the permanently restricted original gift, the temporarily restricted accumulated net gains, and the spendable portion of the funds. Note that if you don’t allocate a portion for spending, then you haven’t followed the donor’s instructions to use the income for congregational expenses.
Second, if you have received endowment funds from a donor, long ago or more recently, then the UPMIFA rules must be followed. Any income (interest, dividends, market gain/(loss), capital gains, less management fees) earned by the permanently restricted funds is temporarily restricted until it is used to offset investment losses, or released by a spending plan. The spending plan must be included in the organization’s financial reports so that all are aware. Common spending plans are spending “4% of the average balance at the end of the previous 20 quarters” or “investment dividends will be transferred to the general fund.”
So an endowment might be reported like this: Statement of Financial Position. In this example the congregation’s spending rule is that 4% of the balance is available for spending. The Jones Endowment Fund was a gift of $100,000 given to earn income for general expenses. On 12/31/12, the balance was $109,120. The investment account earned 7% return in 2013, so on 12/31/13, 4% is transferred to the General Fund and the remaining 3% is added to the Jones Endowment Income Fund. Similarly, the Endowment for Minister’s Salary was $21,824 as of 12/31/12. At the end of the year, 4% was transferred to the General Fund and the remaining 3%, or $655 was added to the Endowment Income Fund, bringing it to $2,479. Finally, the Smith Endowment for Music began with a $5,000 gift. In 2013, 4% was earned on the balance of $5,456, so $218 is added to the Music Fund, and the remaining 3% brings the Smith Endowment Income Fund to $620.