January 13, 2011
"Spending and Management of Endowments under UPMIFA"
The Association of Governing Boards of Universities and Colleges, in conjunction with the Commonfund Institute has issued a very informative report regarding the effects of the Uniform Prudent Management of Institutional Funds Act on college, university and institutionally related foundations. Key findings include:
On average, underwater funds accounted for 22.4 percent of the total value of endowment funds held by colleges and universities at the end of the 2009 fiscal year ending June 30, 2009 (NCSE data). Under UPMIFA, institutions and affiliated foundations have adopted new spending practices yielding greater ongoing distributions from underwater endowments as well as adopting a variety of more flexible methods for determining distributions from underwater endowments. AGB’s survey findings include (as seen in Table 4):
• 46.9 percent are continuing distributions in keeping with their normal spending rule, an increase of 8.7 percentage points over practice prior to the enactment of UPMIFA;
• 25.1 percent are discontinuing all distributions from underwater funds, a decrease of 16.4 percentage points from practice prior to UPMIFA;
• 9.7 percent are distributing only interest and dividends, a decrease of 7.2 percentage points from practice prior to UPMIFA;
• 12.5 percent employ a threshold or tiered approach to spending or some other flexible methodology; and
• 6.8 percent of institutions described a flexible process for determining distributions from underwater funds that was used in lieu of or in conjunction with the spending practices listed above.
After the enactment of UPMIFA, 47.1 percent of institutions and foundations which previously discontinued all distributions or distributed only interest and dividends from underwater endowments adopted a new spending approach likely to yield grater ongoing distributions supporting endowment purposes.
College, university, and affiliated foundation boards are actively involved in making decisions about spending from underwater funds. Survey findings include:
• 75.8 percent of boards approve decisions regarding spending from underwater funds;
• 68.2 percent of institutions have some formal policy addressing spending from underwater funds; and
• 48.3 percent of boards document decisions regarding underwater funds in their minutes.
Only 14.5 percent of institutions and foundations have made use of provisions in UPMIFA allowing charities to modify restrictions on smaller and older funds that have become impracticable or wasteful.
Institutions and foundations have also made changes to endowment-management practices not immediately related to spending from underwater funds but in keeping with UPMIFA’s updated prudence standard for investment and management of charitable funds. Nearly one-third (28.5 percent) of institutions have changed their approach to portfolio construction to focus on factors such as risk reduction, inflation protection, and liquidity; 11.6 percent have made changes in their due diligence and risk management procedures; and 19.3 percent have made changes in investment management staffing and support.
AGB’s recent Statement on Conflict of Interest has advocated heightened conflict-of-interest standards for board members involved in investment decision making. While 97 percent of boards have some type of conflict-of-interest policy, only 60.9 percent of institutions and foundations have conflict-of-interest policies that apply to all volunteers responsible for investment decision making; 15.9 percent have policies which include especially rigorous provisions applicable to investment decision makers; and 13.5 percent have policies addressing board members’ parallel or “side-by-side” investments.
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