Intergenerational Equity

Author: Gabriel Hament, Post Date: June 28, 2017

For 30+ years, Cumberland Advisors has worked with nonprofits, helping boards of directors draft RFPs, structure investment policy statements, and design investment portfolios within a separately managed account format – all in compliance with our clients’ unique state regulatory environments.

Enshrined in the Uniform Management of Institutional Funds Act of 1972 (UMIFA) is the obligation of a charitable institution to manage financial assets designated as perpetual funds in a manner that satisfies the needs of the present without prejudicing the ability to deliver the same benefits to future generations. UMIFA was developed by a nonpartisan consortium of legal professionals from each state, an organization known as the Uniform Law Commission (ULC) or the National Conference of Commissioners on Uniform State Laws. Founded in 1892, the ULC was established to help align the legal and regulatory frameworks in each state and territory “… by drafting state laws on subjects on which uniformity across the states is desirable and practicable.”[1] In essence, the ULC produces a statutory template, and each state legislature then has the opportunity to adopt the law as a whole or in part.

Since the creation of UMIFA in 1972, 48 states have adopted the general language developed by ULC and passed it into law. UMIFA has several important components:

1) Requires that governing boards must “… exercise ordinary business care and prudence under the facts and circumstances prevailing at the time of the action or decision and … consider long and short-term needs of the institution in carrying out its … purposes, its present and anticipated financial requirements, expected total return on its investments, price level trends, and general economic conditions.”[2]
2) Clarifies the right of governing boards to invest funds of such institutions as hospitals and colleges for “total return.” This means governing boards could, for example, invest in growth stocks paying low or no dividends but having a high potential for appreciation in long-term value, rather than concentrate entirely on investments with immediate high-income yields.[3]
3) Allows governing boards to retain professional investment counsel and managers and to seek removal of restrictions on gifts that have become “obsolete, inappropriate, or impracticable.”[4]
4) Defines an “institution” as an “incorporated or unincorporated organization organized and operated exclusively for educational, religious, charitable, or other eleemosynary purposes, or a governmental organization to the extent that it holds funds exclusively for any of these purposes.”[5]
5) Permits an expenditure of revenues derived from capital appreciation in addition to income from dividends, interest, royalties, etc. Capital gains and current income could be spent to provide ongoing support of an organization’s mission so long as the “historical dollar value” (generally speaking, the initial value) of the fund is preserved.

UMIFA was innovative, in that capital gains, in addition to current income, were now available to be spent.

In 2006, the ULC dusted off the 1972 template and updated the language to reflect the dynamic environment of nonprofit finance. The ULC’s focus was on the restrictive spending protocol mandated by the “historical dollar value” rule. In economic downturns, such as the then-recent dot-com bust, most charitable institutions were restricted from temporarily spending any portion of the initial corpus of the endowment to maintain spending levels. The 2006 Uniform Prudent Management of Institutional Funds Act (UPMIFA) removed this spending yoke constraining boards of directors and replaced the “historical dollar value” rule with a checklist that boards, acting as any “prudent stewards,” should consult when setting spending policy. The checklist covers:

* the duration and preservation of the endowment fund
* the purposes of the institution and the endowment fund
* general economic conditions
* the effects of inflation or deflation
* the expected total return from investments
* other resources of the institution
* the investment policy of the institution.[6]

We invite you to contact us to discuss how Cumberland Advisors’ separate account management system can position your organization to meet the obligations of the present while honoring the commitments of tomorrow.

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