Saturday, July 03, 2010

Up with UPMIFA

The Wall Street Journal's Erica Orden reports that New York is about to pass a bill that would allow nonprofits "to spend certain endowment funds without court approval." Current law, she explains, "forbids organizations such as museums and universities from spending the principal of an endowment fund when it falls below its original value, or 'underwater' .... The bill, virtually identical versions of which have been introduced in the Assembly and Senate, would permit 'underwater' fund principal to be used without approval from the State Supreme Court or New York State Attorney General's office."

Judith Dobrzynski calls it "crazy," but, as Orden explains, this is just New York catching up with the rest of the country:

"New York's bills, originally introduced in April 2009, are a variation of model legislation known as the Uniform Prudent Management of Institutional Funds Act, which has been adopted in 47 other states and the District of Columbia since 2007."

This AP story from 2009 describes the problems with the existing rules: they present "a frustrating quandary" for nonprofits, who "have the money they need to save jobs, offer scholarships and put on a solid schedule of programs, but face state laws that keep them from using any of it." The new law eliminates the bright line "underwater" rule and gives nonprofits more flexibility when it comes to endowment spending. Felix Salmon discussed this issue in the context of the Brandeis-Rose controversy here.