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Spending and Management of Endowments under UPMIFA

The value of higher education endowments declined by approximately 19% on average between June 2008 and June 2009 and may have rebounded by 20% between June 2009 and 2010.

Even with gains during 2009 and 2010, the value of higher education endowments is still below their value in 2008, and the purchasing power of many higher education endowments has been significantly eroded.

The main change made by UPMIFA is the elimination of the concept of “historic dollar value” or HDV as the default amount of an endowment fund that must be preserved in perpetuity in the absence of specific donor stipulations as to spending or accumulation.

Over the past three years, adoption of the Uniform Prudent Management of Institutional Funds Act (UPMIFA) has fundamentally changed the regulatory context in which boards make decisions regarding spending from underwater endowments. In 2010, AGB surveyed 207 colleges, universities, and affiliated foundations, providing the only national data on the ways higher education boards are managing spending under the new law and providing college and university boards and executives with important insights into the ways spending and governance practices are evolving.

The value of higher education endowments declined by approximately 19% on average between June 2008 and June 2009 and may have rebounded by 20% between June 2009 and 2010, resulting in significant erosion of the purchasing power of many higher education endowments from June 2008 levels. AGB’s survey demonstrates that UPMIFA has enabled institutions to provide ongoing support for endowed purposes during a period of unprecedented financial hardship. It also suggests that UPMIFA has encouraged governing boards of colleges, universities, and affiliated foundations to devote increased attention to endowment spending and develop increasingly sophisticated and supple decision-making practices.

Perhaps the main change made by UPMIFA is the elimination of the concept of “historic dollar value” or HDV as the default amount of an endowment fund that must be preserved in perpetuity in the absence of specific donor stipulations as to spending or accumulation. UPMIFA replaces this rule with a more carefully articulated standard of prudence and enumerates seven factors boards should take into account when making spending decisions. This has provided boards with greater flexibility to distribute funds from “underwater” endowments (accounts that have fallen below HDV) but has also forced them to develop new processes for making decisions regarding spending and accumulation. Although UPMIFA does not specify an amount that must be set aside as principal, it emphasizes the perpetuation of the purchasing power of the fund, and new accounting standards (addressed below) require boards to define amounts of funds to be classified as permanently restricted.

Key Findings of AGB’s UPMIFA Survey

On average, underwater funds accounted for 22.4% of the total value of endowment funds held by colleges and universities for the fiscal year ending June 30, 2009 (NCSE data, from the NACUBO-Commonfund Study of Endowments). 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:

  • 46.9% 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% are discontinuing all distributions from underwater funds, a decrease of 16.4 percentage points from practice prior to UPMIFA;
  • 9.7% are distributing only interest and dividends, a decrease of 7.2 percentage points from practice prior to UPMIFA;
  • 12.5% employ a threshold or tiered approach to spending or some other flexible methodology; and
  • 6.8% 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% of institutions and foundations that previously discontinued all distributions or distributed only interest and dividends from underwater endowments adopted a new spending approach likely to yield greater 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% of boards approve decisions regarding spending from underwater funds;
  • 68.2% of institutions have some formal policy addressing spending from underwater funds; and
  • 48.3% of boards document decisions regarding underwater funds in their minutes.

How has UPMIFA changed the regulatory context in which boards make decisions regarding spending from underwater endowments?

What is the value of greater flexibility to boards in their decision making about endowments?

Should endowments adopt new spending approaches that are likely to yield greater ongoing distributions supporting endowment purposes?

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