Hannah Rogge, Financial Planning: Is my charitable donation being managed responsibly?
If you’ve ever made a donation to a charitable organization, you may wonder what happened to that donation. Are any regulations in place to ensure that the funds you entrusted to that charity were invested and spent responsibly?
Fortunately, the answer is yes. The Uniform Prudent Management of Institutional Funds Act addresses the management of assets held by charitable organizations and provides guidelines for investing and spending from an endowment.
UPMIFA was created in 2006, and has since been adopted by 49 states, including California. Its guidelines apply to institutions organized exclusively for charitable intentions, including organizations established for educational, religious, scientific or literary purposes, or other similar noble causes. Under UPMIFA, charities must create written investment policies to provide a framework for investing the endowment in accordance with the act. These policies include investment strategies that address risk management, monitoring procedures, and processes for the review and amendment of the policies as necessary. Charities must also create clear spending policies that incorporate a number of considerations outlined in UPMIFA.
Charitable organization endowments are typically managed by an investment committee, which may include members of the organization’s board of directors. Members of the investment committee are responsible for overseeing and safeguarding the charity’s assets, but they may not have the financial expertise needed to do so effectively. As such, most investment committees employ financial consultants to manage their investments. While committee members still act as fiduciaries in overseeing the activities of investment consultants, the consultant also takes on the fiduciary duty. Both parties must adhere to the provisions of UPMIFA.
UPMIFA requires the investment committee to invest their endowment assets in the manner expected of a prudent person: with caution, skill and care. Investments must be well-diversified to minimize risk and should be invested with both current and future needs of the organization in mind. The organization should incur only reasonable investment-related costs, and should make reasonable efforts to verify any relevant facts related the investments. The act also provides factors to consider when making investment decisions, including economic conditions, the impact of inflation or deflation, tax consequences (if applicable), the role of each investment within the greater portfolio, the expected total return on the investments, the organization’s other resources and the preservation of capital.
UPMIFA also specifies factors the committee should consider when determining their annual spending from the endowment: many of the same considerations listed above, as well as the intended duration of the fund (often, in perpetuity), the purpose of the endowment, donor intent for the use of the funds and the investment policies of the organization.
California has adopted an optional provision, stating that withdrawal rates greater than 7% of the fair market value of the endowment, averaged over three years, is considered imprudent. While this provision protects against spending down an endowment too quickly, it may impede the institution’s ability to respond to inflation.
Under UPMIFA, charitable organizations may spend a prudent amount from the endowment, even when the value of the fund has fallen below its historic dollar value (such as the value of the initial donation). Previously, organizations with “underwater” funds like this were unable to spend below that historic dollar value and could therefore only distribute current income. This resulted in institutions being unable to fulfill their charitable obligations and incentivized investment committees to invest towards income generation instead of long-term growth. As an example, consider a charity created just before the 2008 financial crisis. It would have seen its investment portfolio drop significantly below the value of any donated funds. Prior to the adoption of UPMIFA, that organization’s ability to fulfill its charitable mission would have been significantly impeded. However, under these latest changes, UPMIFA encourages charities to focus on long-term outcomes and to honor the intent of the donation to support charitable causes despite short-term investment losses.
UPMIFA has provided charitable institutions with the flexibility needed to implement modern investment techniques and adopt more strategic approaches for investing and spending. It also protects donor intent, ensuring that donations support the charitable mission of the institution in perpetuity.
Hannah Rogge is a senior wealth advisor at Monterey Private Wealth, Inc., an independent wealth management firm in Monterey. She welcomes questions you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Hannah Rogge, 2340 Garden Road Suite 202, Monterey, CA 93940 or email hannah@montereypw.com.
