NYPMIFA – what does this strange acronym mean? These seven letters are used to abbreviate the New York Prudent Management of Institutional Funds Act. NYPMIFA is not something completely new to us. This legislation was signed into New York State Law by Governor Patterson on September 17, 2010 and relates to the Uniform Prudent Management of Institutional Funds Act (“UPMIFA”). UPMIFA provides guidance regarding investment management and spending. UPMIFA strives to promote a total return approach to spending, similar to that of the total return approach to investing. UPMIFA supports investing at a rate that will preserve the purchasing power of the principal over the long-term, while spending at a rate that will reflect the donor’s intentions.
How is this affecting the nonprofit sector? One, it enables nonprofits to spend from endowments whose fair values have dropped below the original gift level, so long as the spending is deemed prudent by the nonprofit. And two, it creates restrictions on any earnings in excess of the spending policy, even in the absence of a donor restriction. In other words, should the Board establish a spending policy noting up to 3% of earnings can be used by the organization and the investment returns turn out to be 10%, the extra 7% of earnings would be treated as a temporarily restricted amount until appropriated.
In passing NYPMIFA, New York State has adopted much of UPMIFA’s standard principles, but with three major differences. The first difference relates to its requirements surrounding written policy. NYPMIFA requires the Board to develop formal spending and investment policies, and also to review those policies on an annual basis. Additionally, there are eight standards of prudent spending outlined by NYPMIFA. Nonprofits are required to have a written policy describing how those standards have been adopted. The second difference relates to NYPMIFA’s presumption of imprudence. The Act believes that a nonprofit’s spending would be considered imprudent if it spends more than 7% of the endowment’s market value, which is to be measured on a quarterly basis and calculated over a period of no less than the preceding five years. The third and last major difference relates to written notification. NYPMIFA, unlike any other state’s version of UPMIFA, requires nonprofits to notify their existing endowment donors, in writing, for approval to spend below the original gift amount. The Act specifies the required language to be used when notifying donors as well as guidelines for the notification itself. Nonprofits must allow donors a 90-day window to respond to the notice before encumbering endowment funds for the first time under NYPMIFA. A donor is considered “available” under NYPMIFA if the individual is living (or if the donor is an institution, is in existence) and can be located and identified with reasonable efforts. However, notification is not required if (1) the gift instrument already allows for spending below the fund’s historical value, (2) the gift instrument specifically limits the nonprofits ability to encumber or accumulate funds, or (3) the endowment is the result of a gift which was part of a solicitation/ funding originated by the nonprofit.
So, what does this specifically mean for your nonprofit? Donor intent documented in a gift document must always be respected. If the donor is silent as to appreciation and spending rules, NYPMIFA then comes into play. Boards will have to set specific spending policies in place that either call for the preservation of endowment funds or prudent spending of endowment fund assets as outlined by NYPMIFA. Should the Board choose to spend endowment funds as it deems prudent, it must act in good faith and exercise care while considering, if relevant, the following factors:
- the purpose of both its organization and the endowment fund;
- the duration and preservation of the endowment fund;
- the overall economic environment;
- the organization’s investment policy;
- the anticipated investment return on the endowment;
- the possible impact of inflation or deflation;
- other resources that may exist within the organization; and
- if appropriate and necessary, alternatives to spending of the endowment fund and the impact such alternatives may have on the organization.
For each of the aforementioned factors, the organization must maintain contemporaneous records of the Board’s decision, the consideration given, and, if applicable, the action taken.
Let’s recap, because this is not a simple subject.
- NYPMIFA advocates for stronger protocols on investment management and requires prudence from the Board in investing institutional funds held in endowments or for investment purposes. It requires nonprofits to have formal investment policies that consider factors such as economic conditions, inflation rates, tax implications, and others noted within this article.
- In an effort to try to preserve organizational assets, many nonprofit Boards take a very conservative approach to investments by keeping them all in certificates of deposits or U.S. Treasury securities. Pursuant to NYPMIFA and the need for prudent consideration of the factors outlined above, this may no longer be an appropriate way of handling an organization’s investments. NYPMIFA requires the diversification of investments; unless the Board determines special circumstances exist that deem doing so inappropriate. Such a decision should be documented and is required to be evaluated annually.
- Should a nonprofit decide to utilize the services of an external investment advisor for management of its institutional funds, the Board must exercise care in selecting and monitoring the advisor. This is inclusive of ensuring no conflicts of interest exist, establishing the advisor’s role and level of control, and monitoring performance results.
- Prior to NYPMIFA, a nonprofit had to obtain approval from the donor or would have to resort to soliciting the supreme court in its jurisdiction or the surrogate court where the will was probated (for an intestate donation) if the nonprofit wanted an endowment released. Thankfully, NYPMIFA provides some level of flexibility in dealing with funds that have become obsolete, wasteful, impractical, or impossible to effect. Now, under NYPMIFA, an organization can either get donor consent or obtain a modification by a court. This doesn’t seem to be much of a change; however, the difference is should the donor decide not to consent to a release or modification of a restriction, the organization is no longer barred from soliciting the court. In either case, the donor and State Attorney General must be given notice. NYPMIFA also allows nonprofits to modify or release donor restrictions without receiving judicial approval, upon 90 days’ notice to the Attorney General, if (1) the fund’s value is under $100,000, (2) the fund has existed for more than twenty years, and (3) the proposed use of the fund after release is consistent with the purpose outlined in the original gift.
- NYPMIFA also requires that an organization soliciting new endowment funds include a statement in its solicitation materials, unless otherwise restricted by the grant instrument, noting that the nonprofit may expend as much of the endowment fund as it deems prudent after considering the factors governing appropriation decisions set forth in NYPMIFA.
It is essential that nonprofit Boards and investment committees are well educated on the rules surrounding NYPMIFA to ensure that all of its provisions are properly being considered and implemented. Retaining qualified and experienced legal counsel to help navigate through the complexities of NYPMIFA may be a good first step to ensuring compliance.