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Reporting on Underwater Endowments

By Jan McGuire

If you worked in fundraising during or immediately following the economic downturn of 2008-2009, you were probably hoping that you wouldn’t have to deal with underwater endowments again during your career. I certainly was, but unfortunately, we find ourselves once again amid economic uncertainty.

Reporting on underwater endowments can be challenging. For the newcomers to the field, “underwater” means the market value of the fund is below the book value or historic value/original gift amount. Here are a few things to familiarize—or re-familiarize—yourself with and to keep at the forefront of discussions with your leadership as you prepare endowment reports.

  1. Your organization’s response to UPMIFA The Uniform Prudent Management of Institutional Funds Act, more commonly known as UPMIFA, allows nonprofits to prudently spend funds from underwater endowments with the requirement of protecting the long-term use and value of the fund. The passage of UPMIFA was a saving grace to many nonprofits as the principal of an endowment was previously unusable. It was common practice to include language such as "principal will never be used" or "distribution will be limited to earnings" in donor endowment agreements. There are variances in how UPMIFA was ratified from state-to-state, so take some time to familiarize yourself with your state's adaptation. It is also pivotal to find out how your organization embraced UPMIFA. For example, did your governing board create standing policies for underwater endowments? Some boards took steps to develop tiered spending policies. These policies specifically outline how distribution will occur based on how far underwater a fund is and may even put a cap on where distribution ceases, meaning a fund could be so far underwater that no distribution will occur even with UPMIFA permissions. You may want to include or at least reference these policies in your reporting, so donors are informed of what occurred with their fund.

  2. The donor correspondence your organization used related to UPMIFA, the subsequent record-keeping, and your current agreement language. Donors who had existing endowments when UPMIFA was passed were notified of the change and asked to provide their consent to applying it to their fund. If you weren’t working at your institution during those times, review the donor correspondence and subsequent record-keeping that occurred. Is it clear in your CRM or other systems which donors agreed to UPMIFA and which donors said no to giving consent? What about the donors who did not respond at all to the modification request? Many organizations take the approach that a lack of response within a reasonable timeframe (ex. 90 days) means the modification will occur, but how was that handled and documented within your organization? And when was the use of restrictive language in endowment agreements – such as the examples mentioned above – discontinued and what was the replacement language?

  3. Identifying funds that won’t distribute and how you’ll report on them, not to mention the impact they will have on your organization. No matter when you report on endowments, now is the time to look into funds that will potentially not distribute and what this could mean to the programs the funds support. Look into funds where the donor refused to give consent to UPMIFA. Share this list of donors will the associated gift officers. Perhaps it's time for them to revisit the conversation with the donor or, at the very least, remind them of the underwater spending policies in place as may have been 10 or more years since the original conversations took place. In my own endowment reporting experience, during the recovery years following the economic downturn, we took the extra step of adding a note on the financial statement for these funds. Again, these are the donors who refused consent to UPMIFA and whose funds were still underwater. Since the line on the financial report for distribution reflected a big fat goose egg, we added an explanation. In essence, we assured the donor that we were honoring their intent, and we were not making a distribution per their wish. We added a contact name and phone number for more information, and what do you know? A few donors changed their minds and agreed to UPMIFA for future years, and some made contributions to the spendable account to make up for the shortfall.

I’m not even going to touch on if your organization pursued court approval (cy pres) to ratify endowments funded by donors who are now deceased because that's veering off course of endowment reporting, but while educating yourself, look into that one, too.

The bottom line is this: during times of economic uncertainty, your work in donor relations is even more crucial than usual. Educate yourself on your organization's policies, review your record-keeping, and evaluate your reporting strategies against industry best-practices. In these critical times, your knowledge and customer service—for your internal and external customers—is the value-add your organization needs most.

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