UPMIFA, the Uniform Prudent Management of Institutional Funds Act, was originally created to provide more relevant standards to help museums, universities, and nonprofit organizations manage their endowments. UPMIFA is a model state law drafted in 2006 to replace and update UMIFA, the Uniform Management of Institutional Funds, which was created in 1972.
Overall, UPMIFA rules provide more specific guidance regarding investment management and spending policies than UMIFA. UPMIFA’s revision of spending policy rules was designed to promote a total return approach to spending, similar to the total return approach to investing. The goals are to invest at a rate that will preserve the purchasing power of the principal over the long term as well as spend at a rate that, over the long term, will reflect the donor’s intentions.
UPMIFA significantly impacts nonprofits in two ways. First, it allows institutions to spend from an endowment whose market value has dropped below the donors’ original gift (referred to as underwater), as long as it is deemed prudent under the institutions’ policies. Second, it creates a restriction on all earnings in excess of the spending policy, even in the absence of a donor restriction. This is made even more significant by the issuance of FASB Staff Position 117-1 (FSP 117-1) a measure introduced in 2008 that provides accounting guidance and interpretation of UPMIFA. This interpretation requires that organizations determine the amount of previous unspent earnings on each endowment that is not donor restricted. These accumulated amounts then become reclassified as temporarily restricted under UPMIFA, one of the few instances where the law creates a restriction on funds.