Legal and Accounting Challenges of Underwater Endowment Funds
Probate & Property Magazine: January/February 2010, Volume 24, Number 1
By Susan E. Budak and Susan N. Gary
Susan E. Budak, a former project manager of the FASB, is a consultant and author specializing in accounting issues of interest to not-for-profit entities. Susan N. Gary is the Orlando J. and Marian H. Hollis Professor of Law at the University of Oregon School of Law.
The widespread adoption of the Uniform Prudent Management of Institutional Funds Act (UPMIFA) across the country has already been of great help to charities, in part because the financial markets collapsed just months after the uniform act was approved. Most, if not all, endowment funds created in the past six years are "underwater"—a phrase used to indicate that the fair market value of the investments in a particular endowment fund is less than the value of the gift that originally created that fund. Many older funds may also be underwater or approaching that condition. Under laws that had been in effect in many states, the amount a charity could spend from an underwater fund was limited, and, had UPMIFA not been adopted, charities that depended on their endowments to fund a significant portion of their operations would have been severely hampered in their ability to provide services.