Patrick clears path for foundations to dip into endowments

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Gov. Deval Patrick has signed into law a measure that will enable organizations to spend more of their endowments, a move that nonprofit leaders say will help them stave off further program cuts and layoffs.

The Uniform Prudent Management of Institutional Funds Act, or UPMIFA as it is known, updates current endowment laws that are decades old and focuses on the management, investment and expenditure of restricted funds donated to nonprofits.

The ability to spend a greater amount of their endowments is the most immediate change the new law would bring to nonprofits, but it also sets a number of standards aimed at protecting the original intent of donors and encouraging prudent management of investments. The law also would simplify the process of releasing restrictions on endowment funds whose purpose is no longer relevant and for those that are smaller and older.

Thirty-six states have approved similar legislation, and proponents in Massachusetts say they hope to have a new law in place by June 30.

The biggest push for the legislation came from Mass Audubon with support from 14 other organizations specializing in the arts, education and the environment. Mass Audubon has lost 28 percent of its endowment and, out of its 260 funds, one-third of them are “underwater” — valued at less today than they were at the time of the original gifts.

Under current law, an organization can spend a portion of a fund’s appreciated value, but it cannot dip into a fund’s original value without donor approval. For example, if a donor gives a $10,000 restricted gift to a nonprofit, the organization can spend a certain amount of what it earns on that money, but not any of the original $10,000.

Under the new legislation, organizations would be able to dip into the original value of the fund up to an amount its managers deem prudent, according to guidelines in the proposed statute. The organization’s managers also would need to consider donor intent.

Although it sets out standards of prudence for how endowment funds should be spent, the legislation would remove a clear line that exists in current law: a 7 percent spending limit based on the total fair market value of an endowment fund, calculated over three years. Without a spending limit specifically articulated in the new law, it would be up to fund managers and boards of directors to decide how much spending of an endowment is enough or too much.