NYPMIFA – Eighteen Months Later!

Indeed, it has been a year-and-a-half since this landmark legislation established new financial and accounting rules for New York not-for-profit organizations (“NPOs”).  How time flies!

Overview: 

The New York Prudent Management of Institutional Funds Act (“NYPMIFA”) became law on September 17, 2010, effective for NPOs – including educational, religious, and charitable entities, as well as certain trusts with charitable interests – that are incorporated in New York State and have fiscal year-ends ending on or after September 30, 2010.  Since that time, the marketplace has been deluged with electronic and paper articles, brochures and newsletters explaining and commenting upon the law, including the interpretive guidance from the New York Attorney General.

In a nutshell, NYPMIFA addresses three principal areas of an NPO’s responsibilities for its “institutional funds”:

• the investment and management of those institutional funds, which are generally considered to be its cash and cash equivalents and its investment portfolio (but excluding its property, equipment, and other operational assets);
• the appropriation or spending of resources (and the related earnings) held as “endowment funds”1; and
• the release of donor restrictions on resources held as endowment.

So, to begin with, NYPMIFA has established specific guidelines with respect to the management of endowment funds and the related investment decisions.  In summary, all NPOs (including those entities, such as private foundations, which do not have “endowments” in the traditional sense) must now have formal investment policies relating to the use of their institutional funds (even if those are just cash checking accounts) that are maintained for investment purposes.  NYPMIFA sets forth a variety of conditions that must be considered for expenditure decisions (including general economic conditions, expected total return, the needs of the entity, the plans for diversification, etc.).  The policy must also be affirmed each year by the NPO’s governing board. 

With regard to endowment funds, a key element of NYPMIFA is the determination of when the governing board of an NPO has acted “prudently” with regard to its endowment.  Prior to September 2010, New York generally considered it prudent for an NPO to spend some percentage of the earnings of its endowment (e.g., interest, dividends, rents, etc.), as well as of its net capital appreciation – to the extent such appreciation was realized on the disposition of all endowment assets and unrealized on those assets that were readily marketable assets.  However, except for very unusual circumstances, it could not invade the endowment’s principal or HDV.

NYPMIFA, on the other hand, did away with the HDV benchmark and permits an NPO to “appropriate” for spending as much of the endowment fund’s assets as the governing board determines to be at a prudent level.  Thus, if the appropriate standards are met, the NPO may invade the historic endowment principal.

Moreover, as was the case before the new law, NYPMIFA permits the governing board to remove an endowment restriction, with the donor’s consent.  NYPMIFA then provides a methodology for sending letters to donors (to the extent they are living and can be reasonably reached), asking for a release from restriction.  For a fund older than 20 years and with a total value of less than $100,000 – and for which the donor’s consent is not available – the NPO may request a release from the Attorney General by submitting documentation that includes the NPO’s efforts at donor contact, an explanation as to why the donor's restriction has become untenable, and  the intended use of the fund if the restriction is released.

Some Frequently Asked Questions 

 Even with the efforts of accounting and law firms to assist their clients and other friends in understanding and complying with NYPMIFA, many NPOs’ governing boards and management teams have questions about the law’s applicability to their own circumstances and how they should respond. 

The following are some of the more frequently asked questions that have come our way:

Q:  An NPO has not yet finalized its investment policy in accordance with NYPMIFA, or notified donors with regard to their endowment restrictions.  Is it too late to comply?  How much trouble is the organization in? 

A:  Clearly, New York State intended for organizations to comply with the new law in a reasonable time frame. Our recommendation for those NPOs who have yet to meet NYPMIFA’s requirements would be, as soon as possible, (i) to complete the development of their investment policies (with governing board approval) and (ii) to determine the extent to which it has responsibility for notification of donors (and to start that process).  It may also be wise for the organization to seek legal counsel as to how to proceed.

Q:  Does a New York not-for-profit religious organization, which has no federal or state compliance filing responsibilities (except perhaps for unrelated business income tax), have to comply with NYPMIFA? 

A:  Yes.  NYPMIFA applies to all types of New York not-for-profit organizations, including educational and religious entities, as well as to certain wholly charitable trusts (although most such trusts that donate solely to charities are exempt). The law also covers trade associations and not-for-profit social clubs and welfare organizations.

Q:  NYPMIFA permits an organization to spend below the historical dollar value (HDV) of its institutional funds; accordingly, what amount, if any, should an NPO classify as permanently restricted net assets in its financial statements? 

A:  Absent explicit donor stipulations, an organization’s governing board must determine an amount that will allow the fund to be retained in perpetuity. In determining this amount, the board may consider such factors as the original gift amount, the effects of inflation on the fund, and the ability to maintain purchasing power (although NYPMIFA does not contain a specific legal requirement to maintain purchasing power).

Q:  If NYPMIFA permits an NPO to spend below historical dollar value, does that prevent a fund from going “underwater” (i.e., below HDV)? 

A:  No. The organization’s board must determine what amount should be retained in perpetuity and classified within permanently restricted net assets. Anytime the fair value of the underlying assets of a fund are less than the amount classified as permanently restricted net assets, the fund is considered to be “underwater.”

Q:  If during the year an endowment fund’s underlying assets are worth less than the amount held in perpetuity, and the fund is now underwater, how does the NPO disclose the fund in its financial statements? 

A: To the extent that the fund had unappropriated accumulated earnings in temporarily restricted net assets, the deficiency would be applied until such balance reaches zero. Any additional deficiencies would be shown in the unrestricted net assets column, in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification (ASC) 958-205-50 (formerly FASB Staff Position FAS 117-1).

Q:  If a donor of an endowment fund that was established prior to the enactment of NYPMIFA opts for the fund to be managed under the provisions of NYPMIFA, does the law’s “7% rebuttable presumption of imprudence” still apply? 

A:  No. The rebuttable presumption of imprudence applies only to new gifts received after September 17, 2010. However, an NPO’s board must still consider the law’s eight governing factors when determining whether to appropriate (and, if so, how much to appropriate).

Q:  If an NPO’s board approves the next fiscal year’s operating budget during the last quarter of the current fiscal year – and thus concurrently approves the appropriations from endowment funds – is the time restriction immediately released on those funds? 

A: No. In accordance with ASC 958-205-50, an appropriation may not occur until the year to which the approved operating budget (or other board action) applies.

Q:  The earnings from an endowment fund may be purpose-restricted by the donor.  Therefore, at the time of the board’s action, are the amounts appropriated immediately reclassified to unrestricted net assets? 

A: No. The action of appropriation releases only the time restriction on those funds’ earnings. However, once the earnings have been spent for the donor’s specified purpose, those amounts will be reclassified to unrestricted net assets through the standard “release from restriction” reporting process in the financial statements.

Q:  If an NPO was originally incorporated in a state other than New York, but is located and operates only in New York, do the requirements of NYPMIFA apply to that organization? 

A: No. That organization must follow the requirements of the version of UPMIFA (or other endowment-related legislation) in force in the state of its incorporation.

Q:  An NPO incorporated in New York has cash accounts but no investments or endowment funds.  Does the organization have any compliance requirements with respect to NYPMIFA? 

A: Yes. The organization must still comply with the investment policy requirements of NYPMIFA, even if it has no more than a single operating cash account.

Q:  If monies are appropriated but not yet spent, should those amounts be removed from the endowment disclosures in the NPO’s financial statements, as outlined by ASC 958-205-50? 

A: Yes. Appropriated but unspent amounts should be removed from the note disclosure for the endowment during the period for which they were appropriated. If those amounts are restricted for a specific purpose by the donor, they must reside in temporarily restricted net assets until spent. If no purpose-restriction exists, they may be classified as unrestricted net assets.

Q:  Should the total amounts reported in the endowment disclosures in the NPO’s financial statements agree to the fair value of an organization’s investments as reported in its statement of financial position? 

A: Not necessarily. If an NPO has other underlying assets as part of its endowment (e.g., cash, pledges receivable, etc.), the amounts of those assets would have to be added back to the investment balance in order to agree to the balance in the endowment note to the financial statements. Conversely, if an organization has operating funds (which are not considered to be either donor or board-designated endowments) included in their portfolio of investments, those amounts would have to be subtracted from the investment balance in order to agree to the note disclosure.

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1For accounting purposes, an endowment fund is an established group of cash, securities, or other financial assets, the use of which may be permanently restricted, temporarily restricted, or unrestricted.  However, endowments have been most usually considered to be established by donors (or through bequests) to provide a permanent corpus and an ongoing source of income for either specific or nonspecific purposes.

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As noted above, in March 2011, the Charities Bureau of the New York State Attorney General’s Office issued “A Practical Guide to the New York Prudent Management of Institutional Funds Act,” (http://www.charitiesnys.com/pdfs/NYPMIFA-Guidance-March-2011.pdf) which was intended to assist NPOs and their advisors in understanding and complying with the new law.  In addition to seeking guidance from its accountants and attorneys, the board or management of an NPO is always encouraged to reach out to Charities Bureau representatives for clarification of any NYPMIFA or other operational matter.