Underwater Endowment Funds Cause Legal and Accounting Challenges

Susan E Budak (consultant and author) and Susan N. Gary (professor of law, University of Oregon) have published their article Legal and Accounting Challenges of Underwater Endowment Funds, Prob. & Prop., Jan./Feb. 2010, at 28.

 The introduction of the article is below: 

The widespread adoption of the Uniform Prudent Management of Institutional Fundsd 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, charties that depended on their endowments to fund a significant portion of their operations would have been severely hampered in their ability to provide services. 

Although UPMIFA’s new prudence standard allows charities to continue to spend from underwater endowment funds, the enactment of UPMIFA , when combined with the economic downturn, has caused challenges for charities when reporting the value of the endowment fund in their financial statements.