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UPMIFA could bring financial flexibility, but not reduce needs for budget cut

Published: October 9, 2009
Section: Front Page


Brandeis administrators are evaluating how the recent passing of a Massachusetts law governing endowment spending could affect the university’s financial policy. But even if the Board of Trustees adapts the university’s financial policy to the Universal Prudent Management of Institutional Funds Act (UPMIFA), the university will still need to implement budget cuts to close the university’s $9 million budget gap for fiscal year 2011.

UPMIFA, passed by the Massachusetts legislature on June 30, marks a change from the state’s previous law governing non-profit endowments which only allowed non-profits to spend endowment gains—not the principal.

Under the previous law, non-profit organizations could not spend below “the historic dollar value” of restricted gifts to the endowment, Senior Vice President for Administration and Finance Jeffrey Apfel explained to The Hoot.

This meant that the university could legally only spend returns gained from the gift adjusted for inflation and interest rates, but not the donation, which was intended to exist in perpetuity. Because many of the gifts to the university’s endowment were given not too long ago, the nation’s economic crisis had a large impact on the Brandeis endowment.

“Brandeis has a lot of restricted funds and our gifts are all young because our university is only 60 years old,” Apfel said. “So we didn’t have the benefit of our gifts aging from their historic dollar value. This means that under the old law, a more significant portion of our funds were underwater and inaccessible than other universities.”

Unlike UMIFA, UPMIFA, which has been enacted in 41 states and the District of Columbia, eliminates restrictions on the spending of principal. Under UPMIFA, “Subject to the intent of a donor expressed in the gift instrument…an institution may appropriate for expenditure or accumulate so much of an endowment fund as the institution determines is prudent for the uses, benefits, purposes, and duration for which the endowment fund is established.”

The act continues, “In making a determination to appropriate or accumulate, the institution shall act in good faith, with the care that an ordinarily prudent person in a like position would exercise under similar circumstances.”

In other words, under UPMIFA, the university could use any “prudent” amount of the “true” or restricted endowment. The Massachusetts version of UPMIFA does not provide any guideline for what “prudent” spending of an endowment would entail; however, the model version of the bill, originally written by the Uniform Law Commission and adapted by various states, creates what is called a “reputable presumption” that any spending over seven percent of an endowment would be imprudent. While that presumption is not law, it does set a guideline for non-organizations in other states.

Apfel said that to him, the five percent the university already spends of its endowment is “a prudent spending rate” and that “were we to adopt a plan under UPMIFA to spend, [we] certainly would not envision spending at seven percent.”

In addition to the “true” endowment, the university has a “fund functioning as endowment” or “quasi-endowment” that was created by the Board of Trustees roughly ten years ago when President Jehuda Reinharz and Executive Vice President and Chief Operating Officer Peter French decided the university needed more unrestricted funds in the endowment to increase the university’s financial flexibility. Because the quasi-endowment is essentially a reserve created by the Board of Trustees and invested by the Board, it has never fallen under UMIFA. As such, any or all of the quasi-endowment’s returns and principal can be used by the Board of Trustees for the budget at any point in time. For that reason, the quasi endowment is often referred to as the “reserve fund,” because it can be used for anything at any time, should the Board approve it.

“That’s why an unrestricted endowment is pure gold financially,” Apfel said. “The Trustees put that money in there, and can take it out to use for anything if we want.”

Before UPMIFA was passed, Apfel said, the university calculated the yearly draw from the endowment to support the budget by calculating five percent of the university’s entire endowment (including both the “true” and “quasi” endowments) – a figure that in fiscal year 2010 amounted to $40 million.

Ideally, Apfel said, the university should treat the quasi endowment as a true endowment and only use that five percent of the quasi endowment per year toward the budget in order to best sustain the fund. However, when the university’s financial crisis hit last fall, the university was forced to use $1 million from the quasi endowment in order to help close the university’s budget gap for fiscal year 2010.

If the university continues to take money from the quasi endowment as a manner of closing future budget gaps, however, the quasi endowment could run out. In fact, Apfel told last week’s faculty meeting that if the university did not make any budget cuts, the quasi endowment could run out by 2014.

“The quasi endowment was meant as a rainy day fund, but now it’s raining,” Apfel said.

The passing of UPMIFA could potentially help the university because it prolongs the life of the quasi endowment by allowing the university to take a portion of the restricted funds and treat them as unrestricted funds.

UPMIFA does not give the university any more money; it simply makes a greater part of the endowment accessible to the university for the budget. Because the university’s funds, therefore, are still relatively constant, Apfel said it would be financially irresponsible, or imprudent, for the university to use anymore than 5 percent of the endowment for the budget in a given year.

“UPMIFA doesn’t generate any new cash flow,” Apfel said. “It gives us more flexibility, because it slows down the rate at which we run down that reserve fund. UPMIFA changes the source of the money we use, not how much.”

Apfel and French are currently reviewing how UPMIFA could aid the university in this financial crisis, but have yet to present a plan to the Board of Trustees. No matter what plan they present, Apfel said, budget cuts will still be necessary in order to preserve both the quasi endowment and, under UPMIFA, the true endowment as well.

For fiscal year 2011, the five percent draw from the endowment comes to $31.1 million, with the drop (from last year’s $40 million) caused by the market decline in endowment investments, Apfel said. Because the university budget is accustomed to using $40 million from the endowment draw, the university needs to make up the $9 million gap in budget cuts.

“We can’t just take the extra $9 million from the endowment every year regardless of the returns,” Apfel said. “We use the five percent draw model to ensure we are operating responsibly. if we adopt UPMIFA and took more than five percent, we would run the risk of running down our entire endowment, not just the quasi endowment.”