Enrollment at many private schools has seen a downturn, forcing schools to become more aggressive with their scholarship programs. In order to still have the necessary cash flow, many schools have established endowments to help fund these scholarships. While this can help to close the gap in funding created by more aggressive scholarship programs, it also opens these schools up to greater regulations under the New York Prudent Management of Institutional Funds Act (“NYPMIFA”).
NYPMIFA is not a new law; its been around since September 17, 2010, when it was enacted into law. The problem is that many schools have not really focused on the regulations pursuant to NYPMIFA for some time now. NYPMIFA governs the management and investments held by nonprofits and it provides information on spending for nonprofit organizations. NYPMIFA requires nonprofit schools to have in place compliant investment and spending policies. In addition, NYPMIFA requires a formal review of the school’s decisions regarding their investments and endowments, with such review memorialized at the Board level.
On at least an annual basis, the Board, or a designated committee of the Board, should review the school’s investments to determine if the current investment strategy is prudent, given the needs of the school, the resources available, and the general economic conditions the school is operating under. NYPMIFA requires schools to review their investments across 9 criteria:
- The general economic conditions that exist;
- The possible impact of inflation or deflation;
- The expected tax consequences, if any, of investment decisions or strategies;
- The role that each investment plays within the overall investment portfolio;
- The expected total return (inclusive of unrealized gains and losses);
- Other resources that exist within the school (such as cash balances);
- The needs of the school and the funds available to make distributions and preserve capital;
An asset’s special relationship or value, if any, to the purpose of the school; and
- Funds must be diversified, unless the institution prudently determines that, because of special circumstances, the purpose of the fund is better served without diversification.
This analysis of a school’s investments should occur annually, should be documented, and should be ratified by the school’s board. When considering the requirements under NYPMIFA, schools must remember that cash and money market accounts are investments and need to be considered under NYPMIFA the same way that other investments do. Furthermore, NYPMIFA looks at the prudency of a school’s investments. When considering whether an investment strategy is prudent, school management needs to consider both that a portfolio can be too aggressive or too conservative.
Endowments are permanent gifts provided to a school by a donor that seeks the preservation of the corpus for the long-term benefit of the school or a specific purpose within the school. Endowments are governed by the donor’s gift instrument as to how the corpus of the funds can be utilized (corpus can or cannot be invaded). If the gift instrument is silent, the board can govern how the endowed funds will be used pursuant to NYPMIFA. The Board’s direction should be spelled out within the school’s spending policy. NYPMIFA provides that there are two ways that endowed funds can be treated:
- The corpus of the endowment is held in perpetuity and only income earned by the endowment can be utilized, providing it is appropriated by the school’s board; or
- The corpus of the endowment can be invaded based upon a formal spending policy established by the Board and appropriation by the school’s board
In order for endowed funds to be utilized, they must be appropriated by the school’s Board. Appropriation does not require funds to be expended or even segregated, it just provides for the release of the funds for their intended purpose.
In deciding whether or not to appropriate funds, the Board, or its designated committee, must consider the following factors:
- The duration and preservation of the endowment fund;
- The purpose of the endowment funds and how it relates to the school’s mission;
- General economic conditions;
- The impact of inflation/deflation;
- The expected total return on investments;
- Other resources of the school;
- Where appropriate and circumstances would otherwise warrant, alternatives to expenditures of the endowment fund giving due consideration to the effect that such alternatives may have on the institution; and
- The investment policy of the school.
The school must make a contemporaneous record of its consideration of these factors in its decision to either accumulate funds within the endowment or appropriate the funds for release and use. A separate assessment should be made for each separate fund or endowment. Furthermore, the decision should be clearly outlined within the minutes of the Board/Committee.
Finally, when your school solicits endowment funds, NYPMIFA requires the following specific wording to be included in all such solicitations:
“Unless otherwise restricted by the gift instrument pursuant to N-PCL § 553(b), the institution may expend so much of the endowment fund as it deems prudent after considering the factors set forth in N-PCL § 553(a).”
NYPMIFA is a New York State law, so if your school doesn’t comply with its regulations, it could have significant ramifications. Take the time to review NYPMIFA and ensure that all provisions have been considered and that all the appropriate documentation is in place.
Kenneth R. Cerini, CPA, CFP, FABFA
Ken is the Managing Partner of Cerini & Associates, LLP and is the executive responsible for the administration of our not-for-profit and educational provider practice groups. In addition to his extensive audit experience, Ken has been directly involved in providing consulting services for nonprofits and educational facilities of all sizes throughout New York State in such areas as cost reporting, financial analysis, Medicaid compliance, government audit representation, rate maximization, board training, budgeting and forecasting, and more.