State Law Rewards Profligate Charities

To the Editor:

In my opinion, Susan N. Gary’s October 15 letter (“What It Means to Use Endowment Money Wisely”), designed to clarify the Uniform Institutional Management of Funds Act, known as UMIFA, and its successor, the Uniform Prudent Management of Institution Funds Act, or UPMIFA, needs much further clarification. It is true, as she says, that “in the 1960s, most people assumed that ‘income’ for an endowment meant trust accounting income. The trust accounting rules defined income as interest, dividends, rents, and royalties and assigned all capital gains to principal. An endowment that could only distribute ‘income’ might be tempted to invest primarily in bonds to generate interest.”

But any sophisticated investor knows it is not necessarily true that “a decision not to invest in stocks meant more income in the short term, but also meant that the value of the fund eroded over time.”

Many fortunes have been made by fixed-income investors.

UMIFA did, as UPMIFA would, authorize a charity to spend appreciation without limit, both realized and unrealized, but that could well be imprudent. If all appreciation were spent, the value of the fund would surely “erode over time.” Worse, consider the consequences if unrealized appreciation is spent, and the securities later incur losses.

I am not a big fan of historic dollar value, if only because most charities’ accounting systems cannot, and perhaps should not, keep accurate track of securities’ basis over long periods of time. But historic dollar value does have the virtue of attempting to preserve the value of the original gift, as the donor of an endowment no doubt intended. And it may help restrain the profligate charities that UPMIFA would reward for their profligacy by letting them spend corpus.

Ms. Gary is less than candid, in my opinion, in her statement, “When a donor says, ‘pay only the income,’ the donor has not clearly indicated what that means,” especially since the quote from her letter in the first paragraph of this letter perfectly expresses what my 50-plus years of law practice tells me. Donors know perfectly well what “endowment” and “income” mean. Most donors will not be aware that both UMIFA and UPMIFA redefine “endowment” not to mean what they think it means, and those donors that are aware will have to use lawyers, if they want to ensure that their intent is respected.

When The Chronicle talked about UPMIFA giving charities “wiggle room,” in its September 17 article, it was being kind. UPMIFA is a terrible statute, which is why the New York State Assembly’s Corporations Committee is drastically revising it. For but one further example, UMIFA said the governing board may delegate investment authority to, among others, independent investment advisers, investment counsel or managers, banks or trust companies. These are regulated professions. UPMIFA authorizes investment authority delegation to an “external agent,” not defined.

Want more Madoffs, more legal bills, more abuses of donor intent? Enact UPMIFA.

William Josephson
Fried, Frank, Harris, Shriver & Jacobson
New York

Mr. Josephson served as assistant attorney general-in-charge of the Charities Bureau at the New York State Law Department from 1999 to 2004.