Donor Groaner: Stealth Provision in NY State’s New Law for "Prudent" Endowment Spending

NY Assemblyman Jonathan Bing, whose district includes Metropolitan Museum

New York Governor David Paterson on Sept. 17 signed the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which I previously discussed briefly here. It took effect immediately.

Widely supported by museums (and sponsored by Assemblyman Jonathan Bing and State Senator Liz Krueger), the new law will allow financially challenged nonprofits leeway in withdrawing funds from "underwater" endowments---those that are valued at less than their original amounts at the time the money was given. Some 46 other states already have UPMIFA laws on the books, according to Bing and Krueger.

In his joint press release with Krueger, Bing said that he was "proud to author legislation which will allow these institutions to remain solvent during the economic downturn."

But what the press release fails to make note of are provisions in the new law (at S 555 in the text) that draw a roadmap for institutions seeking release from or modification of restrictions placed by a benefactor on the use of donated funds. These mischievous provisions closely track the legal doctrine of cy pres that was controversially (and, to my mind, wrongly) used by the Barnes Foundation, the Cleveland Museum and Fisk University to justify trashing donor intent.

The New York law invites institutions to apply for court permission to deviate from donor stipulations "if the restriction has become impracticable or wasteful, if it impairs the management or investment of the fund, or if, because of circumstances not anticipated by the donor, a modification of a restriction will further the purposes of the fund."

Donors ("if available") and the state attorney general must be notified of proposed deviations and must "be given the opportunity to be heard."

As for the widely publicized new rule allowing institutions to tap "underwater" endowments, there is some comfort for donors whose benefactions were made before the effective date of the law. Institutions are required to notify such patrons before relying on UPMIFA to dip into those funds. What's more, such donors must have a 90-day window for instructing the institution NOT to "spend below the original dollar value of my gift." Future donors, however, will have to specify this wish in the original terms of gift, to avoid an underwater dousing.

The law does stipulate that nonprofit cultural institutions and universities, in tapping endowments, must exercise "good faith" and "the care an ordinarily prudent person in a like position would exercise under similar circumstances." There's a lot of guidance in the law about what this means, but also a lot of leeway.

While endowment-tapping may be a necessary expedient in economically troubled times, the danger is that instead of helping an institution remain solvent, such withdrawals could serve to deplete resources to the point of no return.

Far more dangerous is providing legal encouragement for future disregard of donor intent. That enshrines bad institutional practice into bad law.