Bill May Allow Flexibility

Massachusetts lawmakers may soon consider a bill that would revise outdated investment guidelines for charities and endowments, giving institutions like Harvard greater flexibility to manage funds that the current economic climate would otherwise put off-limits.

Known as the Uniform Prudent Management of Institutional Funds Act, the legislation would aid universities by eliminating the “historic dollar value” rule currently in effect in Massachusetts. The rule, a product of legislation dating from the 1970s, prevents institutions from spending from a particular endowment fund if its value falls “underwater”—below levels pegged to a specific point in time, such as the donor’s date of death.

University spokesman John Longbrake was slow to acknowledge the problem that such “underwater funds” may pose as the current financial crisis brings unprecedented losses to the University’s endowment, saying only that it was “probable that [Harvard] will see underwater [endowment] funds” in the current fiscal climate.

But Faculty of Arts and Sciences Dean Michael D. Smith spoke explicitly of the problem presented by underwater funds at a November 18 faculty meeting, and University budget officials have been drawing up budgets for the coming year with these limitations in mind.

While UPMIFA would not allow affected institutions to spend freely from underwater funds, it would offer some breathing room—giving a place like Harvard “more flexibility to spend money for its core purposes,” according to Michael R. Kerr, legislative director for the Uniform Law Commission, which drafted UPMIFA.

The legislation, introduced in 2006 and now approved in 25 states, is likely to be presented to the Massachusetts legislature early this year, according to Kerr.

“We’ve been getting an awful lot of inquiries about [UPMIFA], and we’re going to be talking about it to the folks on the ground there,” Kerr said. “There’s a reasonable chance that we’re going to run it this session.”

The current economic downturn has put several funds at risk of going “underwater,” and therefore helped provide an impetus to pass UPMIFA, Kerr said.

The Uniform Law Commission held a meeting in 2008 with officials from various universities to discuss the legislation, according to Kerr. Kerr said officials from several area schools including Emerson, Tufts, Boston College, and Harvard expressed interest in receiving materials and additional information, but he was unsure if they attended the conference in person. In interviews with The Crimson, Harvard officials have not acknowledged any familiarity with the legislation.

UPMIFA was originally drafted following the collapse of the “dot-com bubble” in the early 2000s, Kerr said. Newly wealthy individuals transferred funds to foundations, only to see the value of these gifts plummet with the stock market—thereby rendering them unusable. The current economic crisis is in some ways a “repeat of the doc-com bust, but more widely spread,” Kerr said.

“There are an awful lot of community organizations, non-profits, endowments, that very much want to keep going at their mission, even though stock market reversals in the past year may have left funds near or under historic dollar value,” Kerr said. “This is one of the pressures out there to see UPMIFA widely adopted.”

—Staff writer Peter F. Zhu can be reached at pzhu@fas.harvard.edu.