Changes to Spending from Restricted Funds in Pennsylvania

On July 23, the governor of Pennsylvania signed into law PA 2020 Act 71, which provides not-for-profit organizations additional flexibility with their spend. The Act modifies Pennsylvania’s existing version of UPMIFA (PA Act 141, which permits spending of no less than 2% and no greater than 7% per year) as follows:

(iii) The board of directors or other governing body shall, in selecting a percentage, consider both the long-term preservation of the real value of the assets and the corporation’s need for capital to fulfill its mission, and may select a percentage of not more than 10% per year. This subparagraph shall only apply during calendar years 2020, 2021 and 2022, or for the corporation's fiscal years that end during those calendar years.

The changes only impact organizations that have elected to be governed under PA Act 141 and Act 71, and does not apply to gift or other instruments with specific spending policies.

As both Acts note, organizations are required to find a balance that considers “both the long-term preservation of the real value of the assets and the corporation’s need for capital to fulfill its mission.” With recent challenges brought about by the COVID-19 pandemic, access to spending additional funds may be helpful, but organizations should still carefully evaluate current needs against the goal of the long-term nature of the funds they maintain, since these funds are typically established by donors and others with the objective that they be invested for the long-term sustainability of the organization.

Some organizations that lack access to liquidity and capital through other means may be able to use the additional spend to meet needs during these difficult times. As always, robust documentation of the discussions that took place during the determination of revising your spend is advised to support your organization’s conclusion.

With this recent enactment, now is a good time to review not only your spending policy and related practices, but also your investment policy, to ensure it remains in sync with any changes. Investment policies typically contemplate a return that is aligned with both the impact of your spending policy and considerations like fees and inflation, to ensure long-term growth and preservation of the underlying assets. Any change to your spend should consider how it might impact your benchmark returns and achievement of your goals.

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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