Kay Francis has recently been appointed director of the foundation for a private university located in the state of Michigan. She is intent on learning as much as she can about the foundation’s responsibilities concerning the management and investment of the endowment and other contributions received by the foundation. In particular, she has questions concerning UPMIFA and its impact on the operation of the foundation.
The foundation is a not-for-profit organization of the university and operates solely for the benefit of the university. It receives substantial support in the form of annual contributions and endowments from alumni. There are two items related to its endowment funds about which Ms. Francis has concerns. The first is the spending rate established by the foundation. Currently, the spending rate is set at 3 percent, and it appears that this rate has been in effect for a very long time. To Ms. Francis, this rate seems somewhat low given that the total return to the foundation’s portfolio has been between 8-10 percent for the last ten years.
The second concern is an endowment that is 50 years old. The endowment document indicates that the income generated by the endowment is to be used to fund research and scholarship related to fossil discoveries along Lake Michigan.
The problem is two-fold: (1) the donor has passed away, and (2) the paleontology department was one of the departments eliminated in the budget cut 10 years ago. As a result, the endowment fund has been collecting income on investments but has been unable to spend any of the income to carry out the purpose of the endowment.
Ms. Francis has asked you to provide her answers for several questions she has related to this information.
a. Are organizations in Michigan subject to UPMIFA?
b. Is the foundation subject to UPMIFA? Explain why or why not.
c. Is the spending rate (3 percent for the foundation) set by UPMIFA? If it is, is there flexibility in determining the rate? If not, what does UPMIFA say about spending or expenditure of funds?
d. In accordance with UPMIFA, what recourse is available with regard to the 50-year-old endowment?