Underwater Endowment Funds: Preparing the UPMIFA Conversation With AI
When a donor-restricted endowment fund falls below the value of the original gift, the board has a decision to make, and in most states the law no longer makes it automatically. Under the Uniform Prudent Management of Institutional Funds Act, a board may keep spending from an underwater fund if it concludes that doing so is prudent, but it has to consider specific factors, respect the gift agreement, and document its reasoning. This article explains what underwater means, how UPMIFA and the accounting rules treat it, how to frame the spend, pause, or reduce choice, and how AI can do the inventory, calculation, modeling, and drafting that make the board's conversation a real one. Counsel, auditors, and the board itself keep the final word.
Most nonprofit endowments are not a single pool of money. They are a collection of individual funds, each created by a particular gift, each with its own agreement, purpose, and history. A scholarship fund established in 2021 at the top of a strong market, a program fund created by a bequest in 2008, and a facilities fund seeded by a capital campaign may all sit in the same investment pool, but they carry different original gift amounts and different returns since inception. When markets fall, or when a fund was simply established at an unlucky moment, some of those funds can end up worth less than the dollars the donor originally gave. That is an underwater fund, and nearly every organization with more than a handful of endowed gifts will face one at some point.
The question an underwater fund raises is simple to state and hard to answer: should the organization keep taking its normal annual distribution from that fund, take less, or take nothing until it recovers? For decades the answer was largely mechanical. The older law prohibited spending below a fund's historic dollar value. Today, in every state except Pennsylvania, the answer belongs to the board, which must reach it through a prudence analysis rather than a bright-line rule. That shift gave boards real flexibility to keep supporting programs through downturns. It also gave them a real obligation to think, decide, and write down why.
In practice, that obligation often goes unmet. Finance committees approve a spending rate once and roll it forward. Nobody checks fund by fund whether anything is underwater. Gift agreements sit in a filing cabinet, unread since the gift was booked. The audit footnote gets drafted by the auditor from whatever the controller can produce in December. Accounting firms that work with nonprofit boards have been blunt that this is not good enough: PKF O'Connor Davies warns that if appropriation decisions and their rationale are not documented, the organization has not met the requirements of the act.
This is preparation work, and preparation work is where AI is genuinely useful. A capable model can help a small finance team inventory every endowed fund and extract the terms from each gift agreement, compute each fund's underwater amount from fund-level records, model what different spending choices do to programs and to recovery, organize evidence against each prudence factor, and draft the board memo, the minutes language, and the donor letters. What it cannot do is interpret your state's statute, sign off on your financial statements, or make the decision. This article walks through the substance first, then shows where AI fits. It complements our pieces on machine learning for endowment investing and tracking restricted funds with AI, which cover investment strategy and day-to-day restriction tracking respectively. It is general information, not legal or accounting advice.
What "Underwater" Actually Means
An endowment fund is underwater when its fair value on the measurement date is less than the original gift amount, or less than any larger amount the donor or the law requires the organization to maintain. The accounting definition, as summarized by PYA's review of underwater endowment accounting, uses exactly this comparison. The measurement happens fund by fund, not at the level of the whole endowment. A $10 million endowment that is up overall can still contain three funds that are underwater, because those three were established recently or received additional gifts at market peaks.
Consider an illustrative scholarship fund. A donor gave $500,000 in early 2022 to create a permanent endowment. The organization's pooled investments fell later that year, then partly recovered, and the organization took a 4% annual distribution throughout. By the end of the fiscal year the fund's share of the pool is worth $462,000. That fund is underwater by $38,000. Meanwhile, a $250,000 fund created in 2010 in the same pool is worth $410,000, comfortably above its original gift. Both funds participate in the same investments. Only one of them raises the spending question, and the board cannot see that difference without fund-level records.
Three details trip organizations up. First, "original gift amount" includes subsequent additions the donor made to the same permanent fund, so a fund that received a second gift needs both amounts in its baseline. Second, some gift agreements require the organization to maintain a value higher than the original gift, for example by adding a share of returns back to principal, and that larger required amount becomes the baseline. Third, board-designated funds, sometimes called quasi-endowments, are not donor-restricted at all. They can lose value, but they are not underwater in the legal or accounting sense because no donor imposed a perpetual restriction. Mixing them into the analysis confuses everyone.
Underwater status is also not a sign of misconduct. Funds go underwater because markets move, because spending continued through a downturn as policy allowed, or because a gift arrived at an unlucky time. What matters is whether the board knows which funds are underwater, by how much, and what it has decided to do about each one.
The data you need for each fund
Without these fields, no one can tell you whether a fund is underwater
- Fund name, donor, date established, and whether the restriction is perpetual or for a term
- Original gift amount plus every subsequent donor addition to principal, with dates
- Any donor-required amount to maintain that exceeds the original gift
- Current fair value of the fund's share of the investment pool on the measurement date
- Distributions taken in each period and the purpose they funded
- A link to the signed gift agreement or will provision that created the fund
From Historic Dollar Value to Prudence: What UPMIFA Changed
The Uniform Law Commission approved UPMIFA in 2006 to replace the 1972 Uniform Management of Institutional Funds Act, known as UMIFA. Under UMIFA, an organization could spend net appreciation on an endowment fund but could not spend below the fund's historic dollar value. An underwater fund was effectively frozen except for interest and dividends. That rule had the appeal of simplicity, but it produced odd results. A fund that was underwater by one dollar could distribute almost nothing, while a fund one dollar above its baseline could distribute fully, and organizations had little room to keep programs running during a downturn.
UPMIFA eliminated the historic dollar value floor. In its place, the act allows an institution to appropriate for expenditure or accumulate so much of an endowment fund as it determines is prudent for the uses, benefits, purposes, and duration for which the fund was established, acting in good faith and with the care an ordinarily prudent person in a like position would exercise. The goal shifted from protecting a nominal dollar figure to preserving the fund's purchasing power over the long term while still supporting its purpose. As Adler & Colvin's overview of endowment law explains, the concept of historic dollar value simply does not appear in the operative spending rule.
Adoption has been nearly universal. UPMIFA is law in 49 states, the District of Columbia, and the U.S. Virgin Islands. Pennsylvania has not adopted it and operates under its own statutory framework for charitable endowments, so Pennsylvania organizations need guidance specific to that state's law. Even among adopting states, the enacted text is not identical. States chose whether to include optional provisions, set their own thresholds for small fund releases, and in some cases added requirements of their own. New York, which adopted its version as NYPMIFA, is a notable example of a state that added detail.
The practical consequence is that "may we spend from an underwater fund?" is no longer a yes or no question answered by a statute. In most states the answer is "yes, if the board concludes it is prudent and the gift agreement does not forbid it." That answer is more useful to programs and more demanding of boards. A board that never discusses its underwater funds has not exercised the judgment the law now asks of it, even if its spending happened to be reasonable.
Check your state's enacted text. The uniform act is a model. What binds your organization is the version your state legislature passed, including any optional provisions and later amendments. Ask counsel to confirm which version applies, especially if your organization is incorporated in one state and operates or holds funds in another.
The Seven Prudence Factors and the 7% Presumption
UPMIFA does not leave prudence undefined. Section 4 lists factors the board must consider, if relevant, when deciding whether to appropriate or accumulate endowment assets. Truist's summary of the act lists them as the duration and preservation of the endowment fund, the purposes of the institution and the fund, general economic conditions, the possible effect of inflation or deflation, the expected total return from income and appreciation of investments, other resources of the institution, and the investment policy of the institution. These factors apply to every appropriation decision, but they become especially pointed when a fund is underwater, because the tension between current spending and long-term preservation is no longer theoretical.
Each factor invites a specific line of evidence. Duration and preservation asks whether this is a perpetual fund and how long recovery might take at different spending levels. Purposes asks how central the funded program is and what happens to beneficiaries if the distribution stops. Economic conditions and inflation ask what the investment environment looks like and how much purchasing power the fund has already lost. Expected total return draws on the investment committee's or advisor's capital market assumptions. Other resources asks whether unrestricted reserves, other restricted funds, or new fundraising could carry the program for a year. Investment policy asks whether the fund's allocation is consistent with its time horizon and spending rate.
Some states go further. New York's statute, for example, adds an eighth factor, alternatives to spending from the fund where circumstances warrant, and requires the institution to keep a contemporaneous record describing the consideration the board gave to each factor for every appropriation decision. That record requirement is the clearest statement in any statute of what good practice looks like everywhere: a written account, made at the time, of how the board weighed each factor.
The uniform act also contains an optional provision that a minority of states adopted. Under it, appropriating more than 7% of a fund's fair market value in a year, measured using a multi-year average of quarterly values, creates a rebuttable presumption of imprudence. The details vary. New York applies its 7% presumption to gift instruments executed after the law took effect and averages values over at least five years. Two points are worth emphasizing. Spending at or below 7% does not create a presumption of prudence, so a 4% rate still has to be justified by the factors. And a presumption is rebuttable, meaning a board that documents good reasons can spend above the threshold, though it should expect to be asked about it.
The prudence factors
As listed in the uniform act; your state may add more
- Duration and preservation of the fund
- Purposes of the institution and the fund
- General economic conditions
- Possible effect of inflation or deflation
- Expected total return from income and appreciation
- Other resources of the institution
- Investment policy of the institution
Questions for counsel
Get these answered before the board meeting, not during it
- Which state's version of UPMIFA governs our funds?
- Did our state adopt the 7% presumption, and how is the average computed?
- Does our state add factors or record-keeping requirements?
- Do any older gift agreements predate the act in ways that matter?
- Which gift agreements contain spending language that overrides the default rule?
Read the Gift Agreement First
UPMIFA's prudence standard is a default rule. It applies "subject to the intent of a donor expressed in the gift instrument." If a donor's agreement says something specific about spending, that language controls. An agreement that says "no distributions may be made when the fund's value is below $500,000" means exactly that, regardless of what a prudence analysis might conclude. An agreement that sets a fixed annual payout, or ties spending to a particular formula, likewise overrides the board's general discretion. The first step in any underwater analysis is therefore not the spreadsheet. It is the file drawer.
The act is careful about what counts as specific enough. Under Section 4(c), as enacted in states such as Delaware, language directing the organization to use "only income," "interest," "dividends," or to "preserve the principal intact" creates a permanent endowment but does not by itself limit the board's authority to appropriate under the prudence standard. This matters enormously for older gifts, many of which use exactly that boilerplate. Donors who wrote "income only" in 1995 were usually expressing a wish for permanence, not imposing a spending formula, and the act reads them that way. Language that names a specific limit, by contrast, does restrict the board.
Gift agreements also contain terms that affect the analysis in less obvious ways. Some require a portion of each year's return to be added back to principal, raising the baseline against which underwater status is measured. Some specify a purpose so narrow that a distribution cannot be used elsewhere even if the program pauses. Some reference a spending policy "as amended from time to time," which incorporates the board's current policy. Some came from bequests, where the will provision is the governing instrument and the estate's correspondence may add context. A board memo that treats every fund as interchangeable will miss these differences. Our article on gift agreements and pledge documentation covers how to draft new agreements so the next generation of funds is easier to administer, including explicit underwater spending language.
Many organizations discover during this review that they cannot find some agreements at all, or that the only record of a fund's terms is a paragraph in an old board resolution. That is worth knowing and worth disclosing to counsel. It is also a strong argument for building the fund inventory described below, so that the next underwater episode does not start with a search through storage boxes.
Spend, Pause, or Reduce: Framing the Board's Options
Once the board knows which funds are underwater and what each agreement allows, the decision usually comes down to three options for each fund or group of similar funds. The board can continue the normal distribution under its spending policy, it can reduce the distribution for the year, or it can suspend distributions until the fund recovers. Each choice is defensible in the right circumstances, and none is automatically the safe one.
Continuing to spend is often prudent, particularly when the underwater amount is small, the spending rate is modest, the fund is well diversified, and the program it supports depends on the money. Most spending policies already smooth distributions by using a multi-year average of fund values, precisely so that one bad year does not whipsaw programs. A board might reasonably conclude that a fund 5% underwater, spending at 4% of a twelve-quarter average, with a long horizon and an expected return above its spending rate plus inflation, should keep distributing. Stopping the scholarship would harm current students for a modest gain in recovery speed.
Reducing spending is a middle path. A board might cut the distribution from underwater funds to half the policy rate, or to a fixed dollar amount, or apply a rule that spending cannot exceed a certain percentage of current value rather than the trailing average. Some organizations adopt a standing policy that sets a lower rate for funds more than a certain percentage underwater. This approach shares the burden between current beneficiaries and the fund's future, and it is often the easiest to explain to donors.
Suspending distributions makes the most sense when a fund is deeply underwater, was established very recently, or supports a purpose that can be funded from other sources in the interim. A newly created fund that has never had a chance to build appreciation is the classic example. Spending from it before it has grown means spending the donor's principal, which is hard to reconcile with the duration and preservation factor. Suspension has costs too: the program may need unrestricted dollars to cover the gap, and the donor may be disappointed that the fund they created is not doing anything.
The board does not have to choose a single approach for every fund. It should, however, make a deliberate decision, for each underwater fund or for clearly defined groups, and record why. A blanket "continue the spending policy" vote without any discussion of the underwater funds is the pattern advisors most often flag.
Continue
Often fits when
- Shallow deficit and modest rate
- Long horizon, diversified pool
- Program has no other source
Reduce
Often fits when
- Moderate deficit
- Program can absorb a partial cut
- Board wants to share the burden
Pause
Often fits when
- Deep deficit or very new fund
- Other resources can cover the gap
- Gift agreement limits spending
How Underwater Amounts Appear in the Financial Statements
The accounting treatment changed with FASB's Accounting Standards Update 2016-14, which took effect for annual periods beginning after December 15, 2017. Before that update, the underwater portion of a fund was reported as a reduction of unrestricted net assets, which made underwater funds look like a hit to the organization's general resources. Under ASU 2016-14, the entire donor-restricted endowment fund, including its underwater deficit, stays within net assets with donor restrictions. As Cohen & Co. explains, the change better reflects that the shortfall is a matter for the restricted fund, not a drain on unrestricted resources.
The standard also requires specific disclosures. For each period presented, an organization must disclose its interpretation of its ability to spend from underwater endowment funds, its policy on appropriation from underwater funds and any actions taken during the period, and, in aggregate, the fair value of underwater funds, the original gift amounts or required levels, and the resulting deficiencies. The calculation is done fund by fund and then summed, so funds that are above water do not offset those that are below. A board that has decided to continue spending from underwater funds will see that decision described in the footnote, which is one more reason the decision should be explicit and documented.
Auditors will ask for the support behind these numbers: the fund-level schedule, the gift agreements for any fund with unusual terms, the spending policy, and the board minutes approving appropriations. Organizations that prepare this package in advance have an easier audit and a more accurate footnote. Our guide to AI-assisted audit preparation covers the broader process, and the underwater schedule fits naturally into the same evidence binder. Your auditor, not a model and not this article, determines whether the presentation is correct.
What the underwater disclosure needs from you
Prepare these before fieldwork begins
- A fund-level schedule showing original gift amount, fair value, and deficiency for every underwater fund
- Aggregate totals that tie to the investment pool and the net asset rollforward
- A written statement of the organization's interpretation of its ability to spend from underwater funds
- The spending policy and the board action that applied it to underwater funds this year
- Amounts actually appropriated from underwater funds during the period
Where AI Helps: Building the Board's Evidence Base
Everything above is a lot of work for a finance office of two or three people, and it tends to land in the busiest part of the year. AI does not change what the board must decide, but it changes how much preparation a small team can realistically do. The useful tasks fall into four groups.
Inventorying funds and extracting gift terms
Start by gathering every gift agreement, bequest provision, and board resolution that created an endowed fund. A model can read each document and extract a consistent set of fields: donor, date, amount, purpose, whether the restriction is perpetual, any spending language, any requirement to add returns to principal, any reporting obligations to the donor, and any release or amendment provisions. Ask it to quote the exact language it relied on for each field and to flag ambiguity rather than resolve it. The output is a structured inventory you can check against the general ledger. Expect it to surface surprises, such as a fund that the ledger treats as permanent but whose agreement allows the board to spend principal after twenty years. Those flags go to counsel. Use an enterprise AI tool with appropriate data protections for this, since gift agreements contain donor names and financial details.
Computing underwater amounts
With the inventory in hand, export fund-level data from your accounting system or investment pool records: each fund's units or share of the pool, its contributions to principal, and its distributions. AI can help write the spreadsheet formulas or a short script that computes each fund's baseline, current value, and deficiency, then produces the aggregate figures the disclosure requires. The important discipline is to have the model show its work in formulas you can audit, not to accept a number it states in prose. A model asked to "tell me which funds are underwater" may produce a confident table with arithmetic errors. A model asked to build a spreadsheet that calculates underwater status, which your controller then reviews, produces something you can rely on.
Modeling spending scenarios
The board's real question is what each option does over time. AI can help build a simple projection for each underwater fund under continue, reduce, and pause scenarios, using a range of return assumptions from your investment advisor. The model should show how many years each scenario takes to restore the original gift amount, how much the program receives in total over that period, and how much purchasing power the fund retains after inflation. It can also show the program side: if the scholarship distribution drops by half, how many students lose awards, and what unrestricted dollars would be needed to fill the gap. These projections are illustrations, not forecasts, and the memo should say so.
Mapping the prudence factors to evidence
Finally, AI can organize the material into a memo structured around the prudence factors, so the board sees each factor alongside the evidence that bears on it: fund terms for duration and preservation, program impact for purposes, the advisor's market outlook for economic conditions and expected return, the reserve position for other resources, and the investment policy statement itself. Asking the model to identify which factors have weak or missing evidence is often the most valuable step, because it tells you what to gather before the meeting. If you already use AI to assemble board materials, our guide to building board meeting packets with AI describes a workflow this memo fits into.
Prompt pattern: gift agreement extraction
"Read this gift agreement. Extract donor, date, amount, purpose, duration of restriction, any language about spending or income, any requirement to maintain a value above the gift, and any amendment or release terms. Quote the exact sentence for each field. If language is ambiguous or missing, say so and do not infer."
Prompt pattern: underwater schedule
"Using these columns, build spreadsheet formulas that compute each fund's required baseline, current fair value, deficiency if any, and aggregate totals for underwater funds only. Do not net funds above water against funds below. Show every formula so our controller can verify it."
Prompt pattern: scenario model
"For each underwater fund, project value and distributions over ten years under three spending options and three return assumptions. Show years to recover the original gift, cumulative program funding, and inflation-adjusted value. Label all results as illustrative."
Prompt pattern: factor-to-evidence map
"Organize these materials into a board memo with one section per prudence factor. Under each, summarize the relevant evidence and cite the source document. List any factor where evidence is thin or missing, and suggest what the finance team should gather."
Documenting the Decision in the Minutes
The minutes are where prudence becomes provable. A good record shows that the board knew which funds were underwater and by how much, that it reviewed the relevant gift terms, that it considered each prudence factor, what it decided for each fund or group, and why. It does not need to be long. A paragraph per decision, referencing the memo as an attachment, is usually enough. What it cannot be is a single line saying the spending policy was "reaffirmed."
AI can draft minutes language from the memo and the board's discussion notes, but the draft should be reviewed carefully against what was actually said and decided. The risk is a polished paragraph claiming the board considered factors it never discussed, which is worse than an honest short record. We have written in detail about the tradeoffs in letting AI draft board minutes, and those cautions apply with extra force here, because these minutes may one day be read by an auditor, an attorney general's office, or a donor's family.
A practical approach is to prepare draft resolution language in advance as part of the board packet, with blanks for the decisions the board will make. During the meeting the secretary records the discussion and the choices, and afterward the draft is completed and reviewed by the chair and the finance committee chair before circulation. That process keeps the record accurate while saving the secretary from writing complex financial language from scratch.
What the minutes should capture
- The list of underwater funds, their deficiencies, and the measurement date
- Confirmation that relevant gift agreement terms were reviewed
- The board's consideration of each prudence factor, briefly stated
- The decision for each fund or group: continue, reduce, or pause, with amounts
- The rationale, and when the board will revisit the decision
- Reference to the attached memo and supporting schedules
Communicating With Donors
Donors who created endowed funds generally receive an annual report on their fund, and an underwater year is not the time to skip it. A donor who learns from a footnote, or from a family member on the scholarship committee, that their fund stopped distributing will be far less understanding than one who received a clear, timely explanation. Good donor communication explains what happened in plain terms, what the board decided and why, what the fund still accomplished this year, and when the organization expects to report again.
AI is a strong drafting partner for these letters, particularly when an organization has dozens of endowed funds and each letter needs fund-specific figures. A model can take the fund inventory, the board's decision, and a template and produce individualized drafts with the right numbers, the right purpose, and the right tone. Every letter still needs a human review for accuracy and sensitivity. Some donors are elderly or bereaved, some created funds in memory of a family member, and some will have strong views about whether their gift should keep supporting students during a downturn. Development staff who know those relationships should read every letter before it goes out, and the most significant donors deserve a call or a visit rather than a letter.
Tone matters. Avoid language that sounds defensive or that blames the market alone. Emphasize the long-term nature of the fund, the board's care in deciding, and continued commitment to the donor's purpose. If a fund was paused, say what the organization is doing to sustain the program in the meantime. If spending continued, explain why the board concluded that was consistent with preserving the fund over time.
What a good underwater fund letter includes
- The fund's current value relative to the original gift, stated plainly
- What the board decided about this year's distribution and the reason
- What the fund accomplished, such as students supported or services delivered
- The organization's long-term commitment to the donor's purpose
- A named contact for questions and an invitation to talk
Releasing or Modifying Restrictions
Sometimes an underwater analysis reveals a deeper problem. A fund may be too small to ever generate a meaningful distribution, or its purpose may no longer be achievable. UPMIFA's Section 6 provides routes for changing restrictions, and an underwater episode is often the moment boards first consider them.
The simplest route is donor consent. If the donor is living and agrees in writing, the organization can release or modify a restriction, though the fund must still be used for a charitable purpose of the organization. When the donor is unavailable or unwilling, the organization can ask a court to modify a restriction on the management or investment of a fund if it has become impracticable or wasteful, or to modify a purpose restriction under the doctrine of cy pres if the purpose has become unlawful, impracticable, impossible, or wasteful. Court proceedings require notice to the state attorney general, who represents the public interest in charitable assets.
For small, old funds, the act offers a streamlined path without court involvement. In states that adopted the provision, an organization can release or modify a restriction on a fund below a set dollar threshold that was established more than a set number of years ago, after notifying the attorney general and waiting a set period, provided it uses the fund consistently with the original charitable purposes. The thresholds vary. Michigan's version uses a $25,000 threshold and a twenty-year age requirement, while New York's version uses $100,000, twenty years, and ninety days' notice. Your counsel will confirm what applies.
AI can help identify candidates for these processes, for example by flagging funds below the threshold and older than the age requirement, or funds whose purposes reference programs the organization no longer runs. It can draft initial donor consent requests or summaries for counsel. It should not draft court petitions or attorney general notices without attorney supervision, and it should not be the basis for deciding that a purpose is impracticable. Those are legal determinations with consequences for the organization's relationship with donors and regulators.
Routes for changing a restriction
Availability and details depend on your state's enacted text
- Donor consent: written agreement from the donor, with funds still used for the organization's charitable purposes
- Court modification: for management or investment restrictions that have become impracticable or wasteful, with attorney general notice
- Cy pres: court modification of a purpose that has become unlawful, impracticable, impossible, or wasteful
- Small, old fund release: institutional action after attorney general notice for funds below a threshold and above an age requirement
What AI Cannot Decide
It is worth being explicit about the boundaries, because the drafting quality of current AI tools can make their output feel authoritative. A model can summarize UPMIFA accurately in general terms and still be wrong about your state's version, your state's amendments, or how a court in your state has read a particular phrase. It can produce a clean underwater schedule from data that contains a misclassified fund. It can write a persuasive memo arguing for continued spending that understates a factor pointing the other way. None of these failures is exotic. They are the predictable result of asking a tool to do work that requires professional judgment and organization-specific knowledge.
Three groups of people own the decisions. Counsel interprets the statute and the gift agreements, especially where language is ambiguous or old. The auditor determines whether the financial statement presentation and disclosures are correct. The board, acting with the care the law requires, makes the appropriation decision. AI supports all three by doing preparation faster and more thoroughly than a small staff could, and by making gaps visible. That is a substantial contribution. It is not a substitute.
A healthy habit is to label every AI-produced document in the process as a draft for review and to keep the source documents attached. If a board member asks where a number came from, the answer should be a formula and a ledger entry, not "the AI said so."
Good uses of AI here
- Extracting terms from gift agreements with quoted sources
- Building auditable calculations and scenario models
- Organizing evidence by prudence factor and flagging gaps
- Drafting memos, minutes language, and donor letters for review
Decisions that stay with people
- Interpreting your state's statute and ambiguous gift language
- Confirming financial statement presentation and disclosures
- Deciding whether to spend, reduce, or pause
- Pursuing releases, court petitions, or attorney general notices
Conclusion
Underwater endowment funds are a normal part of managing permanent money through changing markets. What UPMIFA changed is not the frequency of underwater funds but the responsibility for responding to them. In nearly every state, the board now decides whether to keep spending, and it must reach that decision by considering defined factors, respecting the gift agreement, and recording its reasoning. The financial statements then describe that decision to anyone who reads them.
The organizations that handle this well share a few habits. They keep a fund-level inventory with gift terms attached. They calculate underwater status every year, fund by fund. They bring the board a memo organized around the prudence factors, with scenarios that show the tradeoffs. They record decisions in minutes that would make sense to an outsider. And they tell donors what happened before donors have to ask.
AI makes those habits achievable for small finance teams. It reads the agreements, builds the schedules, models the scenarios, and drafts the documents, all faster than a busy controller could alone. The judgment stays where the law puts it, with counsel, the auditor, and the board. Used that way, AI turns the UPMIFA conversation from a rubber stamp into a real deliberation, which is what donors who trusted you with permanent gifts deserve.
Prepare Your Board for the Endowment Conversation
We help nonprofit finance teams build fund inventories, set up AI-assisted workflows for underwater calculations and scenario modeling, and prepare board memos and donor communications. Your counsel and auditors make the determinations. We help you arrive prepared.