Legislature(2009 - 2010)BARNES 124
04/05/2010 01:00 PM House LABOR & COMMERCE
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HB 416-PRUDENT MANAGEMENT OF INSTITUTIONAL FUNDS 1:12:14 PM CHAIR OLSON announced that the first order of business would be HOUSE BILL NO. 416, "An Act adopting and relating to the Uniform Prudent Management of Institutional Funds Act; relating to the investment of money for charitable purposes by institutions, including governmental institutions; and relating to the University of Alaska." 1:12:18 PM KONRAD JACKSON, Staff, Representative Kurt Olson, Alaska State Legislature, paraphrased from the sponsor statement, which read [original punctuation provided]: HB 416 would allow the State of Alaska to adopt the Uniform Prudent Management of Institutional Funds Act (UPMIFA). UPMIFA replaces obsolete rules and concepts of investment and management of endowments and charitable funds currently in use. It provides current, industry best practices guidelines, essential to proper management. HB 416 is will help administrators fulfill their fiduciary responsibilities to the funds they manage. Clear definitions on prudent practices and applicable standards are laid out for administrators of charitable funds and endowments. The UPMIFA will assist nonprofits and volunteer trustees to minimize exposure to disputes and legal challenges over issues related to currently unclear administrative rules and practices. Traditional trust principles regarding the distribution of what might otherwise be considered the corpus differ from the UPMIFA. In conjunction with Financial Accounting Standards Board requirements, UPMIFA allows advances against future earnings to the extent such advances are prudent and consistent with the mission and purpose of the endowment. At present, only 3 other states have not adopted or introduced UPMIFA legislation. 1:15:23 PM JIM LYNCH, Treasurer, University of Alaska Foundation, stated that he has managed the endowments for the University of Alaska for the past 25 years. He related that he worked with Senator Paskvan on the companion bill. This bill sets out responsible practices for management of charitable funds, consistent with what the legislature has previously adopted for trusts. He explained that this legislation has already been adopted by 43 states, including the District of Columbia and the U.S. Virgin Islands. It essentially incorporates requirements and considerations that provide for accountability and a determination of prudent actions. It allows administrators the flexibility needed to manage endowments during the volatile market conditions. It is difficult to manage endowments when income is "jumping up and down" every year. He stated he cannot tell students who applied for and were awarded scholarships that they are no longer available due to market fluctuations. MR. LYNCH related the bill would clarify outdated provisions, although most of the updates affect East Coast colleges that have been operating for several hundred years, often containing some peculiar provisions. This bill would reduce the exposure for non-profit entities and their trustees that may not be familiar with nuances. In Alaska, without any laws that apply, it is difficult to sort out responsibilities. He referred to two sections that directly address the UA Board of Regents, to indicate how the Board of Regents will follow the provisions of HB 416. The bill corrects unintended consequence of 2005 statutory changes on retirement bills. The Board of Regents authority for investment of funds and the endowments came from a cross reference that allowed the Board of Regents the same authority for the endowments as the state pension committee has for the pension funds. These represent the fiduciary responsibilities, but when the Alaska Retirement Management Board was created, the new statute references changed. Instead, this bill would directly address the responsibilities that apply to the Board of Regents endowment administration and non-profit funds. 1:20:23 PM REPRESENTATIVE HOLMES referred to page 6, line 19, to the definition of "endowment fund ." She read, "...which does not include assets of an institution designated by an institution as an endowment fund for its own use;." MR. LYNCH answered that the definition of an endowment fund is fairly broad and this definition would exclude those funds which are designated by the board as endowments. He referred to them as quasi-endowments, which are treated like endowments but are available to creditors and are unrestricted. The designation was set up by the administrative board and can be changed by the board. That is the distinction between the "true endowments: and "quasi-endowments." This definition would clarify that endowments created by a board are not controlled by this statute. They are unrestricted funds and the board will make the determinations. The other endowments are restricted by donors and the institution cannot change the restrictions. Thus, when a donor donates unrestricted funds, the board can use the funds for anything it chooses, but if the donor designated funds to be used for the math department, the UA would need to abide by the restriction. 1:23:33 PM REPRESENTATIVE HOLMES referred to page 4, to line 7 to gifts that "create an endowment fund of permanent duration." She asked for clarification. MR. LYNCH explained that means "in perpetuity." Thus, if the UA receives an endowment for a specific purposed then the restrictions apply. If the funds are be used for the math department. Otherwise, if the need over time becomes illegal or improper, the UA must go back to the court to make a determination on what happens to the money. This bill would also create a provision for small endowments of less than $50,000 for an expedited procedure since going back to court is expensive. Thus, the UA would go through the Department of Law and this provision would allow the endowment to use the funds for a purpose as closely related to the purposed intent. If the donor states it is an "endowment" then the funds are permanent. REPRESENTATIVE HOLMES related her understanding that the provisions that would apply are those on page 5 under AS 13.70.040. MR. LYNCH agreed that either the UA would go back to court or use the expedited procedure in instances of a small endowment. 1:26:18 PM MR. LYNCH pointed out the default nature of the bill. He explained that essentially if other laws affect endowments, then the other provisions would apply first, followed by the the UPMIFA. Thus, a formal trust would take precedence over UPMIFA. The statute provides the rules absent a donor agreement. He restated that all of the agreements take precedent over the statute. 1:27:38 PM GRANT CALLOW, Member, Alaska Uniform Law Commissioner, National Conference of Commissioners on Uniform State Laws (NCCUSL), explained that he could answer questions on how the bill came about and could answer any drafting questions. He offered that Kentucky just enacted UPMIFA, so Alaska is one of five jurisdictions that still not enacted UPMIFA. This bill would provide much more flexibility to persons managing institutional funds, but also provides some controls on the delegation of the management of the funds. This bill encourages gift-giving and charity since it provides confidence and assurances to donors that their charitable contributions wishes will be followed. MR. CALLOW offered that many institutional advisors were in. Some reference to the attorney general's office. Deborah Behr, Assistant Attorney General is also a Uniform Law Commissioner. The Attorney General's (AG) office has reviewed the bill and does not have any issue with the AG's role. He offered his belief that in Alaska, it is preferable to have the institutional funds managed here rather than elsewhere. Enacting UPMIFA will help ensure that goal is met and will minimize the conflict in instances in which funds are managed outside the state, but benefit persons in the state. Thus, an issue of conflicts of law could arise. This is one reason that this law is designated as a uniform law and to provide for consistency among the states. In addition to being adopted unanimously by the states at the Commission on Uniform Laws, it was sent to American Bar Association House of Delegates where it was approved. This bill has been a very popular bill, he stated. 1:31:58 PM ERIC WOHLFORTH, Attorney, Wohlforth, Johnson, Brecht, Cartledge, & Brooking, A Professional Corporation (PC), asked to add to the comments already made and thanked members. 1:32:37 PM CHAIR OLSON, after first determining no one else wished to testify, closed public testimony on HB 416. 1:32:51 PM REPRESENTATIVE HOLMES moved to report HB 416 out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, HB 416 was reported from the House Labor and Commerce Standing Committee. 1:33:20 PM The committee took an at-ease from 1:33 p.m. to 1:35 p.m.