The PPP loan application requires applicants to make the following certification: “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The Small Business Administration (SBA) has stated that this certification must be made in good faith and take into account the applicant’s “current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”

The SBA has indicated that loans made over $2 million are likely to be audited.  In that event, there is the possibility that organizations with large endowments which obtained PPP loans of over $2 million end up being subject to civil and criminal penalties.

The SBA has created a safe harbor regarding the certification if the loan was under $2 million.  This means the SBA will assume the certification was made in good faith.  However, organizations with endowments, especially those with seven to ten figure endowments, may run the risk of serious harm to their reputation from constituents and the press.

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In response to the dilemma faced by many charities during the 2008 recession, which had limited operating income, but large sums in endowments, 47 states adopted some form of the Uniform Prudent Management of Institutional Funds Act (UPMIFA) which, amongst other things, allows charities to draw on the principal of endowment funds under certain circumstances.

Under New York’s version of the uniform law, the New York Prudent Management of Institutional Funds Act (NYPMIFA), institutions can, under certain circumstances, spend endowment funds below their original gift amount (“historic dollar value”) without court approval or Attorney General review, if the institution’s board of directors concludes that such spending is prudent. More specifically, NYPMIFA requires that boards, when deciding whether to appropriate from an endowment fund, must act “in good faith, with the care that an ordinarily prudent person in a like position would exercise under similar circumstances,” and must consider, if relevant, the following factors:

1. the duration and preservation of the endowment fund;
2. the purposes of the institution and the endowment fund;
3. general economic conditions;
4. the possible effect of inflation or deflation;
5. the expected total return from income and the appreciation of investments;
6. other resources of the institution;
7. where appropriate and circumstances would otherwise warrant, alternatives to expenditure of the endowment fund, giving due consideration to the effect that such alternatives may have on the institution; and
8. the investment policy of the institution.

There are situations where an institution cannot spend below historic value without court approval, including when donors specifically explicitly prohibit this type of spending in the gift instrument.

Lastly, an institution may lift or modify a donor-imposed restriction on the management, investment, or purpose of an institutional fund if the fund is less than $100,000 in value and has been in existence for more than 20 years. If an institution determines that such a restriction is unlawful, impracticable, impossible to achieve, or wasteful, the institution may release or modify the restriction, in whole or part, without court approval, after giving written notice to the Attorney General, who then has 90 days to object. If the Attorney General does not notify the institution within 90 days, the institution may proceed with the release or modification.

The post Charities’ Response to COVID-19: A Guide to Using Endowment Funds for Emergency Purposes appeared first on Perlman & Perlman.