PA Provides New Spending Flexibilities and Nonjudicial Settlement Opportunities for Nonprofits, Charitable Trusts

Ballard Spahr LLP

Ballard Spahr LLP

On July 23, 2020, Pennsylvania Governor Tom Wolf approved 2020 Act 71, enacting House Bill 2484. The new law amends the Pennsylvania Consolidated Statutes, Titles 15 (Corporations and Unincorporated Associations) and 20 (Decedents, Estates and Fiduciaries). The amended statutes now include increased endowment spending provisions related to COVID-19, as well as new provisions for nonjudicial settlements. 

Prior to enactment, Pennsylvania permitted nonprofit corporations (with respect to their endowment funds) and charitable trusts that elected to be governed by the applicable statutory provisions to annually designate for expenditure a minimum of two percent and a maximum of seven percent of the three-year average value of the assets held by or for the nonprofit corporation or charitable trust. These entities may now designate up to 10 percent of such three-year average value as expendable “income.”

The increased expenditure provisions apply only to calendar years 2020-2022 (and fiscal years ending therein). The Pennsylvania General Assembly enacted this temporary increase to spending limits in order to provide flexibility related to fiscal impacts of COVID-19. In selecting a percentage, governing bodies of nonprofit corporations and trustees of charitable trusts must consider both the long-term preservation of the real value of the assets and the organization’s need for capital to fulfill its mission. These provisions relate only to entities that: (1) previously elected or now elect to be governed by the applicable statutory provisions, and (2) adopt and follow a total return investment policy.

The law also includes new provisions for binding nonjudicial settlement agreements related to charitable property transferred, subject to donor restrictions, to a nonprofit corporation. For property subject to donor restrictions on the use or management of the donated property, it is now clear that donors and nonprofit corporations may enter into binding agreements “with respect to any matter involving the property, including a restriction” without the need for court approval.  The new settlement agreements will be valid only to the extent that the terms and conditions therein: (1) are those that a court “could approve under . . . applicable law” and (2) ensure that the property at issue remains committed to charitable purposes. Nonprofit corporations may seek judicial review of whether the terms and conditions are those that the “court could have approved.” 

The new law provides temporary financial flexibility for nonprofit corporations and charitable trusts to address the impact of COVID-19. Governing bodies of nonprofit corporations and trustees of charitable trusts will need to carefully weigh an organization’s current need for increased spendable income from their endowment and trust funds with the long-term preservation of these assets. 

Nonprofit organizations and trustees of charitable trusts should carefully review spending and investment strategies in light of this new temporary flexibility. Nonprofit organizations should review and evaluate those donor agreements with restrictions on use or management of the donated property that now prove to be onerous or prohibitive in unforeseen ways. If the donor is still living, the new law may provide an opportunity to seek agreement with the donor to amend such provisions.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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