Tom Hastings, CPA
As nonprofits have come to play such a critical role in our communities, there has developed a need for them to become even more effective, and often with fewer available dollars. One response to this need has been the concept of capacity building, and has become a major topic among nonprofit managers as well as the consultants who advise these organizations in this endeavor. Capacity building can take many forms and mean different things. A basic definition is “actions that enhance an organization’s ability to fulfill its mission.” Those actions, if conducted properly, will provide a catalyst for greater organizational effectiveness, making them stronger, more sustainable and better equipped to serve their stakeholders. This can encompass a broad range of activities performed in the many different functional areas within the organizations themselves.
Given the current economic and funding crisis in which we find ourselves, capacity building might tend to take a more defensive stance. Nonprofits are now focused largely on the financial management areas of their organizations, including formulating strategies to enhance current funding models, particularly in programs for which funding has been reduced or lost all together. Some organizations are embracing certain social entrepreneurship strategies, or seeking grants from sources they would not have otherwise pursued. Nonprofits are also revisiting budgets, and identifying areas for cost control, which, is contrary to the end objective of capacity building. Nonetheless, to some extent, this is unavoidable.
This article will focus primarily on building capacity in the financial management area of the organization with a focus on the revenue side. Although my purpose here is not so much to provide guidance on the how; rather, my focus will be on the strings that may attach to such activities. Here are a few scenarios where I often find myself in client discussions along with considerations that should surface as part of your organization’s due diligence process.
Planning for (or Borrowing from) Your Future – Use of Endowment and Investment Funds
Although most endowments have become significantly devalued over the course of the last year, the need to tap into endowment funds may seem unavoidable. Issues to consider abound in this area, probably the most critical being assurance you’re maintaining compliance with donor restrictions. The State of Ohio recently enacted into law the Uniform Prudent Management of Institutional Funds Act (“UPMIFA”), which sets forth guidelines and restrictions for prudent endowment management and expenditure, but also provides for some flexibility for the use of those funds in underwater situations (the fair value has declined below the original contribution). The emphasis here is on the prudent use of funds, which may restrict the organization as to the use and amount of allowable or required distributions.
If the organization is fortunate to be in the good graces of a funder willing to establish an endowment on their behalf, these funds are often established by the donor at the local community foundation. In such a case, distributions from the endowment will be limited to the extent of the foundation’s spending policy, which generally ranges between 4 and 6 percent. In fact, UPMIFA provides a safe harbor spending policy at 5 percent. This isn’t required, but it may lead to foundations further limiting their distributions, which has already been occurring due to the economic environment and consequential investment losses. Keep in mind many foundations may exercise variance power, which means in certain rare instances, the foundation could redirect those funds to another organization. The lesson here – read the entire agreement. (more…)
