Social Currency

Editor's Note: The following is an excerpt from NFF's Money & Mission blog at the Chronicle of Philanthropy.  It was originally published August 1st, 2011.  

As the economy continues its slow recovery, nonprofits and donors are more frequently trying to understand the role of financial reserves—a tool that may have been an option in the past but is now a must-have for organizations that hope to maintain stability in turbulent times.

In particular, people want to know how reserves compare with endowments, because both are ways for nonprofits to help secure the organization’s future.

Reserves are a lot more flexible than endowments—and often more appealing. The money and the interest from a reserve are governed by a nonprofit’s board and can be used for many purposes.

Endowments tend to last a longer time than reserves but are much more restricted. Typically, nonprofits can spend only the interest generated by investing the money in an endowment, and donors can place many restrictions on how the money may be used.

Organizations often spend a good deal of fund-raising energy building up endowments and then find they can tap only a small portion of the pool of money raised. Making matters worse, donors who have recently given to endowments often don’t want to make a second gift for current needs—so nonprofits find themselves in a squeeze to pay for current operations even when they have just completed a successful campaign.

Read the rest at NFF's Money & Mission blog >>>

UPDATE 8/18/2011:  The New Jersey Division of Consumer Affairs has informed the NJ Center for Nonprofits that it will not pursue its donor designation Pre-Proposal #2011-001 as a formal regulation. 

We are grateful to Director Thomas A. Calcagni of the NJ Division of Consumer Affairs for his decision, as well as to the NJ Center for Nonprofits for its attention, advocacy and leadership on the issue.  And we’re in good company - many, many other organizations both local and national shared comments with the state, such as the National Council of Nonprofits, AFP, the NJ State Association of Jewish Federations, and the Association of Direct Response Fund Raising Counsel,  just to name a few on this collaborative effort.  Thanks to all!  

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You may have heard that the New Jersey Division of Consumer Affairs recently released a “pre-proposal” that would require nonprofits that raise $250,000 or more a year to notify and give donors in phone, electronic or written solicitations an opportunity to designate or “earmark” contributions for particular programs, reminding them that contributions not “earmarked” for program may be used for administrative and fundraising expenses.  The New Jersey Center for Nonprofits has done a fantastic job of getting the word out about this important pre-proposal and calling for a response.  With Phil’s recent posts on the need to go beyond compliance metrics in mind, and the many things we’ve learned from our nonprofit clients, the NFF team in NJ had to weigh in with our concerns as well.

Our full public comment is available here.  Here are some of the highlights:

• Administrative Costs are Not Bad:  By requiring charities to essentially encourage donors to make restricted program donations, the pre-proposal presents a view that administrative and fundraising expenses are tangential or optional for nonprofit organizations.  Rather than siphoning away program funds, administrative costs build the capacity of the organization to function effectively – and better deliver programming.  Without an infrastructure to pay bills for facility costs, management staff, insurance, and other administrative necessities, programs can’t exist.  While it shouldn’t overshadow programs, fundraising is a necessary expense – a subsidy business – that most nonprofits must use to generate the revenue they need to deliver on mission. 

• Nonprofits Can’t Survive on Restricted Funds Alone:  While one might expect that restricting additional donations would increase compliance and lead to program success, it can perversely create financial challenges that can harm charities’ overall ability to survive, thrive and deliver on their mission.  We at NFF have worked with a significant number of nonprofits that receive restricted program funds but lack sufficient unrestricted resources to support essential overhead costs.  Especially in an economic climate where funds are scarce – in our recent NJ nonprofit survey, almost one-third of respondents reported having only enough cash available to pay 30 days or less of expenses – unrestricted funds are vital for staying in business. 

• Compliance Does Not Equal Impact:  At heart, we think the goal of this pre-proposal is to help donors understand the use of their dollars to maximize impact (following a successful crackdown on certain telemarketing charities with deceptive fundraising practices).  Not to mention that the vast majority of nonprofits are truthful and incredibly dedicated to the causes they serve, the conversation on funding impact is one of the most important and robust in our sector, from Social Impact Bonds and Pay For Success Project to different types of capital.  With a focus on restricted program expenses, this pre-proposal fails to incorporate new insights and lessons learned.  We have found that a focus on financial compliance alone – for example, what percentage of dollars goes to program vs. administrative needs – does not ensure an organization’s effectiveness in delivering on its mission.  There are so many better ideas out there to draw on to maximize and communicate impact and maintain trust.

We hope the Division will reconsider its approach.  We’ll be following the situation closely.