What Nonprofits Need to Know About Donor-Restricted Contributions

  • Impacts of financial decisions
  • 1/11/2021
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Learn about what donor-restricted contributions are, why they can be problematic, how to navigate those challenges, and proactive measures to consider for the coming year.

Key insights

  • Revisiting donor-restricted contributions may present a strategic opportunity for nonprofit organizations during challenging times.
  • Use donor-restricted contributions based upon the donor’s intent. There are also options available to help make sure there’s alignment between restricted contributions and your organization’s needs.
  • Consider the impact that donor-restricted contributions have on financial reporting and recordkeeping, short- and long-term financial health, personnel, and processes before making reactive and/or proactive decisions for the coming year.

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In normal years, nonprofits typically run fundraisers and campaigns to support programs, scholarships, capital projects, and other organizational initiatives. Unfortunately, these methods seem like relics of a distant past, as many nonprofits struggle to stay afloat and cancel or convert fundraisers and campaigns to virtual platforms.

With your 2021 budgets and cash flow modeling projects in full swing, consider whether donor restricted-contributions may be a viable option to help sustain your nonprofit organization’s operations.

Although donor-restricted contributions can be a blessing for organizations, such contributions can be challenging when program funding, general expenses, and administrative expenses are an organization’s greatest need.

Understand what donor-restricted contributions are, why they can be problematic, how to navigate those challenges, and proactive measures to consider for the coming year.

What are donor-restricted contributions?

Restricted contributions result when donors impose restrictions that expire either by the passage of time or by fulfillment of the donor’s stipulated purpose. Other donor-imposed restrictions are perpetual in nature — e.g.,the donor stipulates that resources be maintained in perpetuity.

This is not to be confused with “conditional contributions.” A contribution is conditional if both a barrier and a right of return or right of release exist. Likewise, donor-restricted contributions are not to be confused with “designated contributions,” which are contributions that are without donor restrictions but are designated for a particular purpose by management or those charged with governance over the organization.

It’s important to know these differences and how to account for these different types of contributions, so you can:

  • Segregate the contributions that are available for immediate use
  • Prevent spending funds that are without restrictions when you have restricted funds that could be used first
  • Increase transparency in your organization’s development efforts
  • Monitor whether contributions are being used for their intended purposes
  • Locate funds that are restricted that may be eligible for renegotiation

For further guidance on contributions and how they are recorded, see our article on revenue accounting for nonprofit grants and contracts.

Why can donor-restricted contributions be problematic?

Ultimately, donors have the ability to add restrictions to contributions. Organizations may run fundraisers or campaigns to solicit contributions for certain needs, but only the donors can place restrictions on their contributions — not the organization.

Additionally, donor-restricted contributions (such as endowments) are often made as part of a bequest or will arrangement that takes effect after the donor’s death. That can make it difficult for an organization that would like to seek the donors’ permission to repurpose the contributions.

Donor-restricted contributions are great when operations and programs are running effectively, but they can create significant limitations for organizations that are simply trying to survive. While an organization may have funds available, they are not available to be used based upon the donor’s initial intent.

How do we navigate the challenges of donor-restricted contributions?

There are a few ways to navigate the use of restricted funds for another purpose — and some are easier than others. Knowing these simple facts can spur creative, problem-solving, proactive action.

Currently, each state governs gift restrictions by using the Uniform Prudent Management of Institutional Funds Act (UPMIFA). This is the primary law that governs:

  • Expenditures of charitable assets
  • The release of restricted funds
  • The change or termination of restrictions when they become inappropriate to the needs of the organization

The UPMIFA states that an organization may ask the original donor for a release from the donor-imposed restrictions or may petition a court for such a release.

Review the restricted funds that remain on your statement of financial position and consider reaching out to the donors of those funds to see whether they are willing to change their initial intent. Capture any changes in writing, as an addendum to the original pledge form or donation card.

For those restricted funds where the donor is deceased, consult with legal counsel to see what options may be available. Many nonprofit governing bodies include a member with a legal background or have great working relationships with local law firms that may be able to help with this review.

In addition, the UPMIFA states that organizations may remove or modify a donor-imposed restriction if the funds are of a certain age (e.g., greater than 20 – 25 years old) and under a certain dollar threshold (e.g., less than $25,000 – $50,000). Each state has different requirements, so review your state’s laws and regulations.

If your state’s criteria are met and a restriction is considered unlawful, impractical, or wasteful, the organization may release or modify the restriction, in part or whole, without court approval, after a written notice is given to the attorney general and if there is no objection by the attorney general. Typically, there is a waiting period for the response from the attorney general, but that can vary from state to state.

What are some considerations for the coming year?

Consider the following factors as we look toward the coming year and beyond. These factors may seem simple, as they are not overly time-intensive, but they can be overlooked in a rapid-changing, survival-mode environment.

Consider how to run upcoming fundraisers and campaigns

If your organization is in need of funds, review your fundraising and campaign events and solicitation material to make sure your ask is for your organization’s greatest needs. Update pledge forms, event flyers, donor agreements, donation cards, and other communication that formally documents your ask. This allows you to spend the contributions how and where you deem most important.

Work with current donors to see if they support a pivot toward the greatest needs. If donors are giving to your organization, it is because they support its mission. They want to see your organization thrive and continue to provide meaningful impact to their community. A simple conversation with current donors to educate them on your current financial position may be all that is needed.

Review your organization’s “upcoming events” communications and solicitation material. Then, make sure the finance team, development team, and those charged with governance over the organization are in agreement with any changes and the reason for those changes. This way, you have consistent messaging across all levels of the organization, as well as with donors and the community. To learn more about strategically addressing your donors, check out this article on shaping your ask.

Look ahead to your next grant cycle

Ask grantors and provider agencies if there is any flexibility in how funding can be used and when you may be able to access it.

Have these conversations early in the grant process to gain a better understanding of your funding sources. Remember that the grantors and provider agencies are going through the same challenging times, so an honest and vulnerable conversation upfront may help increase trust and cooperation and help them better understand the current situation at hand.

Know the available flexibilities, if any, to help you more accurately budget and create cash models for the coming year. Collaboration with grantors and provider agencies may even allow you to structure grants and funding requests to better align with when you need cash most. This could prevent you from drawing on a line of credit or using reserves to fund current operations during the slower times in your organization’s business cycle. If you have questions or would like further assistance and guidance on any grant-related matter, contact CLA's grant team.

Review your organization’s board-designated funds

Management and those charged with governance should have frequent and honest conversations about what reserves look like and what designations need to be maintained or what can be altered.

Have these conversations during the budgeting and cash modeling process to help alleviate stress on the development and management teams and help set realistic donation goals for the coming year. If designated funds do not align with the interests and status of your organization, address this internal matter before having conversations with donors. For some organizations, this may be all that is needed.

Review spending policies and plans

If endowments and other donor-restricted funds are made available for general use, consider creating short- and long-term spending and replenishment policies and plans before the funds are used. This holds your organization accountable on spending efforts so funds are available in the future.

Additionally, place increased oversight on those funds so they are used properly, in accordance with policy, and only for your greatest needs. This review is at the heart of the governing bodies’ fiduciary responsibility toward the organization they serve and the role the organization will have in its community for years to come.

How we can help

CLA has the deep industry experience, leadership, and knowledge to help your nonprofit through these challenging times. If you need additional guidance, visit our nonprofit consulting page for more information. Don’t hesitate to contact us — our nonprofit team is happy to assist you and your organization.

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