How Fundraising Managers Can Protect Reserves as Assets

Many not-for-profit leaders ask whether temporarily and permanently restricted net assets should be included in determining an organization’s reserves. Operating reserves — funds that are available to support an organization’s day-to-day operations — are the appropriate measure to consider. This was one of the key findings of Grant Thornton LLP’s not-for-profit practice white paper titled Maintaining Sufficient Reserves to Protect Your Not-for-Profit Organization.

Temporarily restricted net assets that result in additional expenditures beyond normal day-to-day operations — for example, temporarily restricted contributions received to fund nonrecurring activities — should not be considered part of these operating reserves. However, if temporarily restricted net assets fund expenditures that would normally be supported by unrestricted funds, such temporarily restricted net assets should be considered in determining the operating reserves.

Permanently restricted funds should not be considered part of the operating reserves, since the corpus of these funds must remain intact in perpetuity. However, unspent income generated from permanently restricted net assets that are available for the general operations of an organization should be considered part of the operating reserves.

Is there an average percentage that constitutes a reasonable reserve?
Over the years, not-for-profit organizations have used a variety of measurements to evaluate the level of reserves that should be maintained. Some organizations believe that they must maintain the equivalent of at least six months of operating expenses in reserves. Other organizations feel that reserves should equal one to two years of operating expenses.

Applying a general percentage (e.g., one year of operating expenses) as a yardstick to all not-for-profit organizations would be a mistake. Not-for-profits should assess the reasonableness of their reserves based on factors pertinent to their individual situations and the subsectors in which they operate.

For example, higher education institutions often rely on significant net asset balances to provide student scholarships, whereas membership organizations may be pressured by their members to maintain low dues structures and not accumulate significant net asset balances. In addition, some organizations have extensive physical plants, are self-insured, have complex corporate or debt structures, or manage large labor forces. These factors have an impact on the size of the reserves these organizations should accumulate.

What factors should be considered when determining reserve levels?
While some watchdog agencies have developed their own standards for determining appropriate reserve amounts — and many of these standards are very good — there has not been a national standard established that takes into account the full range of factors that can affect reserves. These factors include, but are not limited to, the following:

• Mission and long-term plans or strategies
• Type of organization — higher education, religious, social services, museum, cultural, association, foundation or other
• Corporate structure — sole entity, parent/subsidiary entities, brother/sister entities, loosely affiliated groups, etc.
• Investment in the physical plant — the facilities owned and/or leased
• Complexities of the debt structure
• Current and future commitments
• Funding sources, including fundraising activities
• Types of programs provided
• Self-insurance
• Workforce compensation and benefits issues

A “prudent-person” measurement should be considered in assessing the appropriateness of reserves: Would a prudent person, exercising due care and proper stewardship over the organization’s resources, set aside such a level of reserves? The organization also should use an independent and competent board of directors or advisory committee as a safe harbor in determining whether the prudent-person rule has been followed.

The ultimate objective of maintaining appropriate reserves, of course, is to ensure the long-term viability of the organization and the sustainability of the programs it provides.

Frank Kurre is manager partner, not-for-profit and higher education practices, at Grant Thornton LLP.