By Nick Sabbatini, CPA, Audit Manager
Social distancing has led to a reduction of customer foot traffic and a shift towards a remote workforce, notably impacting revenue streams. For nonprofit organizations, this means finding ways to cope with a reduction in program participation while also grappling with ways to alter processes and program management to ensure health and safety. However, nonprofit organizations face an additional blow, as donations and grants, which often provide the bulk of funding needed for general operations, dry up due to the cancellation of fundraising events, and tightening of budgets during the crisis. Given this significant drain on operational funding, nonprofit organizations need to adjust operations and use existing resources to ensure their doors remain open.
Communicating Your Needs
Communication is integral in each organization’s response to the COVID-19 crisis. Whether through direct contact, new website content, or through social media posts, communications should be honest about the increased need for additional funding during the crisis, and stress the importance of the organization’s programs, including the greater impact to communities if programs are lost. Additionally, as fundraising budgets may be strained or reduced, and as smaller donors may be willing but unable to give due to their own financial constraint, organizations may benefit from focusing their efforts on larger, wealthier donors and grantors who are more likely to be insulated from the financial impact of the current crisis.
Lifting Donor Restrictions
Organizations may also need to reach out to those who have already provided restricted funds, requesting such restrictions be lifted so the funds can be directed where needed most. Organizations with significant net assets with donor restrictions may find this is an important way to leverage existing grants and donations without asking for additional funding. However, it is important to remember that the lifting of restrictions requires documentation, and should not be verbal. While email communications may provide sufficient documentation of a change in intent, a more formal signed agreement is likely necessary. A standardized one-to-two paragraph agreement describing the change in intent would allow the document to be provided to various donors and grantors with limited tailoring, while also providing the recipients a quick way to approve of the change by simply signing and returning the agreement. Organizations should also be aware that such communications regarding change in intent are required to come from, and be signed by, individuals with proper authority to make such decisions.
Board Reserves and Quasi-Endowments
Board reserves and quasi-endowments are another potential source of operational funding during the crisis. The restriction on these reserve funds do not arise from a third party intent, and instead are internally restricted from net assets without donor restrictions. So, while organizations may have stated uses or specific triggering events that allow use of the reserves, the timing and nature of use is ultimately determined by the Board of Directors. As such, organizations may need their Board of Directors to authorize use of Board reserves and quasi-endowments in this time of need.
True Endowments
Even true endowments, based on donor stipulation, may be a source of funding during this crisis. Although UPMIFA rules limit such spending to a specified percentage of an endowment fund in a given year, under the presumption of imprudence, organizations may be able to rebut the presumption and spend amounts above and beyond the percentage if use of funds are deemed prudent because the spending is needed to keep the organization open as a going concern. However, prior to exceeding UPMIFA limits, organizations are advised to consult with legal counsel to determine whether or not such action would have merit as a prudent action and would be defendable.
Get Creative
In general, nonprofits should also be open to new and creative solutions to problems caused by the coronavirus crisis. In addition to the suggestions above, nonprofits may want to explore:
- Innovative online events and campaigns could be an alternative for canceled in-person fundraisers.
- Existing relationships with other organizations and knowledge of other local nonprofits may provide cost reductions if strategic partnerships are developed.
- Needs arising from the COVID-19 crisis may allow for the development of new programs, keeping the organization relevant and in demand.
The COVID-19 crisis is unprecedented, and the financial impact on nonprofits is likely significant. As such, organizations must develop unprecedented responses that incorporate new and innovative strategies while leveraging existing resources. If you have any questions, our Nonprofit Group is here to help.
Additional Resources for Nonprofits:
- Candid.org – Funds for Coronavirus Relief
- CalNonprofits – COVID-19 Resources for California’s Nonprofits
- National Council of Nonprofits – Nonprofits and Coronavirus
- Nonprofit Quarterly – How Nonprofits Can Utilize the New Federal Laws Dealing with COVID-19