Balancing the Mission Checkbook

We’ve heard a lot from nonprofit clients in the last week or so about cash - too little, too restricted, or just right. Maybe the right amount, but the wrong timing. Maybe the right timing, but too risky or some other problem that results in cash on the balance sheet ending up as only “cash” on paper.

Here are three stories:

• Organization 1 has been holding a nice balance in a money market investment account for the last two years. The funds were earned from a special grant-funded project but no one ever figured out whether there was an ongoing restriction on the earnings. Now they wonder if they can use this idle cash as an operating fund.

• Organization 2 has a substantial balance in a building reserve fund and no money in operating reserves. There are no improvements planned and the building has been well maintained, but the policy keeps this cash out of reach to address immediate needs.

• Organization 3 has operating reserves invested in a bond fund and realized that the value of the account has dropped with the market. The treasurer thought that the fund was like a money market account and didn’t realize there was risk of market fluctuations.

In all three cases the nonprofit was accurately reporting the asset balance on financial reports. Beyond verifying an accurate number, though, it’s important to have a solid grasp of all the strings and restrictions that might hinder your ability to use that cash when you need it. Some restrictions are external, such as temporarily restricted grants. Other strings on cash result from internal decisions related to investment decisions, reserve policies, or overly-complex designations and conditions.

Thomas McLaughlin addresses the problem of illiquid cash in this week’s Streetsmart Financial Manager column in The NonProfit Times.

How Liquid Are We, Really? Cash is king, or queen, depending on the realm. As long as you have sufficient cash you can outlast most blows the environment delivers. But you need to be sure that the things listed as cash really are cash.

Nonprofits Assistance Fund has created a quick cash analysis resource to help nonprofits easily distinguish cash that’s liquid and available from other types of restricted, designated, or hard-to-access funds. You can download this Cash and Investment Analysis worksheet now.

All of us are reading waves of economic information right now - the stimulus, the proposed state and federal budgets - and are trying to sort out which parts have a direct impact on our communities and organizations. Both the stimulus and federal budget are big and bold and pretty overwhelming. There is so much to understand and analyze - thank goodness for some great resources like Minnesota Budget Bites and National Council of Nonprofits. I’m trying to keep up with the general framework and get into specific details when I need to. I hope that all of us who are committed to stronger communities will spend the necessary time to understand what’s needed and work together with the big picture in sight.

Considering the importance, scale and scope of the economic proposals, I am really disappointed that that the number one, highest priority, most important issue for many in the nonprofit world is the proposal contained in the President’s budget that would limit the extent of deductions for charitable contributions for those in the highest tax bracket, reported here in the Chronicle of Philanthropy.

Typical of the outcries in response is a statement from Independent Sector:

Independent Sector believes that this change could be a disincentive to some donors who might further cap their gifts on account of the new limit.

Most of the comments made by our well-known leaders include the phrase “In these hard economic times” and forecast doom if this change comes to pass.

I’m disappointed in this knee jerk reaction that’s just a version of NIMBYism at a time when we really need to pull together and work for the greater common good, which may involve sacrifice. Beyond that disappointment, I’m skeptical that doomsday will come. First of all, the change wouldn’t be effective until 2011, so it won’t impact donors “in this tough economic environment.” And if you really believe that your donors are in it for the tax deduction I think that you need to re-write your case statement. Surveys, like one conducted in 2006 by Center on Philanthropy at Indiana University for Bank of America, report that over 50% of the high net worth people interviewed would not decrease their giving even if there was no tax deduction at all. From what I’ve read, the tax deduction is more likely to impact the timing and form of a gift rather than whether a gift is made. It’s easy to get this form confused with substance. Consider this from Charity Navigator’s blog:

The data that we have seen over the years has shown a big spike in donations through our site during the last several days of the year, especially on December 31st which of course is the last day to make a qualified tax deductible charitable contribution (see our Tax Benefits of Giving article). This data indicates to us that the tax benefits really do motivate people to donate.

This logic needs checking - do the tax benefits “motivate” people to donate, or have we in the nonprofit world trained our donors to give in December regardless of their motivation? The New York Times article Limiting Deductions on Charity Draws Ire quotes several other experts about the relationship between tax deduction and reasons for giving and their confidence that taxes are at the low on the list.

Even if this tax code change would have an impact on total giving, it’s important to focus on the forest, rather than the leaves on the trees. The proposed federal budget blueprint represents a seismic shift in priorities and structure. I agree with blogger John D. Columbo’s comment:

So let’s not turn this into a doomsday scenario, folks. The truth is, if Obama can fix our health care system, charities as a whole (and everyone else, from GM to the local barbershop) are going to be much better off in the long run.

Independent Sector’s statement (quoted above) includes only one other paragraph about the rest of the 140 page blueprint for the federal budget:

The budget outline also calls for winding down spending for the war in Iraq, boosting funding for domestic priorities, and creating a “reserve fund” of $634 billion to cover health care expansion. The President has stated that his outline will cut the deficit in half by 2013.

Well, maybe that doesn’t seem that important to them.