Options and Tactics for Managing Restricted Funds During a Crisis

Nonprofit organizations are often not the best at the “Re’s”— reconsideration and reassessment, and then repositioning to better reallocate programs, activities and operations to changing conditions. When unexpected change happens quickly and there is great disruption to sources of funding, this weakness is exposed and magnified.

Nonprofits, especially publicly supported 501(c)(3) nonprofits, that regularly receive and have accumulated substantial funds with donor restrictions (restricted funding), find themselves in a precarious position. They quickly find themselves not pivoting fast enough to align operational expenditures with the pace of unexpected reductions in funding.

When there is substantial accumulated restricted funding in place and held on the balance sheet, most nonprofit organizations find themselves at great risk of inadvertently using restricted funds for purposes other than those agreed to with the donor/funder.

When economic conditions change quickly, like we often see during a crisis, nonprofits find that previously acquired restricted funding can put them at a disadvantage.

A typical example is as follows:

A publicly supported 501(c)(3) nonprofit recently finished a capital campaign for expansion and renovation of their national headquarters office. Because of the coronavirus pandemic, they were forced to delay the start of the construction and ultimately the board of directors decided to put the project on hold while they reconsider if the need still exists for an expanded national headquarters office after the crisis abates and recovery begins.

Meanwhile, because of the crisis and declining sources of funding and cancellation of activities and events, cash flow is running extremely low and they have had to furlough staff. They are also considering additional staff reduction options if the situation does not improve soon. Consequently, they are struggling with what to do with the funds received from the capital campaign.

Based on the description of this situation, it appears the organization has a large amount of restricted funds for a project that is at best delayed or maybe will be determined to not be needed to support future operations. Although somewhat unusual as major construction projects do not happen every year, it does paint a vivid picture of how rapid unexpected change can force an organization to go in a different direction.

During a crisis, most nonprofit organizations will experience funding disruptions of various magnitudes, including declining funding and actual funding losses. These funding declines and losses can include notifications of actual funding cuts, grants being revoked, event cancellations, regular donations, memberships, and sponsorships dropping rapidly and many other similar declines in sources of funds.

Options, Planning and Tactics to Consider

Of course, restricted funds cannot be used for purposes outside of the restrictions agreed to unless the donors/grantors consent to modify the restrictions (or, alternatively, the modifications are approved by a court).

However, there are several steps you can take to get a better sense of how narrow or flexible the restrictions actually are and to work with your donors and grantors to seek the appropriate modifications that will benefit your organization.

Nonprofit organizations that are dealing with a crisis need to take a three-step proactive approach to both optimize and explore the options available related to their restricted funds.

Step #1 – Become fully knowledgeable about all current information related to the organization’s restricted funds. Review all grant agreements and restricted donor gifts to see if there is room to interpret the restrictions more broadly (which could possibly expand your options for use of the funds). Likewise, carefully review time restrictions to see if there are additional possibilities to accelerate or defer use.  

Step #2 – Prioritize restricted funds that align with your current capacity to meet/perform those promised functions. It could be in your best interest to accelerate efforts so these funds can be released.

Step #3 – Contact funding sources directly (grantors, sponsors and donors) and explore:

• If restrictions could be outright released. Funds would become unrestricted and available for use as needed.

• If restrictions could be modified and broadened to be used for other programs and activities. With agreement of the donor/funder, the funds would be eligible for use for active programs during the crisis.

• If time restrictions could be changed to better align with current program needs. With agreement of the donor/funder, time restrictions are extended so the restricted funds could be used at a later date.

  • Example #1 – During the crisis the program covered by a restricted donation had to be suspended due to social distancing requirements. A request was put forth to the donor to extend the expiration by one year so the program could be rescheduled for a future date.

  • Example #2 – An organization had grant funding that would expire within 3 months for a specific research project. The grantor was contacted to ask for an additional 3-month extension so the staff on the research grant could be redirected to another project. The staff labor costs during the current time would then be in better position to be eligible for the CARES Act Paycheck Protection Program (PPP) loan and eligible forgiveness. If the employees during the 8-week PPP covered period were funded by the grant, they would not be eligible for forgiveness under the PPP. 

• If grantors and donors would be able to make new unrestricted gifts or accelerate future funding to the present. Current grantors and donors are often your best advocators and supporters of your mission and would understand the power of additional gifts would have during a time of unexpected need.

  Planning Tip – Do not delay. Move quickly through steps #1 and #2 to develop a priority plan of action. Share this information directly with your funders so they have confidence and trust that you are in control and proactively managing through a time of crisis with a thoughtful approach. Do not hesitate to start a conversation with them to gain their insight and ask for them to partner in positive resolution planning. They will better appreciate the relationship and partnership.

Moving swiftly and decisively will demonstrate that your nonprofit organization is in control and proactive during a time of great uncertainty. Transparency, active communications and mindfulness are key during a time of crisis. Actively engaging with your restricted funders with well thought out plans and requests that will benefit the mission and ensure stability will help safeguard the confidence and trust you have built up with them over many years.