The National Grants Partnership Webcast

1
The National Grants PartnershipWebcast
TeleconferenceNonprofit Operating Reserves
Initiative

• Prepared by
• Bill Levis
• The Urban Institute
• and
• James C. Schmutz,
• Merrill Lynch Financial Advisor

Contact Bill Levis E-mail qrlevis_at_aol.com
or James Schmutz Email James_Schmutz_at_ml.com Phon
e 202-659-6173
2
Agenda

• Nonprofit Operating Reserves Initiative
• Reserves Ratio
• It Depends!
• Financial Stability of Nonprofit Grantees - How
  is it Relevant to the National Grants
  Partnership?
• Appendix
• Internal Management Tool
• Acknowledgements

3
Nonprofit Operating Reserves Initiative
4
Nonprofit Operating Reserve Initiative Reserves
Ratio

• Nonprofit Operating Reserves Workgroup convened
  in spring 2008
• Purpose
• Define Operating Reserves Ratio
• Bring focus to importance of financial stability
• Call to action increase the number of
  nonprofits that maintain operating reserves at
  levels adequate for achieving financial stability

5
Nonprofit Operating Reserves Initiative
Reserves Ratio

• Why was the Nonprofit Operating Reserves
  Initiative Workgroup formed?
• Preliminary research indicates that a large
  portion of nonprofits may not have sufficient
  reserves. For example, according to analysis of
  IRS Form 990 data (2003)
• 1,516 or nearly 50 of 3,154 nonprofits located
  in Washington, D.C. had year-end operating
  reserves below 25 percent or less than 3 months
  of their annual expense budget.
•  
• In fact, 996 nonprofits (32) had reserves of
  zero to 25 percent while 620 nonprofits (16)
  actually had negative reserves ratios.

6
Nonprofit Operating Reserves Initiative
Reserves Ratio

• What are operating reserves?
• The portion of unrestricted net assets that
  nonprofits maintain as rainy-day funds to
  weather unexpected setbacks.
• Unrestricted net assets is a required line item
  in balance sheets in audited financial statements
  and IRS Forms 990 (line 67) of not-for-profit
  organizations.

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Nonprofit Operating Reserves Initiative
Reserves Ratio

• What are operating reserves?

8
Nonprofit Operating Reserves Initiative
Reserves Ratio

• Nonprofit boards need to establish a minimum
  Operating Reserves Ratio policy.
• Operating Reserves Ratio
•  
• A percentage operating reserves divided by the
  annual expense budget
• Or number of months operating reserves divided
  by the average monthly expense budget.
• Minimum operating reserves ratio suggested by
  the Workgroup, is 25 percent or 3 months of the
  annual expense budget.

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Nonprofit Operating Reserves Initiative It
Depends!

• What are adequate reserves for nonprofits to
  achieve financial stability?
• IT DEPENDS!

10
Nonprofit Operating Reserves Initiative It
Depends!
Range of Factors
Concentrated Revenue Stream(s) greater than 15?
Organization activity is more reactive/unpredictab
le.

• Board of Directors Influence
• Do they take long-term or short-term view?
• Budget Planning status quo, growth etc.?

Confidence in adequate backup sources for
resources?
Volatility related to day-to-day revenue and
expenses.
Decision to hold reserves greater or less than
25 - It Depends!
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Nonprofit Operating Reserves Initiative It
Depends

• The Key Action Establish a policy.
• Precisely because it depends, the Nonprofit
  Operating Reserves Workgroup concluded that it
  would be appropriate for every nonprofit
  organization to have a written Reserves Policy
  that
• defines its own adequate operating reserve
  level
• defines how its operating reserves are
  calculated
• provides the rationale that led staff and Board
  to this conclusion.

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Financial Stability How is it relevant to the
National Grants Partnership?
13
Financial Stability How is it relevant to the
National Grants Partnership?

• 80,000 nonprofit recipients of government grants
  that deliver services to US citizens across the
  country on behalf of federal, state and local
  governments.
• Government agencies that provide these funds
  need to take a special interest in the financial
  stability of the nonprofit organizations in this
  service delivery system. 

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Financial Stability How is it relevant to the
National Grants Partnership?

• There are a range of stakeholders that can
  influence establishing and maintaining adequate
  Operating Reserves for financial stability
• CEOs, CFOs and boards of nonprofit organizations
  
• Grant making community such as
• program officers of foundations
• regional associations of grant makers
• GOVERNMENT AGENCIES
• Associations of nonprofits and umbrella groups
  geographic and subsector.
• Accountants such as individual CFOs and CPAs,
  CFO groups and CPA societies
• Financial institutions serving the nonprofit
  sector

15
Financial Stability How is it relevant to the
National Grants Partnership?

• What can these stakeholders do to enhance
  financial stability among nonprofit
  organizations?
• All stakeholders can encourage nonprofits to
• establish comprehensive written Reserves
  Policies for maintaining adequate operating
  reserves for financial stability
• employ budgeting and accounting procedures that
  implement their Reserves Policy effectively.
• Resource providers including government
  agencies, can permit and even encourage their
  grantees to include surpluses for building
  reserves in the administrative portion of their
  grant budgets.

16
Appendix
17
Appendix Internal Management Tool

• The Nonprofit Operating Reserves Initiative
  understands the sensitive nature and potential
  implications resulting from the suggested
  parameters such as the 25 figure presented as
• a benchmark, outlined in the White Paper. The
  group
• understands that the content of the White Paper
  could be misused as a performance metric if
  assigned blindly and arbitrarily to a nonprofit
  organization.
• With that in mind work group members were
  emphatically unanimous in declaring that the
  results of this initiative were intended for use
  and application as an internal management tool
  for nonprofit staff and Boards.
• Because of the It Depends factors, it is not
  intended for use by watchdog groups or any
  other external observer. The risk of not
  recognizing the unique nature of each nonprofit
  is too great for the suggestions outlined in the
  White Paper to be used without greater depth of
  knowledge of the nonprofit organization.

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Appendix Acknowledgements

• Bill Levis and Jim Schmutz want to thank and
  acknowledge all the people who have participated
  in the Nonprofit Operating Reserves Initiative
  project process.

Nonprofit Operating Reserves Initiative Project
Members
Rob Batarla, American Physical Therapy
Association Wendy Batkin, Nonprofit
Consultant Elizabeth Boris, Center Director, CNP,
The Urban Institute Mary Buszuwski, ANA Gale
Case, Rothstein Kass Glenda Cognevich, DC Central
Kitchen Gail Crider, National Arts
Strategies Linda Crompton, BoardSource Cami
Cumblidge, Nebraska Council of School
Administrators Mary Ann de Barbieri, de Barbieri
Associates Keith Danos, Jewish Federation for
Group Homes Tim Delaney, National Council of
Nonprofit Organizations Rick Dorman,
GWSCPA Phylis Edans, American College of
Emergency Physicians Ken Euwema, United Way of
America Bess Foley, Nonprofit Finance
Accounting Consultant Carlos Gomez-Montes, United
Way of America Flo Greene, California Assn of
Nonprofits Bill Hamm, Foundation for
Independent Higher Education Bob Hawkins,
concerned citizen Marge Heitbrink, Wise Giving
Alliance, CBBB George Hergenhahn, Special
Olympics Maryland Deborah Hickox, Goodwill of
Greater Washington Maria-Nelly Johnson, Special
Olympics District of Columbia Lisa Junker,
ASAE Fred Lane, Center for Nonprofit Strategy
and Management, Baruch College/CUNY Dick
Larkin, BDO Seidman () Bill Levis, Senior
Associate, NCCS, The Urban Institute
Elaine Lynch, American Anthropological Assn Dawn
Mancuso, Association of Air Medical Services Rick
Moyers, Meyer Foundation Patty OMalley, Rubino
McGeehan Tom Pollak, Program Director, NCCS,
Urban Institute Dennis Ramprashad, MillerMusmar,
Chair, GWSCPA QR Task Force Celeste Regan,
National Park Foundation Sally Rudney, The
Montgomery County Community Foundation Daniel
Saat, Tides Foundation Susan Sanow, Center for
Nonprofit Advancement () Jim Schmutz, Merrill
Lynch Jeff Schragg, Argy, Witse Robinson Cathy
Stegmaier, Aliamce of Cambridge Advisors Suzanne
Stone, Society for Womens Health
Research Janette Stout, Southeastern University
Research Assn Alan Strand, California Association
of Nonprofits Russy Sumariwalla, Global
Philanthropy Nonprofits Russell Willis Taylor,
National Arts Strategies A Irene Tongelidis,
Accounting and Consulting Services Tim Walters,
Association for Small Foundations Bennett
Weiner, BBB Wise Giving Alliance Yonas
Weldemariam, Society for Womens Health
Research Brian Williams, Step Afrika! Jack
Ziegler, Movement Advancement Project/LGBT Joe
Zillo, Defenders of Wildlife Steve Zimmerman,
Spectrum Nonprofit Services LLC () Bill Levis
and Jim Schmutz collaborated to bring this group
together and establish the Nonprofit Operating
Reserves Initiative.
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The National Grants PartnershipWebcast
TeleconferenceNonprofit Operating Reserves
InitiativeThank You

• Comments, suggestions and questions are welcome
• Jim Schmutz, Merrill Lynch, James_Schmutz_at_ml.com
• Bill Levis, The Urban Institute, qrelvis_at_aol.com
•  
• See also Nonprofit Operating Reserves Initiative
  White Paper at http//www.nccs2.org/wiki/images/5
  /50/What_are_Adequate_Nonprofit_Reserves.pdf