The National Grants Partnership Webcast & Teleconference Nonprofit Operating Reserves Initiative

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@aol.com or James Schmutz Email: James_Schmutz@ml.com Phone: 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.

7. Unrestricted Net Assets Equity in fixed Unrestricted Net Assets Available Unrestricted Net Assets Operating ReservesPortion of Unrestricted Net Assets Board Designated (Set aside for strategic purposes) 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.

9. 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/unpredictable. • 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!

11. 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.

12. 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. 

14. 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.

18. 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 O’Malley, 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 Women’s 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 Women’s 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.

19. The National Grants PartnershipWebcast & TeleconferenceNonprofit Operating Reserves InitiativeThank You Comments, suggestions and questions are welcome: Jim Schmutz, Merrill Lynch, James_Schmutz@ml.com Bill Levis, The Urban Institute, qrelvis@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