The Impact of Endowments and Reserves on a Nonprofit’s Access to Funding Under the Paycheck Protection Program

May 4, 2020 | Article

The United States Department of the Treasury recently issued an update to its Paycheck Protection Program Loans Frequently Asked Questions page, adding question #31.

Question 31 specifically addresses adequate sources of liquidity to support ongoing operations.

At first glance, question 31 appears to be targeted at publicly traded companies receiving PPP loans. However, the Treasury’s unclear response suggests that other types and sources of funding available could be considered liquid in making a “good faith certification” that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

The Impact of Question 31 on Nonprofits
The lack of clarity in the response has many nonprofits asking the question—is my organization’s endowment or board-designated reserves considered a liquid asset for determining eligibility under the PPP loan? The answer, like many aspects of federal funding, is not black and white but something that nonprofits with these funds should evaluate.

The National Council of Nonprofits’ survey shows that less than 25% of nonprofits have more than six months of cash on hand. Many nonprofits are heavily reliant on their day-to-day activity to sustain operations and are quickly finding themselves in an uncertain environment of lost revenue, full or partial suspension of operations, cancelled fundraising events, and declining contributions.

Tapping into operating reserves or endowments when investment portfolios are at their lowest point in over a decade can further jeopardize the longevity of these organizations and their ability to weather the economic declines, further impacting their ability to provide support to communities that heavily rely on their help.

The impact to nonprofits is further complicated by donor and grantor limitations on the use of funds that may seem at first glance to be available for use in operations, considerations that their business entity counterparts do not face. This inherent difference can result in nonprofits appearing to be rich with liquid assets when, in fact, their most significant resources may not be available for general expenditure.

Consider a nonprofit organization’s endowment, for example. Endowments fall into two distinct categories:

  • Those that originate from donor-restricted gifts.
  • Those that are designated by the board of directors to function as endowments.

The key difference is the existence or absence of donor restrictions placed on the use of the funds and length of time that the funds are to be maintained by the organization.

The Impact of Donor Restrictions
In nearly all states, spending from donor-restricted endowments is governed by the Uniform Prudent Management of Institutional Funds Act (UPMIFA). Even though spending from endowments during times of uncertainty and portfolio losses is not precluded, UPMIFA requires an organization and its board of directors to manage its endowment funds in a way that preserves their purchasing power in perpetuity.

Nonprofits place heavy reliance on the annual distributions from endowments to cover their operations, support their programs, and smooth out revenue fluctuations. Continued declines in the value of endowment portfolios can be detrimental to the ability of nonprofits to draw from their endowments, which can ultimately impact the longevity of the organization.

In addition, donor restrictions on spending legally obligate the organization to comply with the donor’s wishes on the use of the endowment funds. Most donors establish endowments to support specific purposes, like scholarships or capital expenditures, and seldom establish endowments to support general operations. This means that even though a nonprofit may continue to spend from its endowment during this unprecedented time, their levels of spending will likely be less and may not be available to help them with everyday operating costs.

Board-designated endowments, however, do not carry the same donor limitations as donor-restricted endowments. Neither do designated reserves established by the board of directors for purposes other than operations, such as capital improvements or additional programmatic support. In both cases, a nonprofit organization’s board has placed internal restrictions on the use of its asses.

Nonprofits need to work with their board of directors to carefully assess whether they should consider these assets when evaluating access to alternative sources of funding to help sustain the organization’s operations. Documentation of this evaluation and the conclusion is a key component to ensuring a nonprofit can support their acceptance of the PPP loan when they have these types of funds available.

Uncertainty Remains When it Comes to Nonprofits and PPP Funding
Many questions remain related to intent of the guidance issued by the Treasury. It is critical that nonprofit organizations with endowment funds or operating reserves determine which funds are restricted and which are not as they evaluate acceptance of PPP loan funds. Management and boards must be prepared to support their decision to accept funds. Proper documentation and alignment with their fiduciary responsibility over their organization’s assets and operations will be necessities to avoid issues with PPP funds.

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