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This is the twenty-second in a series of informative monthly articles for North Carolina businesses from PNC in collaboration with Business North Carolina magazine.
Local PNC leader reflects on best practices to help nonprofit boards meet today’s unique challenges.
North Carolina’s 40,000+ charitable nonprofits play a crucial role in delivering services, resources and education throughout local communities – while also creating lift and impact for the state’s economy and workforce. According to the North Carolina Center for Nonprofits, organizations in the nonprofit sector pay more than $19 billion in wages to North Carolinians annually. In total, nonprofits put $56 billion in revenue back into the state’s economy each year – and the life-changing impact they provide cannot be overstated, particularly when reflecting on the personal and economic hardships and disruptions that have arisen in recent years.
Unpredictable markets, increased reliance on philanthropy and complex regulatory requirements are among the challenges nonprofits face today – all while being asked to expand their impact with fewer resources. As a result, many nonprofits are reevaluating their business models by establishing or strengthening long-term asset pools (“rainy-day funds”) and reinvigorating fundraising and donor education efforts.
As nonprofits throughout North Carolina continue on the path to recovery and emerge from the pandemic, Winston-Salem-based Henri Cancio-Fitzgerald, senior vice president and managing director of nonprofit solutions for PNC Institutional Asset Management®, provides insights on selected trends and best practices in the nonprofit sector.
Unrestricted giving and trust-based philanthropy
Among the emerging trends shaping the nationwide philanthropic landscape is the uptick in unrestricted giving and trust-based philanthropy. While this type of funding represents a departure from the norm for many donors, nonprofit leaders are increasingly communicating to funders the benefits of unrestricted or less restricted funding. “This could be as simple as explaining the differences between restricted and unrestricted giving and the impact that the type of funding has on the organization and its mission,” says Cancio-Fitzgerald.
More unrestricted dollars reflects a stronger organization from a financial health perspective, and can, in turn, lower the cost of borrowing, affording the organization more financial flexibility. Restricted funds can be limiting and even jeopardizing to a nonprofit organization. Take, for example, an organization with a very large endowment that was forced to make a special donor appeal during the pandemic because the endowment was largely restricted. The unanticipated expenses brought on by the pandemic left the organization with insufficient budget flexibility to optimize operations. This cautionary tale is a great case study in the need for unrestricted assets. By making the donor an “insider,” organizations are better positioned to make the case for unrestricted giving.
“With the events of recent years prompting nonprofits to revisit their identities, development strategies and business models, unrestricted funding can help fund capacity building efforts and education that can help organizations become more resilient,” he says.
Saving for a rainy day
A reserve fund is a best practice for any organization, but it can be difficult to build due to donors’ preferences to fund capital projects and mission-specific initiatives. “While there is no one-size-fits-all answer in terms of how much an organization should have in a reserve fund, aiming for 3-6 months of operating expenses is generally a good place to start,” says Cancio-Fitzgerald. And for endowments, having 2x the annual operating budget is the industry standard. “While building this reserve through fundraising is typically challenging, events of the past few years may make donors more receptive to the idea,” he says.
One way to navigate this challenge is with scenario analysis. Running a model using various scenarios and assumptions over a 5-, 10-, and 15-year timeline can make a compelling case.
For organizations with excess cash, starting a rainy-day fund with a goals-based investment approach could provide stability during future unforeseen events and help the organization be positioned to take advantage of strategic investment opportunities. “A first step is to define the organization’s financial goals – for example, attaining a certain level of net assets, providing a specific level of budget funding through annual distributions from an investment pool, or obtaining some liquidity target,” says Cancio-Fitzgerald.
The distribution of high-profile gifts from mega donors and the relatively recent public availability of IRS Form 990 information support the premise that organizations could be in the process of being considered for funding without their knowledge. Because organizations may not be aware they are being evaluated, it is important they can be readily found during a private donor’s research.
“Clear, concise reporting of an organization’s impact metrics is crucial to attracting donors and mega donors alike,” says Cancio-Fitzgerald. “Making these metrics readily available on the organization’s web site and in its annual report will allow it to effectively illustrate the impact of each dollar spent. An organization should ask itself, ‘Can a potential donor quickly and easily determine how additional assets could positively affect the community, constituents or cause? If the answer is no, organizations should reevaluate the key performance indicators they measure and share.”
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