Managing Charitable Dollars

1.  Money Management – Rules of the Road

Board members of nonprofit organizations do two critical things when it comes to money management matters for the nonprofits they serve. First, they must approve the organization’s budget and how much it will spend each year.  Second, they must establish policies for how the organization will invest its funds longer-term to carry out its mission.  To make these decisions, Board members must follow certain fundamental rules.

Fiduciary Duties

Whether the organization is a nonprofit corporation or a charitable trust, Board members have fiduciary duties. For a nonprofit corporation, these duties are the duty of care, duty of loyalty, and duty of obedience.  For a summary of these duties and the actions Board members take to fulfill them, download our Summary of the Primary Fiduciary Duties of Directors of Pennsylvania Nonprofit Corporations. For more information on the fiduciary duties of trustees of charitable trusts, which are similar but have some differences from nonprofit corporations, download our Summary of the Primary Duties of Trustees of Pennsylvania Charitable Trusts.

Donor Restrictions

Board members must also help the nonprofit adhere to donor restrictions, if any, on the use of donated funds. See below for helpful tips about identifying and managing donor restrictions.

State Laws

Board members must follow any applicable state laws governing the investment and spending of charitable funds. For a summary of these rules in Pennsylvania, download our Summary of Pennsylvania’s Laws for the Investment and Spending of Charitable Funds.

Federal Tax Laws

Particularly for private foundations, federal tax laws sometimes have implications for investing and spending, and Board members must be sure that the nonprofits they serve comply with these rules. For example, private foundations must comply with the Internal Revenue Code rules to meet the 5% annual pay-out requirement as well as the rules related to net investment income, jeopardizing investments, and excess business holdings. For a summary of the federal rules and regulations governing private foundations, download our Summary of the Private Foundation Rules Regarding Investment and Spending.

Now that you know the rules, Topic #2 on Getting Started has suggestions for starting or managing an endowment or a reserve fund – for emergencies or cashflow and future expenses.  Or, if you have an endowment and are looking for inspiration on how to get the most out of your charitable dollars, go to Topic #3 on Impact Investing – Thinking Differently.

Donors often have specific ideas about how they want their contributions to be used – and when nonprofits accept donations with restrictions, Pennsylvania law generally provides that the restrictions are enforceable.
Before making any management decisions about making the most of donated funds, your nonprofit must know how it got the funds and review any related documentation to identify and understand any specific limitations or restrictions that may have been imposed on the funds. If restrictions exist, your organization will need to confer with legal counsel about strategies for making the most of those funds while complying with the restrictions.

Donor restrictions are often formalized in written agreements with donors – like endowment agreements, pledge or donation agreements, grant agreements, and other gift instruments. Sometimes, restrictions are imposed by a nonprofit’s formation document (such as its trust document or its Articles of Incorporation), or by language in a bequest in a donor’s Will.

Having a gift acceptance policy can help flag issues for Board members and staff and address whether and under what circumstances your organization will accept donor-restricted funds. Check out our Sample Gift Acceptance Policy.

If a nonprofit solicits money for a specific restricted purpose (i.e., a capital campaign or a specific program or purpose), funds received as part of the fundraising solicitation could be considered restricted funds that must be used for the purposes described in the solicitation documents.