Strings Attached

Restricted gifts pose genuine challenges to nonprofit organizations, but such gifts also present unique opportunities to expand programming and increase the donor network.

In 1989, a powerful earthquake in Northern California caused significant damage to a high school swimming pool. A local soft drink and beer distributor offered to pay for all repairs as long as the school hung a banner with its name over the pool. The school board had grave reservations about the donor’s stipulation, hesitant to promote a beer distributor in an educational institution. In the end, the board rejected the gift but feared alienating the company and dissuading other donors from stepping forward.

Restricted Gifts, Unrestricted Potential
As in the case of the high school, gifts that carry restrictions can pit needs against values and force difficult decisions. But at many nonprofit organizations, navigating the complex waters of restricted gifts is a regular fact of life. “As donors grow more sophisticated, increasingly they designate their gifts to specific purposes,” observes Stacy Cullison, Director of Planned Giving and Principal Gifts at the San Francisco Opera, where philanthropists regularly direct major gifts to the endowment, to specific productions, or to favorite compositions.

“When donors involve the organization in planning a gift, together they can accomplish great things,” says Cullison. “I don’t want them to be afraid to talk to an organization if they have a particular interest that they want to support.”

Restricted gifts are vital to nonprofit organizations, and while wrangling over the terms of a gift might sound awkward, seasoned development officers must learn to conduct these conversations adeptly to defuse potentially acrimonious situations. Restrictions pose genuine challenges to nonprofit organizations, but such gifts also present unique opportunities. When donors seek to attach significant restrictions to their gifts, organizations must consider the ramifications carefully.

Establish Gift Policies

The San Francisco Opera addresses each gift on a case-by-case basis, Cullison says. A strong relationship with the board and proper due diligence ensures that donors maintain faith in the organization even if the company declines a gift. But organizations less familiar with restricted gifts tread through more difficult terrain.

To prepare for such situations, Maria Gitin, a Certified Fund Raising Executive, suggests that nonprofits establish a rigorous gift acceptance policy overseen by a review committee. “With such a policy in place the refusal of a gift will never be personal,” she says. A well-crafted gift acceptance policy does more than prevent rancor: An adequate policy works in tandem with a clearly defined mission statement to protect the interests of nonprofit organizations. “Welcome gifts that don’t distort one’s mission statement,” Gitin urges.

Small organizations can be overwhelmed by large restricted gifts that target a specific project. A hypothetical $3 million dollar gift for the advancement of literacy to a foundation managing $27 million means that suddenly 10 percent of the budget is dedicated to a single project that may tax the limits of an organization’s expertise. “Such a situation can transform the organization,” Gitin says.

When a potential restricted gift is offered, organizations must ask themselves if they can afford to administer it, Gitin says. She also suggests that organizations “engage the donor, heirs, or trustees in advance of drawing up the contracts with the attorney.” Organizations should maintain open lines of communication throughout the process and continue to make clear the mission and works. In so doing, they have a much better chance of turning a restricted gift into an unrestricted one.

Finding Opportunities

Of course, restricted gifts afford opportunities as well as risks. The costs of new programs can be mitigated by partnering with groups already working on similar projects. These partners can provide subject area expertise and amplify the potential of a restricted gift.
Similarly, new programming introduced by a restricted gift may stimulate interest among untapped donors.

One professional fund-raiser used the example of an organization that received an unexpected $2 million gift but lacked the experience to carry out the donor’s intent: the founding of a public think tank devoted to the issues of global warming. Rather than reject the gift, the group sought additional support from scientists in the community who had created wealth from patents they held. The organization was able to leverage the initial restricted gift to create a lasting relationship with new donors. In so doing, it both fulfilled the intent of the gift and extended its donor network.

Donor Intent and Related Risks

Yet restricted gifts carry perils of which organizations too frequently are unaware. When an organization such as the American Red Cross raises funds for Tsunami Relief, for example, those funds cannot be diverted to other purposes. They are deemed restricted by the Internal Revenue Service and must be accounted for in the costs of programming.

Restricted gifts often cover programming but fail to account for indirect costs such as initial fund-raising or administrative expenses, says Thomas J. Raffa, a Certified Public Accountant and the President and founder of Raffa, Inc., a Washington D.C.-based consulting, accounting, and technology firm that serves nonprofit organizations. “The more we, as donors, dictate that dollars are used for programming, the harder it is for organizations to sustain themselves,” he says.

Moreover, without extra sources of revenue, “mission creep” can ultimately threaten the existence of nonprofit organizations failing to carefully determine needs and adequate revenue sources.

The solution, Raffa notes, is to work with donors, articulate needs, and together plan for projects. Sustained communication with donors, their attorneys and heirs can help organizations tap the unrestricted potential of every restricted gift.

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Thomas Asher is a freelance writer based in San Francisco, California.

Copyright 2006 Community Foundations of America
Used with Permission

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Posted at 12:28 PM, Oct 31, 2006 in Nonprofit Management | Performance Measurement | Philanthropic Strategy | Permalink | Comment