Your adult son is asking you for money again. He wants $100,000 to open a second restaurant to expand into a new market. You’re inclined to gift him the money since his first restaurant has been a great success. But here’s the thing: he’s sitting on $44 million after winning the lottery a few years ago. He invested the proceeds prudently so that the performance gains alone have amounted to almost $3 million a year—far more than he earns from his restaurant. He hasn’t said what he plans to do with the lottery winnings.
Do you give your son $100,000?
I use this fictitious account to introduce the story of the nonprofit Miracle Flights as reported October 2019 in the Las Vegas Review-Journal by Briana Erickson and by Nonprofit Quarterly Editor-in-Chief, Ruth McCambridge. Miracle Flights, with an annual budget of almost $4 million, provides free flights to ailing children seeking specialized medical care and second opinions. The Review-Journal’s article came soon after the organization announced a fundraising push to expand flight services to veterans, but according to reports, did not mention to prospective donors its $44 million reserve received in large part from a 2012 legal settlement from British Airways. The chart to the right from the Las Vegas Review-Journal using data from ProPublica shows Miracle Flights’s asset growth over the last few years.
“It’s a poor basis to ask for money when they’ve already got so much money,” said Daniel Borochoff, president and founder of CharityWatch, as reported in the Las Vegas Review-Journal article. In response to Miracle Flights’ fundraising while sitting on an operating reserve equaling 11 years’ of expenses, Borochoff added, “My question would be, ‘You’ve got this balance of $44 million. Couldn’t you spend some of that before you take my hard-earned money?’”
Let’s walk it back a bit and review what we’ve discussed in previous pieces here and here about unrestricted operating reserves. First, they’re great! Institutions with a consistent, unrestricted reserve that grows along with the organization, signal that 1) income, revenue or fundraising is robust and 2) they are prepared to manage threats or take advantage of opportunities that come their way. For nonprofits, building a reserve can be especially difficult when the expectation from donors is that almost all assets should be funneled into programs. There is no concept of owners’ or shareholders’ equity, as with for-profits. Building a reserve is even harder when a nonprofit’s sources of funds are limited. For example, they rely on one major grant or have no earned income. As a result, it can take several years for an organization to build a reserve sufficient to fund the potential risks and opportunities.
So it’s unusual for a nonprofit—or any institution, for that matter—to come into a windfall that covers the budget many times over. A dream come true! But, as the reporting in NPQ and the Las Vegas Review-Journal suggest, is there such a thing as too much reserve? Should Miracle Flights have stopped all fundraising in light of their windfall? I’d argue, it depends.
An experienced financial analyst would scrutinize any massive cash reserve to determine whether the organization has earmarked the assets toward a specific goal. Without a grand strategy, discontinuing fundraising might be the most ethical move and could show true commitment to the philanthropic mission. As with a public company, shareholders expect that if expanding the business does not provide a better return than, say, the stock market, shareholders would want excess funds returned to them in the form of a dividend. The same might be said for donors of a nonprofit with exceptionally large reserves; if the organization is not prepared to invest big in the philanthropic mission when funds are abundant, it suggests management may not be strategic or are not pressured to perform.
What do you think? What strategies do you recommend for nonprofits with very large reserves?
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