Mary Hiland of Inspired Nonprofit Leadership interviews Maya Tussing to discuss nonprofit risk management, why nonprofits need a reserve, how much is required and other insights.
INTRODUCTION Welcome to Inspire Nonprofit Leadership, where you’ll hear insights and useful strategies as well as lessons learned from other nonprofit leaders and valuable tips from a variety of experts. Here to help you with the challenges and opportunities you face day after day. Here’s your host nonprofit leadership expert, Mary Hiland.
MARY HILAND Hello nonprofit leaders and welcome to your go-to place for information and inspiration to help you be even more effective. I’m your host Mary Hiland and you’re listening to Inspired Nonprofit Leadership. My guest today is Maya Tussing. Maya is a Partner at Fairlight Advisors providing investment management and risk consulting services for philanthropic institutions and individuals. Fairlight Advisors was founded to help philanthropic leaders fulfill their missions with investment and risk solutions. Fairlight provides Investment Management Services, offering nonprofits and philanthropic individuals a widely diversified and cost effective investment strategy aligned with their financial goals. Fairlight also provides risk management consulting, taking a disciplined approach to helping philanthropic leaders deliver on their missions and prepare for the unexpected. Maya has worked in the investment services industry for almost 25 years. Over the last 20 years she’s held senior risk management roles at firms such as BlackRock, Barclays Global Investors, Visa and GE Capital. Maya has coached hundreds of men and women at all levels of corporate and nonprofit organizations to achieve personal and professional success and satisfaction. She’s been sitting on boards for over a decade and volunteering for many more years. Maya holds a BA from Pomona College and an MBA in International Finance from the University of Washington. Welcome, Maya. It is great to have you with us today.
MAYA TUSSING I’m very happy to be here. Thank you so much, Mary.
HILAND You are welcome. Well, let’s dive right in. As we talked about earlier, with your background in finance, I did want to just invite you to lead off by saying, what are some of the top challenges one or two that you see, when you work with nonprofits.
TUSSING The top challenge that I observe working with and sitting on boards really is being able to maintain a strong risk management culture and practice and risk management is really a new concept for nonprofits. But nonprofits are doing it every day. Basically, identifying, prioritizing and controlling those unexpected unplanned perils, hazards, or even opportunities. And nonprofits really are a great example [of an organization that] should be practicing risk management very effectively because they manage on a shoestring.
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And so there’s very little wiggle room for a nonprofit. If they make a mistake, if there is an external challenge that they didn’t anticipate, there isn’t a lot of money there, there isn’t a lot of cash there and resources to be able to move the ship quickly. Or even on the positive side. There’s an opportunity to launch a new program or some kind of service and to tap some resources to do that quickly based on a changing environment. Nonprofits aren’t aren’t really that nimble. And where the for-profit industry, particularly in financial services and health care and transportation technology, these are industries that are practicing risk management because they have to by law. Nonprofits should be leveraging that. And so I see this as a challenge. Because if something goes wrong, nonprofits could be dead in the water immediately. And so it’s something that I’ve been pounding the table with.
TUSSING The top challenge that I observe working with and sitting on boards really is being able to maintain a strong risk management culture and practice and risk management is really a new concept for nonprofits. But nonprofits are doing it every day. Basically, identifying, prioritizing and controlling those unexpected unplanned perils, hazards, or even opportunities. And nonprofits really are a great example [of an organization that] should be practicing risk management very effectively because they manage on a shoestring. And so there’s very little wiggle room for a nonprofit. If they make a mistake, if there is an external challenge that they didn’t anticipate, there isn’t a lot of money there, there isn’t a lot of cash there and resources to be able to move the ship quickly. Or even on the positive side. There’s an opportunity to launch a new program or some kind of service and to tap some resources to do that quickly based on a changing environment. Nonprofits aren’t aren’t really that nimble. And where the for-profit industry, particularly in financial services and health care and transportation technology, these are industries that are practicing risk management because they have to by law. Nonprofits should be leveraging that. And so I see this as a challenge. Because if something goes wrong, nonprofits could be dead in the water immediately. And so it’s something that I’ve been pounding the table with.
HILAND Can you give an example or a story of normally I like to be positive and uplifting but you know, risk is risk. And is there a nonprofit that comes to mind? I know we didn’t talk about this ahead of time, but is there a nonprofit that comes to mind where you saw some lack of risk many management processes and what happened to them because of it?
TUSSING I could talk generally of small issues that can create a setback and some larger. So on the small side, every nonprofit has the misfortune of a gala or some big fundraising event that for whatever reason, doesn’t bring in the anticipated amount of funds that they they budgeted for. And it could be because of some external misfortune. For example, there was a nonprofit that I was working with [that experienced] a huge thunderstorm on the day of this luncheon that was supposed to bring in hundreds of thousands of dollars. But nobody wanted to get on the road. I attended this event and there was practically no one there. That is that’s a risk. It’s not something that they could control. And so they were well underwater that year and continue to talk about the year of the storm. You shouldn’t have to manage your organization [with the assumption that] bad weather really affects fundraising. That’s that’s a tough pill to swallow.
HILAND That’s really hard. You know, in fact, it’s interesting that you say that because just recently, I was talking to a nonprofit development director and she was in the Midwest and she said that they had to actually cancel their fundraising gala because of a huge weather event. And of course, we all know those are happening more and certainly less predictable. So that’s a really interesting example Maya and I appreciate your sharing that. One of the things we did talk about was the idea of an operating reserve. And clearly this might be why that’s important, although other things I’m sure nonprofits have to think about. To mitigate a loss like that besides just dipping into a reserve. But could you talk a little bit for our listeners about what’s a restricted reserve? What’s an unrestricted reserve? What are, you know, some distinctions? And are there any guidelines for what boards and executives should be working toward in terms of an amount relative to their budgets? What are your thoughts about that?
TUSSING So stepping back. I’m a believer that nonprofits should try to maximize their surplus income every year. Not everybody believes that. There are a number of nonprofits that try to break even every year. I’m of the philosophy that they should try to make a surplus income, mainly because there’s this thing called inflation, which means that every year your prices will go up. And so your costs are going to go up every year. And so you should be trying to to have a little more than what you’ve budgeted.
HILAND I am with you’re there. This idea that nonprofits can’t have a profit. I mean, we typically don’t call it that, we call it excess revenue. But absolutely. I think they should be strategically planning for that. Not just sort of allowing it to happen and tolerating it.
TUSSING Right. And you know, I’m not saying that nonprofits should think about trying to live on a shoestring. That it’s this idea of scarcity. But trying to make a little more than expenses, because those surpluses could go toward an operating reserve. Now, as as you said, we can’t predict so many things that could go wrong. And we talked about donors that walk away. A major donor who says, you know, I’m not I’m not doing this anymore. Some organizations really rely on staff and volunteers and we know that staff make mistakes. They do bad things. They walk away. They have other priorities. And maybe we’re not ready for that. We have laws that sometimes we run afoul of. We have fines. Maybe we have clients that are a protected class and we’re not treating them correctly. There are just so many things that could go wrong. We try our best for those things not to happen, but we know we can’t let it control our life. But at the same time, it doesn’t make sense, it’s impossible to fund all of that. We don’t have enough resources. So we have to pick and choose. If we we pick the risks that we think are most likely going to happen, we’re probably better off. But there is that corner case that we’re just not going to be able to control. It’s going to need some more resources. So why not have this emergency fund. Think of it as 911 cash, that we can call it up it, we’re able to pay for these unexpected expenses. And it allows us to keep the lights on so we can continue to provide, services and continue to deliver on the mission. This fund should–and this is going to be a really wishy washy answer–but this operating reserve really should be commensurate with the risk of the organization. We talked about risk profile. So, there are some institutions don’t have a very high risk profile and some have very high risk profile. Consider organizations that are in health care, where we’ve got a lot of laws surrounding how we treat clients. Maybe it’s working with children. Those are going to be higher risk because because of the the class of clients or beneficiary we’re dealing with. If we have facilities, we have far more things that can go wrong with a building. Let’s say an organization owns a building. You have all of the facilities that you need to fund: the expenses on maintaining that and all the things that go wrong outside and inside a building. Then you you may have boards that are very conservative and they they just don’t like uncertainty, and that may also increase the amount of reserves that you have. And there there are a lot of factors that a nonprofit nonprofit leader should say, “You know what, what are all the things that could go wrong and that means that we should earmark more money to this emergency reserve.” It’s just like when we’re doing our own personal finance. We should have some money in a savings account and it’s all dependent on what we do for a living, how old we are, what other expenses, it’s the exact same concept. Now, you talk about how much typically operating reserves is, as you probably know, are calculated based on the number of months available for monthly expenses. So, often what a nonprofit will do is they will find out what their average monthly expenses are, and then calculate how many months of reserves you need to hold. And three months is considered the bare minimum. It is not a lot. If you think about it this way: if something were to go wrong, the presumption is that it would take you three months to get back on your feet. So if if your scenario of, let’s say it’s the failed gala or your hot shot, development director who leaves, is it going to take three months to get that money back to get back on your feet? To get the lights back on to rehire an individual? And three months is not a lot of time. But you don’t want to see more than a year.
HILAND Maya it’s interesting because when I was the CEO, a lot of years ago, the United Way in our community had a guideline for the reserve. And they, the guideline was six months. And I went from in my career growing a very small nonprofit up to having a very big nonprofit. And it seems to me that size of the organization can affect this too, because if you’re really small, you know, you’re talking about that Galen, maybe it’s only $50,000 that you lost. But if you’re really small, and you have an operating budget of seven $800,000, three months is not very much money. But if you have as I did, at one point, a $20 million nonprofit and you’ve got an operating reserve, then that’s over a million dollars a month in your operations, then you might be able to get by with a three month reserve compared to a smaller nonprofit. And I love the idea that you brought up about the risk profile of the organization because I think that’s an additional dimension. In addition to this, what your operating your monthly operating burn, is, what is your risk profile? Because if that’s higher, I absolutely agree. You really need to put that a notch up in terms of what you need to have.
TUSSING Exactly. I was thinking of this a couple years ago. I spoke to CFO of a nationally known nonprofit and they held a year’s worth of operating reserves and I thought, “Wow,” that’s a lot and then I thought about it. That the the smaller one may want to hold more because they just can’t absorb, they can’t make any mistakes. But this organization, this national organization, it was in the crosshairs of the government and have a lot of protests. It’s highly regulated and was a political football as well. They were experiencing a lot of violence against people working there and at the same time were able to increase their fundraising because of that. It reminds me of one of the risk factors is how volatile is your revenue source. So, if you have a really hard time predicting from year to year, how much you’re going to bring in because let’s say you have very few revenue sources, you’re you’re going to want to have a larger operating reserve as well. Now, one thing I I should also raise is the fact that an operating reserve is not meant to consistently fill an annual gap. So maybe you’ll have this unanticipated gift. It was great, it was a million dollars. And we constantly have a $200,000 gap in our budget. And luckily, we have this gift that we can keep filling that fundraising gap in our budget. That’s very dangerous. The operating reserve is supposed to be a one time thing. It’s not something that you rely on indefinitely because of course, that means that there is a systematic problem in the management of that nonprofit and papering it over with a big pool of cash is papering over a problem. So you could say sometimes having too much cash is also a problem because it hides flaws in your operations.
HILAND Well, and it’s how you use it, you know, and what your plans are for it. I do think there’s probably you would know better because of your financial background, a point at which the IRS might start looking at you and saying, Why do you have so much money in the bank? I mean, this is going to be a problem that most nonprofits don’t have. But if you did, you know, Why do you have so much money in the bank, you’re not reinvesting money that you should have in your mission. But I, you know, I think that’s a possibility. But it’s certainly not a risk that many nonprofits are going to have.
TUSSING Well, the more immediate problem is donors are going to wonder why they are wasting their time with this nonprofit that’s not putting [money to work]. And so, in fact, I understand that some of the nonprofit rating agencies will downgrade nonprofits who show too much cash on on their balance sheet. I’ve heard that the 990 is going to require more specificity. I’m not an accountant, but more specificity on where that cash is. There are ways to protect yourself from that by setting up a board designated fund. Are there belts and suspenders around that cash and saying, “These are not funds from a major donor. This is not an endowment, but this is extra. These are extra funds that we want to use toward this program and we want to fund it in perpetuity or for a specific amount of time. That donors like. You have extra cash you have earned, you’ve maximized your “profit” or surplus, you have been able to amass some additional funds, so let’s make our own quasi endowment to fund a new program. And that looks better than just having this fungible cash. That’s not really earmarked for anything right.
HILAND We had a situation when I was a less experienced executive where we did have excess revenue at the end of the year. And the board said, “Oh well, let’s give everybody a bonus.” And we learned later that you can’t do that at the end of the year when you have the money because that’s considered private inurement by the IRS. But if the board is proactive at the beginning of the year and says it’s our policy that if we have excess revenue, this proportion or this amount will be given out as a bonus to the staff. But it does remind me of that when you were talking about the board setting policies and the board being intentional about how it’s going about doing this. And you did say though, when I asked you about this quasi endowment because I find that nonprofits have a huge amount of confusion. About what is an endowment? And what is a reserve, a restricted reserve, because they say, “Oh, we want an endowment. We want to have a big endowment.” And in some cases, they’re not really considering how much their hands can be tied with an endowment versus a restricted reserve. That it might be more flexible because it isn’t technically an endowment and not being a finance person. I don’t want to mislead anyone. Can you say something about those distinctions so our listeners can really understand?
TUSSING So an endowment is restricted funds that are for the exclusive benefit of that organization or maybe for a specific program. It’s usually tied to a major donor who has explicitly documented their wishes for this money. Now, when you have an endowment, and I can see there’s a positive with having an endowment because optically it shows that people believe in this nonprofit. That they have major donors who believe in the mission and and believe that they can execute on that mission for a long time. But to your point, there are a lot of laws and a lot of regulation surrounding that. And not only that, think of it as you’ve been given funds that the board alone must execute. That they must have the funds available year after year to devote to that mission. They’re also responsible for picking the investments or picking an advisor who will manage those investments year in and year out and deliver a return. So it’s very complicated to maintain, but it’s good practice. So if a nonprofit said, “Yes, we really want to endowment,” realize, yes, it is a badge of honor to have an endowment. Yet, there’s a lot of work to maintain it.
HILAND And I think this has come up in the podcast before. You have to have a strong donor base, I think, to be thinking about an endowment because of the amount of money. You don’t have any yield really, in interest or money that you can use on an ongoing basis from an endowment if it’s not very big, and so I’ve seen small nonprofits just kind of see this as a magical word where, oh, we’ll have an endowment. And then I ask, Well, how many major donors do you have? How do you define your major donors? And how many do you have? And they’ll have like two or three giving it $1,000 level. And so the amount of effort that has to go in to figuring out how the heck are you going to get a million dollars in the bank for an endowment may or may not be a good decision for that particular size nonprofit, but it does depend on what your likely people are that would get engaged with that kind of an effort.
TUSSING Another thing that I think sometimes nonprofits don’t realize is sometimes the limitations that a major donor may put on these funds may not be the priority of the board. I’ve seen a nonprofit accept a major gift from a donor that is really not something that they are focusing on. So they have a million dollars sitting there which they are not ready to deploy, but they are struggling on with the operations. They are very poor when it comes to day to day operations, but then they have this big endowment for something that’s really not that important. And that goes to other policies, like gift acceptance policies, which development officers can talk about. About accepting money that has too many strings attached.
HILAND So that’s the thing boards really do need to think about, is having a gift acceptance policy around the guidelines for those kinds of reasons. Just because somebody’s giving you money doesn’t mean you want to take it. You know, if it has strings attached or there are expectations, or I’ve seen where the donors maybe aren’t explicit about that to begin with, and you accept the money, but then they want to tell you what to do with it and be a little more hands on in the spending of that money than you really want them to be. And, of course, these are the kind of sad story cases of getting money that I think are, thank goodness, few and far between.
TUSSING Yeah, you could do a whole podcast and that.
HILAND That’s right. That’s right. I could! I could do that! Well, we’re getting close to the end of our time together, Maya, but there other issues around investment. What came to mind when you were talking about the board and policy were investment policies. At what level of money in the bank do you think a board needs to start to pay attention to an investment policy? Smaller nonprofits who, unfortunately, don’t have a reserve? You know, if they don’t have any money to invest, then maybe they don’t need that, but how to how should board members and executive directors think about when do we think about having an investment policy? And are there some critical elements it needs to include?
TUSSING So if the money is restricted, I would think that you would would want an investment policy anyway. [An] investment policy statement really just puts some guidelines and rules on the objective of what these monies are for and the rules for maintaining and managing that fund. So that helps for when those board members are no longer there, or you’ve hired someone else to manage that money, that the rules are the same, they should not change. You should limit the changes from board member to board member or from investment advisor. This document should be the guiding light for how these funds would be managed. If money were lost, based on mismanagement, or fees, or negligence or poor investment decisions, that you could point to this document. Well, you know, we this is what we intended to do. And we’re regularly monitoring against the policies, the rules in that policy. If the organization feels this is enough money that it could damage the reputation and the the future of the organization, they should definitely have an investment policy. And it doesn’t have to be overly complicated it just says, here are the rules for for us and for [..] any vendor or outsider that we have looked at. We are now accountable, and this piece of paper says what you’re supposed to do, the marching orders, and if you don’t follow that…and it’s amazing how I’ve seen a lot of investment policy statements that aren’t being followed. […] I worked in corporate America for many years and you say “Okay, this is the process.” […] and then you look back and say, “Well, actually, we haven’t been following that.”
HILAND Probably forgot about it or the people who created that aren’t there anymore. And that happens with boards too. And I’ve seen that in an interesting dimension of this, as that everybody is those of you out there know, everybody has their own emotional issues around money. And when I was an executive and also a board member, at a different organization, what I saw and experienced with the discussions around investment policies were all about the personal risk level, the personal risk tolerance that individuals on the board had. And so for example, one nonprofit, there were board members that said, we’re not putting a dime of this money into anything but interest bearing insured accounts. And then there were other boards Members who said, Well, we should put some in that. But when we have a certain threshold, we really have a responsibility to be, you know, a little more strategic about growing this pot of money that we have, that we’ve accumulated over many years. And so those discussions are always very interesting. And I think, frankly, there aren’t any real guidelines out there. I don’t know. And maybe you do. I don’t think there’s any standard body that sets standards that says, you know, unless you have this much, you shouldn’t put it in the stock market, you know, that depending on other than donor restricted, you know, if this is money that the board is free to say, “This is how we’re going to manage it and this is how we’re going to invest it.” So maybe you have some comments about that before we close.
TUSSING If you’re dealing with public money, for example, these wouldn’t be nonprofits but public entities that have endowments. I did some research on, for example, public cemeteries that have endowments that fund the the operations in the care of the cemetery. The states will have very explicit rules on what you can invest in, but nonprofits, unfortunately, there aren’t. But there’s, fortunately and unfortunately, a lot of information on the internet that you can find about what to invest in. Some is very sound, it’s just you should look for the ones that are more effective. And, you know, some of the larger institutions have some kind of basic investment guidelines. But Mary, I think of it this way, it’s not your money.
HILAND That’s right, you raise a really good point.
TUSSING What what we do [for a nonprofit] is very different as an investment advisor for an individual. Frankly the way I think of it, you can speculate all you want for you. You can take risk, because it’s you, it’s on you. If you invest and do not take enough risk or take too much risk, it’s you and your family who bears that. But if it’s other people’s money, then you have to think efficiently, effectively and soundly and ethically. I need to be taking some risk because this money’s got to grow, but it’s not play money. It’s not gambling.
HILAND You can’t be reckless.
TUSSING So that’s why it’s good to have a board because you have a lot of points of view. We actually wrote an article, a blog post, recently about this perception of risk is very personal. While it has some value in a board discussion, it’s not the only one. And so you talk about maybe one person who holds a board hostage based on very personal views about something and it could be about money or whatever. And they say, you know, I have a brother who lost all his money in the stock market. And so we’ll never, you know, do that. Well, this is not about your brother’s money. It’s not about you. It’s about this organization. So it’s really taking off your personal hat. Sometimes it’s important information, but it should not be the rule that the board follows.
HILAND Well, Maya we have come to the end of our time together. And this has just been delightful to talk to you and hear your perspective and drawn this expertise for our listeners. I want to make mention, the website is www.fairlightadvisors.com. And that’s where Maya is and associates, is there any other way that you would like people to learn about you or connect with you that I’m not considering here?
TUSSING You can find us also on LinkedIn. We have a number of articles there. And we also are on Twitter and Facebook. This has been really fun. Thank you, Mary.
HILAND You are welcome. Thank you, and thank you to our listeners I so appreciate all that you do out there in the world to make our community so much better. So bless you for that and I wish you all the best. Until next time, bye bye. Transcribed by https://otter.ai
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