[Kate Barr]

The webinar and discussion on Nonprofit Reserves: The Real Deal broadened my understanding of reserves beyond the simple image of a “Rainy day fund” to view reserves as a foundation for the capital available to a nonprofit for short, medium, and long term financial health. . One question came up over and over during the session – once you HAVE reserves, how do you invest them? There were questions about risks with investment, staying liquid, and the operational decisions about banks, brokers, and investment choices.

What are your strategies and policies for your reserve funds?

[Mary]

I recently retired as CFO from a $20 million human services agency. We had approximately $1.5 million in reserves that came mostly from bequests and unexpected items like retroactive rate adjustments on state contracts.

We worried that perhaps we shouldn’t be in the securities markets, but with the help of a savvy board treasurer we concluded that it was a necessity to guard against inflation. I think it’s helpful to think about nonprofit investing a bit like retirement investing. Even in retirement, it is not unusual to have IRAs in high quality, diversified stock and bond portfolios.

Our agency put out a request for proposals to area money managers and wound up with a regional company that has a family of mutual funds with varying levels of risk. We put the majority of our money in a high quality fund with an asset allocation of 30% stock and 70% fixed income. The historical rate of return was around 5% – far better than less than 1% for a savings account – and the turnaround time for withdrawals was a couple of days.

We also had an endowment made up of donor-restricted and quasi-endowment funds. Again, with the help of our board, we learned that we could add a portion of our reserves to our endowment assets but had to label that portion “quasi-endowment” since it could be dissolved at any time with board action. Since endowments, by definition, are long-term assets, we invested this money in a less conservative fund with a 50-50 asset allocation.

[Dick]

We also have invested our reserves in a short term investment pool that is 70% a low-duration bond fund and 30% in an S&P 500 index fund.

We use a local community foundation for our investing.

[Kate Barr]

That seems like a good approach, Dick. Did you have a process for choosing the community foundation to manage the funds, or has that been a long established relationship?

[Ruth McCambridge]

Dick, How does that contract work with the community foundation? what are the parameters of such a contract?

[Mark H (forum moderator)]

Hire professionals? This has at least got to be in the discussion.

I like to manage investment of my own household money. I think I do okay, and I resist all the marketing calls to hire somebody to do it for me. My father-in-law, who has a lot more money than I ever will, DOES hire people to manage his household money. Could I do substantially better if I hired somebody to invest and manage my money? Maybe. Probably. But I’m cheap.

A couple examples make me think nonprofits also can benefit from hiring money people to invest their money (if they’re not cheap).

I’m amid a contract to do some research for the Council on Foundations. One project is to study compensation in grantmaking foundations. I found more than 50 people with salaries over $1 million. More than half of those people have the word “investment” in their job title. The highest several salaries are investment officers. In many cases, investment officers out-earn the foundation president. The nonprofit sector’s money (private foundation corpuses) hires professionals to manage its growth.

The other example is Harvard. That famous $53+ billion endowment throws off $2+ billion each year to fund one-third of Harvard’s operations. They have an office called the Harvard Management Company that’s staffed by serious money people who work daily to maximize the endowment’s value.

I manage my own household money because “it’s not rocket science.” On the other hand, rocket scientists have a lot better chance of getting to the moon than I do.

[Wade R (forum moderator)]

I work primarily with very small organizations (up to $2M budget) who are mostly taking baby steps toward building reserves – once we establish what that word means to them (another thank you for the last webinar!). These boards are squeamish about going beyond traditional interest-bearing deposit accounts and it has been quite a sell to even move toward laddering CDs. In all cases, they are holding fast to the need to remain within FDIC limits. Fortunately (for this situation), interest rates are on the rise.

I appreciate the earlier responses regarding strategies to go beyond liquidity and to begin considering placing funds in the markets, albeit conservatively. It really does boil down to understanding the different layers of capital and which may be appropriate for long-term growth.

[Mark H (forum moderator)]

Wade: I’d love to hear more about this. Being responsible with money is laudable, but sticking it in a mattress isn’t good stewardship. You’ve found boards really reluctant to invest?

[Wade R (forum moderator)]

Mark, I would only say they’re reluctant to invest the small amount of money that is being held as an emergency fund, say 3-6 months of operating expenses. The few groups that I have who have started to build or have been awarded an endowment are of course entering the market, typically following the strategies that respondents have been describing in this forum.

[Mark H (forum moderator)]

That’s helpful, thanks. Right, I’d always support keeping emergency reserves in something very liquid and safe. And with the fed rate hikes, some basic accounts are paying upwards of 4% now. But for an investment corpus, I’m on the side of letting the historical returns of the market (hopefully) work in our favor.

[Kate Barr]

The current market environment for liquid accounts is so much better now than it was a year and two ago (although the context for that is higher rates for borrowing, of course.) Many organizations kind of gave up on trying to get better returns on their liquid funds so it’s good to be reminded to pay attention again and ask your bank or other advisor for the options for liquidity. Money market accounts and laddered certificates of deposits are a pretty good option now.

[Dana B (forum moderator)]

As a Board Treasurer and nonprofit consultant, I certainly understand the importance of having the right team/resources to manage to reserve funds to effectively manage risk and maximize returns, and that doing this often does require some type of professional help or expertise as noted above (particularly if you don’t already have it in-house or on your board). And while I’ve come across many money managers to help support this on some level, in my experience it’s been much more challenging to find professional support to help effectively ensure the alignment of your organizational values and investment strategy with the emphasis usually being on returns and the right type of diversification. Even as someone who operates with financial sustainability at the fore, I also believe that it’s important to make sure that investment choices don’t directly contradict an organization’s mission and values, particularly for organizations that are focused on achieving equity within their respective communities, teams and across the global landscape.

I’d love to hear from folks who’ve encountered and worked to address issues around values alignment within investment strategies. Have you found effective professional support around this area? Have you and your teams determined where your organization definitely will NOT invest it’s funds from a values perspective? Do you have experience developing criteria for ethical investment strategy? Any and all thoughts welcome!

[Kate Barr]

I agree, Dana, this is an important factor for many nonprofits. I’ve seen it addressed at two points in the process – the selection of an advisor or money manager and then at the investment policy level. I read an RFP for money managers last year that included some good language and criteria about this. I’ll track that down and ask permission to share it.

[Jennifer]

At our non-profit, we are pretty risk-adverse and don’t do investing beyond CDs and savings accounts, and while I know it’s barely bringing in any interest, at this point this is where our comfort level lies.
In order to ensure our cash reserves stay protected under FDIC limits, I encourage folks to consider a “sweep” account. You work with your bank and set a target balance, and anything outside that amount at the end of the day is moved into other banks, so no one balance exceeds FDIC limits, allowing cash to stay protected even if it’s beyond the FDIC limit. As an example, if we had one million in our bank account, we’d set our account to sweep anything beyond 250k. That 750k then goes to various banks overnight (with less than 250k in each account), protecting those extra funds. It allows us to earn interest, but we don’t have to manage having funds in multiple accounts/banks.
It takes a little while to grasp the concept (at least for me), but over time as my understanding has increased and it’s a relatively regular practice.

[Kate Barr]

Thanks, Jennifer, this is a great example of an option that doesn’t require a while investment policy review and risk management. Banks offer sweep accounts and a few other cash investing options that aren’t top of mind for most of us. It’s a good reminder to probe and ask what they have available, and then to check around for other options. We had a sweep account as well and then when rates dropped so much in 2021 it wasn’t really worth it. As rates have gone back up this year it was worth reinstating the service.

[Nancy D]

I am the CEO of a nonprofit with a large endowment and a much smaller Board designated reserve fund, We have a Board investment committee made up of active and retired investment experts that hire several money managers. The results of each of the managers are compared and inform how much money is given to each of the money managers going forward. The Board investment committee members meet regularly with the money managers and provide consistent oversight without micromanaging. The full Board votes on the investment strategy annually and the Board investment committee members implement it. Equities generally make up 60-70% of the portfolio. The endowment is invested for growth with a set 4.5% payout for operations based on a five year average.of the funds. Using a five year average smooths out fluctuations of the payout. The smaller reserves come primarily from bequests or end of the year surplus. The reserve funds are invested but easily liquidated in case of an emergency or urgent need. In 1984, the endowment was about $8 million. It is now about $80 million. It is a true endowment with the majority of the funds donor restricted to using only interest and dividends. A smaller portion of the endowment has donor instructions to use interest, dividends and capital gains. The reserve fund is unrestricted.

[Mark H (forum moderator)]

I think this is a big point. Nonprofits that are willing to make standard investment risks (along the lines that people typically do with their retirement savings) make good returns over time. Nonprofits unwilling to invest more aggressively are stuck around 1% and won’t keep up with inflation.

[Bruce]

We have a not-for-profit budget of $6.5 mil. We run an overnight camp and a day camp, as well as some mission run retreats.
Our board investment subcommittee of our Finance and Operations committee created an IPS (Investment Policy Statement) that then allowed us to hire money mangers for our endowment fund. The IPS provides for asset allocations of Equity = 30%; Fixed Income = 65% (investment grade is at 60% and below-investment grade is at 5%); 5% cash. We have a permitted variance of +/- 5%. The value if our endowment is $2.4 mil. We also leverage this towards a priority line of credit which allows a draw on 60% of the value of the fund if needed. The interest on this LOC is much less than traditional LOC’s and there is not mandated time horizon as long as the ratio is in tact. The interest/draw yields between 3-4% and is used for stipulated purposes as defined by the donors.

In addition, we have an annual capital/operational campaign to raise money for camp scholarships, programs, and capital projects. we budget for depreciation and, as long as we hit our budgetary mark, we have that depreciation to put away in a depreciation fund. We use this fund for its purposes. We also borrow from this fund before going to traditional LOC’s or PCL for cash flow needs. We replenish when able.

After the webinar, I made it a priority to budget for an unrestricted cash reserve fund. over and above our depreciation fund.

[Kate Barr]

Thanks for sharing this great summary, Bruce. Do you have a designated amount of operating reserves in a more liquid account?

[Bruce]

Not yet Kate. We carry a little over $200,000 in our Capital Depreciation fund. This is a liquid fund that depletes as needed, and replenishes as we hit our budgetary marks ($240,000 of depreciation is a budgeted expense on our P&L). Additionally, our annual campaign brings in between $400,000 and a million dollars, which is all raised as unrestricted. About $400,000 is used for annual scholarships; $200,000 for program support; $100,000 – $150,000 for new capital projects; and the rest for reserves.

The above is our best case scenario.

[Kate Barr]

Thanks, I appreciate that there’s a strategy grounding your reserves.