FROST, PLLC Warns Nonprofits to Update Cash and Investment Risk Policies or Face the Financial Consequences
Summary
“In today’s economic times, many organizations are tossing out the notion of maximizing interest income because they are struggling to have adequate cash to meet current operating needs.” In a downturn economy, private contributions decline as donors are less inclined to give; earnings from investments shrink along with their capital market values; and community needs increase – hitting nonprofits with a funding triple whammy.“Given the current stock market, bond yields and certificate of deposit rates, investment earnings are fundamentally low, which means nonprofit organizations may struggle to have sufficient resources to meet their increasing program needs,” Ekenseair says.With the recent bank failures, government bailout programs, current economic uncertainty, declining investment earnings and portfolio values as well as new complicated instruments available to investors, there is certainly significant risk involved.“In today’s economic times, many organizations are tossing out the notion of maximizing interest income because they are struggling to have adequate cash to meet current operating needs.”In a downturn economy, private contributions decline as donors are less inclined to give; earnings from investments shrink along with their capital market values; and community needs increase – hitting nonprofits with a funding triple whammy.Many generous donors have given significant funds to nonprofit organizations in the form of endowments.However, these endowments typically allow the organization to utilize the investment earnings and fair-market value appreciation over the original donor contributed amount to meet the organization’s overall or specific program needs.Endowment funds may also be impacted by law restriction such as the Uniform Prudent Management of Institutions Funds Act of 2006, which is a robust set of guidelines about what constitutes prudent spending and explicitly requires consideration of the duration and preservation of the endowment fund.“Given the current stock market, bond yields and certificate of deposit rates, investment earnings are fundamentally low, which means nonprofit organizations may struggle to have sufficient resources to meet their increasing program needs,” Ekenseair says.