Nonprofit Amicus Brief

No. 13-31296 (Aligned with Nos. 13-30843, 13-31299, 13-31302)

________________________

IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT ________________________

IN RE: DEEPWATER HORIZON ________________________

LAKE EUGENIE LAND & DEVELOPMENT, INCORPORATED; ET AL.,

Plaintiffs,

PLAINTIFFS STEERING COMMITTEE, Appellee,

v.

BP EXPLORATION & PRODUCTION, INCORPORATED; BP AMERICA PRODUCTION COMPANY; BP P.L.C.,

Defendants-Appellants,

v.

SEALED APPELLEE, Claimant-Appellee

________________________

On Appeal from the United States District Court for the Eastern District of Louisiana

MDL No. 2179, Civ. A. Nos. 12-970 & 13-492 _________________________

BRIEF OF AMICI CURIAE NONPROFIT FINANCE FUND, AMERICANS FOR THE ARTS, GRANTMAKERS IN THE ARTS, AND

ALLIANCE OF ARTISTS COMMUNITIES IN SUPPORT OF APPELLEE

________________________

[counsel listed on next page]

Case: 13-31296 Document: 00512670422 Page: 1 Date Filed: 06/19/2014

Zachary L. Wool (32778) Dawn M. Barrios (2821) Bruce S. Kingsdorf (7403) BARRIOS, KINGSDORF & CASTEIX, LLP 701 Poydras Street, Suite 3650 New Orleans, Louisiana 70139-3650 Telephone: (504) 524-3300 Counsel for Amici Curiae


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SUPPLEMENTAL STATEMENT OF INTERESTED PARTIES

Pursuant to this Courts Rule 29.2, undersigned counsel of record for Amici

Curiae certifies that the following persons or entities have an interest in the outcome of

the case:

Amici Curiae

Nonprofit Finance Fund (a 501(c)(3) not-for-profit organization) 70 West 36th Street 11th Floor New York, NY 10018 Americans for the Arts, Inc. (a 501(c)(3) not-for-profit organization)

1000 Vermont Avenue, NW 6th Floor Washington, DC 20005

Grantmakers in the Arts (a 501(c)(3) not-for-profit organization) 4055 21st Avenue West, Suite 100 Seattle, WA 98199-1247

Alliance of Artists Communities (a 501(c)(3) not-for-profit organization) 255 S. Main Street Providence, RI 02903


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Counsel for Amici Curiae Zachary L. Wool Dawn M. Barrios

Bruce S. Kingsdorf BARRIOS, KINGSDORF & CASTEIX, LLP 701 Poydras Street, Suite 3650 New Orleans, LA 70139-3650

/s/ Zachary L. Wool Zachary L. Wool (32778)


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TABLE OF CONTENTS

SUPPLEMENTAL STATEMENT OF INTERESTED PARTIES .......................... i

TABLE OF AUTHORITIES ................................................................................ iv

INTERESTS OF AMICI CURIAE ....................................................................... iv

ARGUMENT .........................................................................................................1

I. BPs Misrepresentations and Misunderstandings of Corporations with Not-for-Profit Status. ..................................................................................... 2 A. Corporations with a not-for-profit designation do engage in business activities. ......................................................................................................... 2 B. Not-for-profit businesses do earn a profit/surplus through their central business operation. .......................................................................................... 5

C. Contributed Income is a vital source of revenue for not-for-profits. .......... 7 D. Calamities like a massive oil spill negatively impact not-for-profit businesses. ....................................................................................................... 9

CONCLUSION .................................................................................................... 11

CERTIFICATE OF COMPLIANCE .................................................................... 12

CERTIFICATE OF ELECTRONIC SERVICE .................................................... 14


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TABLE OF AUTHORITIES

Cases

In re: Deepwater Horizon I, 732 F.3d 326 (5th Cir. 2013) ...................................4,9

In re: Deepwater Horizon III, 744 F.3d 370, 375-376 (5th Cir. 2014).................... 1

Statutes

26 U.S.C. 501(c)(3) .............................................................................................. 3

26 U.S.C. 6033..................................................................................................... 4

Federal Rule of Appellate Procedure 29(c)(5) ...................................................... vii

Other Authorities

Amy Blackwood, Katie Roeger, and Sarah Pettijohn, The Nonprofit Sector in Brief: Public Charities, Giving and Volunteering, 2012, Urban Institute (October 5, 2012) .................................................................................................................. 5

Carol J. De Vita, Amy Blackwood, and Katie Roeger, A Profile of Nonprofit Organizations in the Greater New Orleans Metropolitan Area, Urban Institute (November 1, 2012) ............................................................................................... 7

Danshera Cords, Charitable Contributions for Disaster Relief: Rationalizing Tax Consequences and Victim Benefits, 57 Cath. U. L. Rev. 427 (2008) ...................... 9

Doug MacCash, BP oil spill settlement strengthens the Contemporary Arts Center, The Times-Picayune, March 23, 2013 ...................................................................10

IRS Publication 558 (March 12, 2012) ................................................................... 4


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TABLE OF AUTHORITIES

Other Authorities Continued

Kate Barr and Jeanne Bell, An Executive Directors Guide to Financial Leadership, The Nonprofit Quarterly, Fall/Winter 2011 ........................................ 8 Nonprofit Finance Fund, Glossary of Financial Terms ........................................... 5

Nonprofit Operating Reserves Initiative Workgroup, Maintaining Nonprofit Operating Reserves: An Organization Imperative for Nonprofit Financial Stability (2008) .................................................................................................................... 6

Peter Schworm, Old-line charities losing support; Many Area Donors focus on victims of Marathon Attacks, Boston Globe, May 13, 2013 ..................................10


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INTERESTS OF AMICI CURIAE

Nonprofit Finance Fund, Americans for the Arts, Grantmakers in the Arts,

and Alliance of Artists Communities are 501(c)(3) not-for-profit corporations

familiar with the not-for-profit sectors operations and financing. They bring to the

table various perspectives on contributed income as a means of not-for-profit

funding by representing individuals and organizations that award grants on the one

hand (Grantmakers in the Arts), and organizations that plan and receive grants on

the other (Alliance of Artists Communities). Americans for the Arts works with

corporations and individuals on both sides of the equation in an effort to advance

the arts. And the Nonprofit Finance Fund has, for thirty-four years, worked with

thousands of not-for-profit corporations to understand and improve their financial

operations and long-term sustainability. They universally have an interest in

correcting some fundamental misunderstandings and misrepresentations made by

BP about the not-for-profit sector.

Amici support the decision of the District Court and the Claims

Administrators treatment of each Sealed Claimants claim,1 and they vigorously

oppose BPs position that contributed income is not revenue. BPs position stands

in stark contrast with almost every major authority on the subject, and its briefing

1 Amici recognize that appeal nos. 13-31299, 12-31296, and 13-31302 are aligned but are not consolidated. Amici will file the same Brief in each case. The forth aligned appeal no. 13-30843 concerns administrative rules, and amici have nothing to add to Class Counsels arguments.


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may likely leave this Court with erroneous impressions about the not-for-profit

sector and how it operates. In particular, amici understand how catastrophes like

an oil spill can negatively impact the not-for-profit sector, how not-for-profits are

businesses with a central business purpose, how the sector plans for and relies on

contributed income, and how not-for-profits universally seek to end each year with

a profit (which the not-for-profit sector calls a surplus). Amici strongly support

the District Courts decision and the claim outcome for Sealed Claimant Appellee

and respectfully request that this Court should it reach the substantive merits of

these appeals affirm the District Courts inclusion of grants as revenue,

generally, and the outcome of Sealed Claimant Appellees claim.2

2 Pursuant to Federal Rule of Appellate Procedure 29(c)(5), counsel for amici certifies that neither Class Counsel nor counsel for any Sealed Claimant authored, in whole or in part, any part of this Brief and that no party, its counsel, or any other person or entity made any monetary contribution to the preparation or submission of this Brief. Further, neither counsel for Sealed Claimant Appellee nor Class Counsel object to the filing of this Brief. The BP Entities do not object, though they reserve the right to object and to file a response after reviewing [amicis] position.


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ARGUMENT

Businesses with a not-for-profit tax designation have more in common with

businesses that do not than BP would have this Court believe. At the time it

negotiated the Deepwater Horizon Economic and Property Damages Settlement,

BP recognized this similarity and included all businesses regardless of IRS tax-

status designation in the Business Economic Loss claim category. ROA.13-

31302.4578, 4674. Now BP has a much different view. And just like it wielded a

footnote in Exhibit 4B of the Settlement on a previous appeal in an attempt to

undermine the objective causation standards to which it agreed,1 it now seeks to

eviscerate the claims of not-for-profit businesses in a round-about fashion by

excluding one of their most important sources of revenue.

Nothing prevented BP from excluding contributed revenue and services at

the time it negotiated the Settlement, and it cannot seek to re-write the Settlement

now. As this Court has said, there is nothing fundamentally unreasonable about

what BP accepted and now wishes it had not.2 That sentence is as true now as it

was when written by this Court.

Amici Curiae Nonprofit Finance Fund, Americans for the Arts, Grantmakers

in the Arts, and Alliance of Artists Communities (Amici) submit this Brief in

1 In re: Deepwater Horizon III, 744 F.3d 370, 375-376 (5th Cir. 2014). 2 Id., at 377.


2

Support of Sealed Claimant Appellee to address and correct some

misunderstandings and misrepresentations made by BP about the fundamental

workings of not-for-profit businesses. Like businesses that do not apply for tax-

exempt status from the IRS, not-for-profit organizations are incorporated

businesses that engage in a central business activity. Like their for-profit brethren,

they seek to generate more revenue than they spend. They rely heavily on grants

and donations as integral parts of their revenue. And they can be negatively

impacted by outside economic forces such as a massive oil spill just like for-

profit businesses.

I. BPs Misrepresentations and Misunderstandings of Corporations with Not-for-Profit Status.

A. Corporations with a not-for-profit designation do engage in business

activities.

Just as two brothers may incorporate a business to sell t-shirts to tourists on

a beach, so too can two brothers incorporate a business to provide free meals to the

homeless. The better the product of the t-shirt selling brothers, the more revenue

they will generate through sales. The better the quality of services to the homeless

that the brothers provide, the more revenue they will generally receive through

grants and donations of those wanting to support their mission. Whether it be

selling t-shirts or providing free meals, both are business activities that generate

revenue. The revenue generated is central to their ongoing operations.


3

Not-for-profit organizations are not an odd form of business entity created

by the IRS Code. Rather, they are businesses organized under state law for a

public or charitable purpose that then apply for tax-exempt designation. For

example, one type of not-for-profit status that businesses apply for is the 501(c)(3)

designation. And to achieve that designation, corporations must meet two

requirements. First, the business must be incorporated.3 When they incorporate,

just like a for-profit business, they register with a Secretary of State, file

incorporating documents, and go through the other formalities required by state

law. Second, a corporation must be organized and operated exclusively for

religious, charitable, scientific, testing for public safety, literary or educational

purpose.4 That requirement forces a corporation seeking 501(c)(3) tax-exempt

status to have a core business activity it must pursue, such as providing low-cost

legal services, offering free meals to the homeless or operating an art museum. To

retain its tax-exempt status, the corporation must continue to operate in that same

core activity that formed the basis of its original application to the IRS.5

The requirement that a not-for-profit corporation must focus on its central

business operations manifests itself in the way the IRS requires not-for-profit 3 26 U.S.C.501(c)(3) (starting with the basic premise that those eligible for tax-exempt status are corporations, and any community chest, fund, or foundation). 4 Id. 5 This heightened requirement is one way in which not-for-profit corporations differ from for-profit corporations. For-profit corporations are free to change the business activities in which they engage at the whim of their owners, whereas not-for-profit corporations are restrained to operate in their core area(s) approved by the IRS.


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businesses to report their income. Generally speaking, not-for-profits must file an

annual Form 990 tax return (entitled by the IRS Return of Organization Exempt

from Income Tax).6 That return requires the organization to report revenue

generated by its central business operations (i.e., through its tax-exempt mission

and purpose). Should a not-for-profit organization earn money separate from its

central mission or purpose, that income is not tax-exempt and must be reported on

a Form 990-T.7 The Form 990-T requires an organization to report, in Part I, its

unrelated trade or business income. This separate, dual-reporting requirement

underscores that, contrary to BPs assertions, not-for-profits do engage in a central

trade or business and do generate revenue from that same central trade or

business.8 As discussed infra, grants and contributions constitute a large portion

of that revenue generated by the central mission and business of a not-for-profit

corporation.

6 26 U.S.C. 6033. 7 See generally IRS Publication 558 (March 12, 2012) (available at www.irs.gov/pub/irs-pdf/p598.pdf). 8 BP has conceded this point at the District Court level, recognizing that grants and donations to not-for-profit businesses are revenue, both generally and in the context of the Settlements application. In response to In re: Deepwater Horizon I, 732 F.3d 326 (5th Cir. 2013) from this Court, the District Court asked Class Counsel and BP to propose matching policies. BPs proposed policy included a section on defining revenue for Exhibit 4C purposes. That section included grants and donations to not-for-profit businesses as revenue for Exhibit 4C purposes. (Rec. Doc. 11886-2, at 35-36).


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B. Not-for-profit businesses do earn a profit/surplus through their central business operation.

Just as for-profit businesses seek to end their fiscal year with more income

than expenses, so too do not-for-profits. In the for-profit community, this excess is

called profit. In the not-for-profit community, this excess is called surplus.9 The

major difference between not-for-profit businesses and for-profit businesses is that

this surplus is, generally speaking, not taxed. In a sense, the commonly-used

moniker not-for-profit (that stems from a designation given by the IRS) is a

misnomer.10

In 2012 the Urban Institutes Center for Nonprofits and Philanthropy

released a study entitled The Nonprofit Sector in Brief: Public charities, giving,

and Volunteering.11 The study examined the finances of not-for-profit

organizations through their Form 990 tax returns, making various findings on

private charitable giving and volunteering. Of interest and import here, the study

found that all not-for-profit organizations nationally reported revenue of $2.06

trillion. Those same organizations had expenses of $1.94 trillion, with a

profit/surplus of $120 billion. That surplus was not an anomaly. In 2005, the not- 9 Nonprofit Finance Fund, Glossary of Financial Terms, (available at http://nonprofitfinancefund.org/financial-terms/S?title=). 10 The name derives from the idea that not-for-profit corporations are not primarily motivated by profit; instead, it is subordinate to their public purpose, which could not be supported if the corporation did not strive to earn a surplus. 11 Amy S. Blackwood, Katie L. Roeger, and Sarah L. Pettijohn, The Nonprofit Sector in Brief: Public Charities, Giving and Volunteering, 2012, Urban Institute (October 5, 2012), available at http://www.urban.org/UploadedPDF/412674-The-Nonprofit-Sector-in-Brief.pdf.


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for-profit sector reported total revenues of $1.63 and expenses of $1.48 trillion,

which translates into a surplus of $150 billion. In 2000, the sector reported $1.15

trillion in revenue, $1.01 trillion in expenses, and $140 billion in profit/surplus. 12

Achieving a profit/surplus does not happen haphazardly; rather, financially

sound not-for-profit organizations plan to make money, just as for-profit

organizations do. In 2008, the Nonprofit Operating Reserves Initiative Workgroup

authored a White Paper entitled Maintaining Nonprofit Operating Reserves: An

Organizational Imperative for Nonprofit Financial Stability, annexed hereto at

Exhibit 1. The White Paper cautioned that not-for-profit corporations must

pursue financial stability by budgeting for and then actually achieving

reasonable, modest surpluses year after year. Id at 1. Under the heading

Nonprofit doesnt mean that you cant make a profit i.e., have a

surplus, (emphasis in original) it warned that the staff and board of

nonprofitsneed to understand and agree that it is ok to save money and build a

reserve, but that it is a critical necessity for long-term sustainability. Id. at 3. A

not-for-profits reserve fund, observes the White Paper, increases as a result of an

excess of revenue over expenses, or when the not-for-profit achieves an annual

profit/surplus. Id. at 1.

12 Id., at 2.


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Contrary to BPs assertions, not-for-profit corporations should and do, on a

sector-wide basis, generally earn surpluses every year. That profit/surplus is

placed at great peril when natural or man-made disasters strike, as discussed in

Section D, infra.

C. Contributed Income is a vital source of revenue for not-for-profits.

Not-for-profits have various income streams. The IRS Form 990 tax return

for not-for-profit organizations lists four categories into which most revenue must

be categorized (except, of course, revenue not related to the central business

purpose of the not-for-profit, which must be reported on the separate Form 990-T):

contributions and grants, program service revenue, investment income, and other

revenue.13 Grants and contributions are reported first; they are not grouped into

the catch-all category of other revenue. The importance, though, of grants and

donations to the continued feasibility and operation of not-for-profits is not limited

to the realm of the implicit, abstract, or merely academic.

In 2012, the Urban Institute released a study of the health and human service

sector of the not-for-profit community.14 The study found that 63% of health and

human service not-for-profit revenue in the greater New Orleans area came from

13 The IRS does not require that a not-for-profit report all types of income. For example, donated services, which accounting authorities such as FASB guidelines consider revenue, need not be reported. Appellees Brief in 13-31302 at 20. 14 Carol J. De Vita, Amy S. Blackwood and Katie L. Roeger, A Profile of Nonprofit Organizations in the Greater New Orleans Metropolitan Area, Urban Institute (November 1, 2012), available at http://www.urban.org/UploadedPDF/412689-A-Profile-of-Nonprofit-Organizations-in-the-Greater-New-Orleans-Metropolitan-Area.pdf.


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contributions and grants, amounting to approximately $369,477,749 in revenue. In

the Louisiana-wide health and human service sector, 58% of total revenues come

from contributions and grants, amounting to $1,095,767,823 in revenue. With

more than $1 billion in revenue from grants and donations in the Louisiana health

and human service not-for-profit sector alone, it comes as no surprise that not-for-

profit corporations strive year after year to improve their services and

programming to attract donors, large and small, individual, corporate, and

governmental. 15 And they expend substantial resources to do so.

The actual 2010 data showing the breakdown of contributions and grants as

a portion of revenue in both New Orleans and Louisiana illustrate how vital grants

and donations are to not-for-profit organizations. The data stand in stark contrast

to the portrait BP paints of grants and contributions generally being gratuitous, not-

planned-for, unearned, and unexpected.16 Given the size and importance of grants

and donations to not-for-profits, a question arises: how can the Claims

Administrator exclude such vitally important revenue sources like grants and

15 It is common practice for not-for-profits to budget for revenue in the form of grants and contributions from unknown donors or organizations. The development staff must then work to find and raise the funds. Kate Barr and Jeanne Bell, An Executive Directors Guide to Financial Leadership, The Nonprofit Quarterly, Fall/Winter 2011, at 8 (If the budget includes as-yet-unidentified income, which is standard for many organizations). 16 Amici note that BP cherry-picked three individual claims and attempts to mischaracterize the whole not-for-profit industry through the lens of those three claims. BP also fails to explain why FASB guidelines, the AICPA, and the IRS should all be ignored, instead relying on Blacks Law Dictionary (9th ed. 2009) as the main accounting authority for its argument. Appellants Brief in no. 13-31299, at 20.


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donations, yet still process claims in accordance with economic reality? In re:

Deepwater Horizon I, 732 F.3d at 339 (5th Cir. 2013). The answer is obvious: he

cannot.

D. Calamities like a massive oil spill negatively impact not-for-profit businesses.

BP argues that, by awarding money to not-for-profits, the Claims

Administrator is giving awards to entities that have no colorable claim of injury.

Appellants Brief in no. 13-31299, at 39. Belying that sweeping statement is that

calamities negatively impact not-for-profit businesses on a routine basis. The

adverse impact is attributable to two simple facts: first, those affected by the

calamity tend to slow their giving (deciding whether to keep the donations for

personal spending or to give to charity because they do not know how the calamity

will affect them personally) and, second, donors shift their giving to those

impacted directly by the disaster (deciding between charities based on the outside

influence of the calamity). Danshera Cords, Charitable Contributions for Disaster

Relief: Rationalizing Tax Consequences and Victim Benefits, 57 Cath. U. L. Rev.

427, 246 (2008).

This impact is not merely academic; it manifests itself in reality. For

example, in the aftermath of the Boston Marathon bombings, not-for-profits that

did not work to support those injured in the bombings fell short of their financial

goals as public giving shifted to, e.g., the One Fund Boston:


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Support for One Fund Boston, the primary relief effort that has raised nearly $30 million [in] donations and pledges, has sucked all the oxygen from the fund-raising air, said Peter Lowry, publisher of massnonprofit.org, a news service for the nonprofit sector.17

The Times-Picayune also reported the same phenomenon in New Orleans in

the wake of the Oil Spill. In an article dealing with the Contemporary Arts Center

(CAC) in New Orleans, the then Executive Director observed that

philanthropies that might have been counted on to provide funds for arts

organizations like the CAC focused their largess on areas more directly impacted

by the spill, such as the seafood industry.18

Not-for-profits certainly have, at a minimum, colorable claims for injury as

they can be negatively impacted by a calamity such as an oil spill. BP

acknowledged this fact when it negotiated a settlement that explicitly included not-

for-profit corporations as claimants, when it agreed to a causation test under

Exhibit 4B that includes all revenues, when it sat idly by for nearly a year as not-

for-profit claims were paid by the Claims Administrator, and when it submitted its

matching policy which included grants and donations as not-for profits revenue.

17 Peter Schworm, Old-line charities losing support; Many Area Donors focus on victims of Marathon Attacks, Boston Globe, May 13, 2013. 18 Doug MacCash, BP oil spill settlement strengthens the Contemporary Arts Center, The Times-Picayune, March 23, 2013.


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CONCLUSION

BP fundamentally misunderstands and misrepresents not-for-profit

businesses and how they operate to achieve now what it did not negotiate for in

2012. When not-for-profits and their operations are explained and put into context,

it is readily apparent why every major authority on the subject including the IRS,

American Institute of Certified Public Accountants, and Financial Accounting

Standards Board (the SECs authoritative financial accounting body) considers

contributions and grants revenue; how the Claims Administrators policy on the

issue is correct; and how the outcome of Sealed Claimant Appellees claim is

proper.

For the foregoing reasons, amici curiae Nonprofit Finance Fund, Americans

in the Arts, Grantmakers in the Arts, and Alliance of Artists Communities urge this

Court to affirm both the District Courts interpretation of the Settlement and the

individual award made to Sealed Claimant Appellee based on that proper

interpretation.


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Respectfully Submitted,

/s/ Zachary L. Wool

Zachary L. Wool (32778) Dawn M. Barrios (2821) Bruce S. Kingsdorf (7403) BARRIOS, KINGSDORF & CASTEIX, LLP 701 Poydras Street, Suite 3650 New Orleans, Louisiana 70139-3650 Telephone: (504) 524-3300

Counsel for Amici Curiae


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CERTIFICATE OF COMPLIANCE

Pursuant to Rule 32(a) of the Federal Rules of Appellate Procedure and

Circuit Rule 32(a)(2), I hereby certify that the foregoing brief is proportionately

spaced, has a type of 14 points, and contains 3,782 words as determined by the

word-counting feature of Microsoft Word 2010.

/s/ Zachary L. Wool Zachary L. Wool (32778) Dawn M. Barrios (2821) Bruce S. Kingsdorf (7403) BARRIOS, KINGSDORF & CASTEIX, LLP 701 Poydras Street, Suite 3650 New Orleans, Louisiana 70139-3650 Telephone: (504) 524-3300 Counsel for Amici Curiae


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CERTIFICATE OF ELECTRONIC SERVICE

Pursuant to Rule 25 of the Federal Rules of Appellate Procedure, I hereby

certify that I have electronically filed the foregoing with the Clerk of Court for the

United States Court of Appeals for the Fifth Circuit by using the appellate

CM/ECF system. I certify that all participates in the case are registered CM/ECF

users and that service will be accomplished by the CM/ECF system.

/s/ Zachary L. Wool Zachary L. Wool (32778) Dawn M. Barrios (2821) Bruce S. Kingsdorf (7403) BARRIOS, KINGSDORF & CASTEIX, LLP 701 Poydras Street, Suite 3650 New Orleans, Louisiana 70139-3650 Telephone: (504) 524-3300 Counsel for Amici Curiae


EXHIBIT 1


MAINTAININGNONPROFITOPERATINGRESERVESAnOrganizationalImperativeforNonprofitFinancialStabilityDecember2008

Atoppriorityfornonprofitleadersneedstobemaintainingoperatingreservesatlevelsadequateforachievingfinancialstability.Whilethismayseemobvious,preliminaryresearchindicatesthatmanyorganizationsneglecttoputasidefundsthatwillhelpthempreservetheircapacitytodeliverontheirmissionsintheeventofunforeseenfinancialshortages.

Thefactisnumerousnonprofitshavenegativereservesandarealreadyatrisk.TheWorkGroup(seesidebar)recognizesthatthecurrenteconomiccrisisthreatenstheveryexistenceofthousandsofnonprofitorganizations.Atatimewhennonprofitorganizationsmaybefocusedonsurvival,thethoughtofbuildingreservesmayseemadistantpriority.Butfororganizationscurrentlyjusthangingonwhichexpecttosurvivethiscrisisandthoseinrelativelystablecurrentfinancialconditionwhichseektofortifytheirposition,theWorkGroupencouragesincludingoperatingreservesintheplanningprocess.Organizationswhichreviewtheirpoliciescloselyanddeviseplansforreplenishingtheiroperatingreservestoanagreeduponadequatelevelwillemergefromthiscurrenteconomiccrisisinastrongerfinancialposition,positionedtowithstandthenextchallengethatarises.

Briefly,operatingreservesaretheportionofunrestrictednetassets(seeFigure1)that nonprofit boardsmaintain or designate for use in emergencies to sustainfinancialoperationsintheunanticipatedeventofsignificantunbudgetedincreasesin operating expenses and/or losses in operating revenues. Unrestricted netassets is a required line item in the balance sheets of financial statementsprepared inaccordancewithgenerallyacceptedaccountingprinciples(GAAP)andIRSForms990ofnonprofitorganizations.[SeeOperatingReserveRatiopage2]

BY:TheNonprofitOperatingReservesInitiativeWorkgroup

In spring 2008, a NonprofitOperating Reserves InitiativeWorkgroup (see member list onpage 10) comprising experiencedindividuals representing multiplefacetsof thenonprofitsectorwasconvenedwiththeobjectiveof:

1. Defining an OperatingReserveRatio

2. Using the ratio to focusattention on the importanceofnonprofitfinancialstability.

TheNonprofitOperatingReservesInitiative Workgroup reachedconsensus on definitions foroperating reserves and theOperating Reserve Ratio. Theworkgroup also reached aconclusion on what constitutesadequate operating reserves.Workgroup member RichardLarkin had previously concludedandwritten that the answer is: itdepends.DrawingonMr.Larkinsinsight and experience theworkgroup concluded, there isnoone size fits all ratio orbenchmark. However, theWorkgroupeffortresultedinsomeinsightful conclusions andrecommendations thatare sharedinthisWhitePaper.

Finalnote:TheOperatingReserveRatio is one of a number ofimportant and useful financialviability indicators thataddressvariousaspectsoffinancialhealth.

Figure1 SuggestedbalancesheetnetassettermspresentedinanillustrationthatallnonprofitCEOsandboardsneedtounderstand.

*Availableunrestrictednetassetscouldalsoexcludetheequityinothernoncurrent,nonliquidnetassetssuchaslongtermreceivables,inventory,prepaidexpensesanddepositsheldbyothers.

AWHITEPAPER

UnrestrictedNetAssets

Available*UnrestrictedNetAssets

EquityinfixedUnrestrictedNetAssets(Excluded from available unrestricted net assets*)

BoardDesignated(Setasideforstrategicpurposes

and/orquasiendowment)

OperatingReserves(SuggestedMinimumGoal:25%ofannualoperating

expensebudget)


2

The amount of accumulated unrestricted netassets is increasedordecreased as the resultof annual operating surpluses or deficits.Nonprofits pursue financial stability bybudgetingforandthenachievingreasonable,modestsurplusesyearafteryearuntiltheyhavemettheiroperatingreservesobjectives.TwoInterRelatedQuestionsNonprofitscanaskthefollowingtwoquestionstofacilitateinternaldiscussionsaboutadequateoperatingreservesforfinancialstability.1. Whatdoesitmeantobefinanciallystable?2. Whatareadequateoperatingreserves?According to Richard Larkin, CPA, NationalTechnicalDirectorofNotforProfitAccountingandAuditing,BDOSeidman,LLP,theanswer is,Itdepends. Mr. Larkingoeson to say, It isbest to start by saying that based on theliterature available there is simply no singlecorrect solution for all organizations. Despitethe importance of the issue there exists noagreed upon industry benchmark. Tocomplicatemattersfurther,suchbenchmarksasare commonly used must be viewed in thecontextof theparticularorganization towhichtheyarebeingapplied.1

OPERATINGRESERVERATIOThe Nonprofit Operating Reserves InitiativeWorkgroup recommends thatnonprofitboardsestablish a minimum Operating Reserve ratiopolicy. An organizations Operating ReserveRatiocanbecalculatedintermsofapercentage(operating reserves divided by the annualexpense budget) or number of months(operating reserves divided by the averagemonthly expense budget). The minimumoperating reserve ratio at the lowest pointduringtheyearsuggestedbytheWorkgroup is

25percentor3monthsof theannualexpensebudget.The classification of unrestricted net assets inthe balance sheet, as depicted in Figure 1, iscritical to developing a clear and accuratesnapshotofanorganizationsfinancialposition.Available unrestricted net assets are theportionoftotalunrestrictednetassetsthatareavailable for use. A simple definition foravailable unrestricted net assets isunrestrictednet assets less the equity in fixedassets i.e., fixed assets net of related longtermdebt. Amore conservativedefinitionofavailableunrestrictednetassets is footnotedin Figure 1. Each organization needs todetermine if the simpledefinition canbeusedreliablyformeasuringOperatingReservesorifitneedstouseamoreconservativedefinition.

Operating Reserves are that portion ofavailable unrestricted net assets that anorganizations board maintains and/or hasformally designated, or reserved for use inemergencies to sustain financial operations inthe unanticipated event of significantunbudgeted increases in operating expensesand/or losses in operating revenues. Theadequacy of operating reserves beyond theminimum is variable and depends on factorssuch as the reliability of operating revenues,impactofeconomicconditionsamongothers.IRSFORM990ASHELPFULTOOLTheWorkgroup concluded that the Form 990providesagoodtoolforillustratingthecontentoftheOperatingReserveRatio.UsingtheForm990,OperatingReservesconsistofUnrestrictednet assets less fixed assetsnetofdebt. Fixedassetsnetofdebtequals (Land,buildings,andequipment i.e., fixed assets) minus

1DeterminingAppropriateLevelsofReserves,RichardLarkin,CPA,NationalTechnicalDirectorofNotforProfitAccountingandAuditing,BDOSeidman,LLP,BethesdaMaryland.

MAINTAININGNONPROFITOPERATINGRESERVES: ANORGANIZATIONALIMPERATIVEFORNONPROFITSTABILITY


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(Mortgages and other notes payable). Annualexpensesconsistof (Total functionalexpenses)less(Depreciation).NEARLY50%HAVELESSTHANTHEMINIMUM

Preliminary research indicates that a largeportion of nonprofitsmay not have sufficientreserves toweatherunexpected setbacks. Forexample,accordingtoanalysisof IRSForm990data (2003)2, 1,516 or nearly fifty percent of3,154 nonprofits located in Washington, D.C.hadyearendoperatingreserveratiosbelowthesuggestedminimumof25percentorlessthan3months of their annual expense budget. Infact,996nonprofits(32%)hadreserveratiosofzero to25percentwhile520nonprofits (17%)actuallyhadnegativereserveratios.

IMPACT OF NEGATIVE OPERATING RESERVERATIOS

When theOperatingReserveRatio isnegative,be experiencing a serious, disruptive financial

crisis. Forexample, itmaybehavingdifficultymeeting payrolls, and/or may be seriouslybehind inpaying itsbills. It is likelyoperatinghandtomouth disbursing funds as soon astheyaredeposited. Thestaffandmembersofthe board can be devoting a disproportionalamount of time on daytoday financialmanagement, resulting in a reduction in thedelivery of program services. In some cases,staffmaybeasked to foregoallorportionsoftheir salaries. And, some staffmembersmayleaveforamorestableenvironmentormaybesubjecttofurloughsorlayoffs.Internalcontrolsmaybeignoredwithlessstafftodomorework.

Organizations with significant temporarily orpermanently restricted net assets may beborrowingfromthosefundstocoverdeficits inunrestrictednetassetsavailableforoperations.This is a very serious financial managementproblem because it violates the organizationsfiduciaryresponsibilitytoassurethatrestrictedfundsareusedonlyforpurposesdesignatedbythedonors.

DESIGNATED FOR INTERNAL MANAGEMENT,NOTOUTSIDEWATCHDOGGROUPS

Precisely because it depends, the NonprofitOperating Reserves Initiative Workgroupadamantly maintains that anyrecommendations and/or guidelines outlinedhere are for the purpose of helping staff andboardsbetteraddresstheneedforplanningfor,and measuring financial stability for theirparticular organization. Using it depends asthe underlying theme for this Whitepaper isexpected to put to rest any thought of usingOperating Reserve Ratios to measure theworthiness of a nonprofit organization or tocompareoneorganizationwithanother.


2NationalCenterofCharitableStatistics,CenteronNonprofitsandPhilanthropyattheUrbanInstitute,IRSForm990data,circa2003.


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APPLICABILITY

The Nonprofit Operating Reserves InitiativeWorkgroupbelievesthisdiscussion isofvalueforalltaxexemptorganizations.Whethertheannualbudget is$100,000or$10million,committingtoandholdinganadequatereserveisanimportant,prudentbusinesspractice.

ESTABLISHAPOLICYPrecisely because itdepends, the NonprofitOperating Reserves InitiativeWorkgrouprecommendsthatevery nonprofit organizationhaveawrittenReservePolicythat defines its ownadequateoperatingreservelevel, defines how itsoperating reserves arecalculated and provides therationale that led staff andBoard to this conclusion. Ingeneral, for calculating theOperating Reserve Ratio, theWorkgroup is stronglybiasedtowardthesimplestandmostwidely applicable formula.[See Operating ReserveRatio on page 2.] The group also felt thatoperatingreservesinanamountdeterminedbyan organizations board to be adequateshould be accumulated in advance of otherboarddesignatedfunds.

FORMULATINGTHEPOLICY

Eventhesmallestnonprofitorganizationscouldestablishatleastasimplereservespolicywiththeoverarchingpurposebeingtobuildandmaintainacertainlevelofpositiveunrestrictednetassetsthatcanaccommodate:

a)daytodayfluctuationsinnormalcashflowrequirements,andb)unusualand/orunforeseenemergencycashrequirements.Keystepsforanyorganizationinformulatingthepolicy.

1. Establish a minimum level for anadequateoperatingreserveratioatthelowest point during the year. (The

Nonprofit OperatingReserves InitiativeWorkgroup suggests25% of the annualoperating expensebudget as a startingpoint.)

2. Define how theoperating reserveratiowillbecalculated[e.g., use formulashown in theOperating ReserveRatio sectiononpage2 or another formuladesigned to meetspecific operatingreservesneeds].

3. Definehowreserveswillbeinvestedaspartof theoverall InvestmentPolicyStatementbasedonshort,intermediateandlongtermneeds.

4. Define frequency of measuring andreporting on operating reserves. (As aminimum,theNonprofitOperatingReservesInitiative Workgroup recommends amonthly report to theCEOandaquarterlyreporting system to the boards financecommittee.)

A board may find it useful for internalaccounting and reportingduring the yearto divide Operating Reserves into twounrestricted net asset accounts: BoardDesignated Operating Reserves andOperating Funds. The BoardDesignated Operating Reserves accountwould show the portion of OperatingReservesthattheboardhasdesignatedforuse inunusualorunforeseen financialemergencies. This net asset accountcouldserveasaninternallineofcreditwithboardspecifiedtermsofuseandreplenishment. The OperatingFundsnetassetaccountwouldshowthe remaining portion of OperatingReserves andwould fluctuate up ordownaccordingtodaytodaychangesinnormalcashflowactivity.



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5. Define methods by which the operatingreservewillbe replenished if it isused,orfor any reason drops below the policymandatedminimumthresholdatanypointduring theyear.Oneexamplewouldbe toestablish a surplus budget in order toreplacethe lostrevenue. Fororganizationswith additional, nonoperating BoardDesignatedfunds,therecommendedpolicywouldbe to redesignateportionsof thoseBoardDesignated specialpurpose fundsasneeded to replace lost value of operatingreserves.

ITDEPENDSFACTORS

There are numerous it depends factors thatmakeitimpossibletoconstructastandard,onesize fits all formula forwhat is the correct oradequate level of operating reserves for allorganizations. Ingeneral, there isa continuumof variables thatmight influencewhat definestheappropriateoperating reserve level foranygiven organization. The extent to which anorganization finds itselfmoreor lesssubjecttothe variableswill influence how far above thesuggested 25% baseline the adequate orappropriatereserve level isset. Someofthesevariablesareoutlined indetail inAppendixAIt Depends Factors to Be Considered inDeciding What Amount of Reserves anOrganizationWillPlantoMaintain.

BEYOND OPERATING RESERVES FORPROGRAMDEVELOPMENT

The Nonprofit Operating Reserves InitiativeWorkgroup suggests that adequate operatingreserves are the basis for financial stability.However, fororganizations thathaveawrittenpolicy and have successfully met the policyparameters for their Operating Reserve,establishing and budgeting surpluses needed

foradditionalBoardDesignatedspecialpurposefunds and/or QuasiEndowments are logicalnext steps to allow for planned, strategicprogram development thatmight include newprograms, capital purchases, staff expansion,for example. By design this higher level offinancial flexibility allows the organization toenhance quality, introduce new programelements and grow without compromising orjeopardizing core program delivery to existingconstituentsandstakeholders.

NONPROFITDOESNTMEANYOUCANTMAKEAPROFITSOSTRIVETOHAVEASURPLUS

Themostfinanciallystablenonprofitsarebeingproactive in building reserves through annualsurpluses,butasevidencedby thesnapshotofDC nonprofits there are still many nonprofitslivingdangerously close to thebone. The staffand boards of nonprofits, as well as theirfunders,needtounderstandandagreenotonlythat it isoktosavemoneyandbuildareserve,but that it is a critical necessity for longtermsustainability. For nonprofits struggling butstriving to reach a certain operating reservesthreshold, the Nonprofit Operating ReservesInitiative Workgroup advocates specificallybudgeting for it as a disciplined approach toachievingthegoal.Insomecasesthismayalsorequire a rigorous evaluation of theorganizationscurrentoperatingmodelthathasledtothechronicshortfalls.

1. When an organization operates within abalanced budget that includes a modestsurplus (e.g., 5%), operating revenues forthe year will exceed operating expenses,with the result that the availableunrestrictednetassetswouldbe increasedat the end of each year. An organizationwith no reserves at all could thus plan tobuild its Operating Reserve Ratio to the



6

suggestedminimum25%targetover5to6yearsofmodestsurpluses.

2. Theneed foranoperating reserve isclear:Withouta reserve, theorganizationcanbethrown into cash flow stress and becomedistracted from good longterm decisionmakingor forced tomakeexpensiveshorttermcrisisbaseddecisions,orworse;itmaynothavetheresourcestocontinuedeliveryofitsprograms.

Over time, based on its existing availableoperating reserves and the percent of budgetsurplusadded, theorganizationwillhaveusedits profits to prudently build the operatingreserve to the level established in theorganizationspolicyasadequateoroptimal.

FINANCIAL STABILITY ITS EVERYONESRESPONSIBILITY

Aftermany hours of discussion and numerousiterations of this Whitepaper, the NonprofitOperating Reserves Initiative Workgroupsconclusionsaresimple.

1. Nonprofit organizations will be bettermanagedandmorefinanciallystableiftheyhaveapolicydefininganOperatingReserveRatio level appropriate for the specificconditions in which that particularorganization operates,with full support ofthe Board, CEO, CFO and other seniorleadership.

2. Because it depends on numerousvariables, which are best known andapplied to thedecisionby theorganizationitself,thebestpolicywillbedefinedbytheorganization rather than by adhering tosome arbitrary benchmark imposed byoutsiders.

WHOARESTAKEHOLDERSWHATCANTHEYDO?

Thestakeholdersthatcanhelpnonprofitsachievefinancialstabilityinclude:

CEOs,CFOsandboardsofnonprofitorganizations.

Grantmakingcommunity,suchasprogramofficersoffoundations,regionalassociationsofgrantmakersandgovernmentagencies.

Associationsofnonprofitsandumbrellagroupsgeographicandsubsector.

AccountantssuchasindividualCFOsandCPAs,CFOgroupsandCPAsocieties

Managementsupportorganizations

Academiccenterswithnonprofitprograms

Financialinstitutionsservingthenonprofitsector

Allgroupscanencouragenonprofitsto:

EstablishcomprehensivewrittenReservesPoliciesformaintainingadequateoperatingreservesforfinancialstabilityandgeneratingspecialpurposefundsforoptimalmissionaccomplishment

EmploybudgetingandaccountingproceduresthatimplementtheirReservesPolicyeffectively.

NonprofitBoardmembers,CEOsandCFOscanaskforandreceiveatleastquarterlyreports.

Resourceproviderscanencourageandpermitbudgetingsurplusesandbuildingreserves.



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3. By taking this conscious and proactiveapproach to setting itsown financialgoals,the staff and board take responsibility forthefinancialstabilityoftheorganization.

4. It is important that institutional funders,individual donors, and other communityleadersunderstand theneed for smallandmidsized nonprofit organizations to buildand sensibly use their unrestricted netassets to create an operating reserve thatachievesfinancialsustainability.

CALLTOACTION

Thepreliminaryfactstellusthatnearly50%ofnonprofitorganizations in theDCmetropolitanareahaveoperating reservesof less than25%.As a result of these preliminary findings theUrban Institute is planning to do a more indepth study of the data. This research projectwillhelpbetterdefineandquantifythestateoffinancial stabilityamongareanonprofits. And,while that information will prove extremelyvaluable, you as a board member, a CFO, adonor, a funder or any other nonprofitstakeholderneednotwaitto takeaction.Ifyouknow of an organization that appears to bestruggling to achieve this objective, share thisinformation with key leadership. If yourorganization doesnt have a policy, establishone. If your organization has a policy but hasnotrevieweditinthelastthreeyears,pullitoutandevaluateit.

Thereisnoonesizefitsallsolution,butthereisasolution that isright foreveryorganization ifthekeystakeholderstakethetimeandefforttounderstand and define what is best for yoursituation. The region depends so much onnonprofits todelivermyriad services to valuedcitizens of our community. And, achievingfinancialstabilityisacriticalcomponentofyourmissionsustainability.Takethenecessarystepstobe financially stable so thatour communitycancontinuetobenefitfrom yourmission.

HELPFULRESOURCESRELATEDTONONPROFITOPERATINGRESERVESINITIATIVE

WorkingPapersandHelpfulResourcesoftheNonprofitOperatingReservesInitiativeWorkgroupcanbefoundatthewebsite(seep.10forlink)providedbyCenteronNonprofitsandPhilanthropyatTheUrbanInstitute,whichservesassecretariattotheWorkgroup.

SupplementstoNonprofitOperatingReservesWhitePaper.x ImpactofinadequateOperatingReserves.x DefiningtheOperatingReservesRatio.x ItDependsFactorstoBeConsideredin

DecidingWhatAmountofReservesanOrganizationWillPlantoMaintain.

InitialNonprofitOperatingReserveRatioWorkingDocumentsx NonprofitOperatingReserveRatio(primary

workingpaperforWhitePaperAugustdraft)x SummaryNonprofitOperatingReserveRatio

RelatedpapersbyRichardF.Larkin,CPA,BDOSeidman,LLPx NonprofitsandSquirrelsor,Howbigareserve

doyouneed?x DeterminingAppropriatelevelsofReserves.

Illustrativereservespoliciesx UnitedWayofAmericaReservesPolicyx IllustrativeGuidelinesforDevelopinga

Reservespolicy Reservespolicytoolkit1.0(Scheduledtobe

completedSpring2008.)AlldocumentsaredownloadableinPDFformatandalsoavailableinwordonrequesttoBillLevis([email protected]).TheviewsrecommendationsandsuggestionsexpressedintheWhitePaperandotherdocumentsarethoseoftheNonprofitOperatingReservesInitiativeWorkgroup.SomeWorkgroupmembersmaydisagreeonsomepoints.Workgrouppositionsontheissueshavebeenestablishedonaconsensusbasis.Workgroupmembersrepresentthemselvesandnottheiraffiliations.ThesedocumentsarenotresearchbasedpapersoftheCenteronNonprofitsandPhilanthropyatTheUrbanInstitute.

MAINTAININGNONPROFIT OPERATINGRESERVES: ANORGANIZATIONALIMPERATIVEFORNONPROFITSTABILITY


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Factorswhosepresencewouldindicatethattheorganizationprobablyshouldtrytomaintainahigher*levelofreserves

Factorswhosepresencewouldindicatethattheorganizationcanlikelygetalongwithalower*levelofreserves

OperatingFunds[forfinancialsustainability]Themainsourcesofexpendablerevenuemaybesubjecttolargeunexpectednegativefluctuations.1

Ourmainsourcesofrevenuearegenerallynotsubjecttolargeunexpectednegativefluctuations.

Thenatureofouractivitiesissuchthatthereisahighriskoftherebeingsignificantunpredictabledemandsonourresources.2

Itislesslikelythatsignificantunexpecteddemandsonourresourceswilloccur.

Ourregulardaytodayfluctuationsinincomeandexpensesaresignificant.3

Ourregulardaytodayfluctuationsarerelativelyminor.

Ourgoverningboardtakesalongertermviewofprovisionofservicesanditsattitudeistobeverysuretherearealwaysresourcesavailable.

Thegoverningboardbelievesitisofoverridingimportancethateverypossibleresourceisusedintheprovisionofcurrentprogramservices.

Ourgoverningboardsapproachtoplanningandbudgetingisaconservativeandprudentone.Whiletheorganizationmayneverhavefacedaneventrequiringtheextendeduseofourreserves,theboardconsidersthisafundamentallysoundfinancialmanagementpractice.

Thegoverningboardisgenerallywillingtolivedaytodayandtrustthatresourceswillbeavailablewhenneeded.Theboardbelievesitisofoverridingimportancethateverypossibleresourceisusedintheprovisionofcurrentprogramservices.

Ourplanningandbudgetingprocesseshavehistoricallyprovedtobelessaccurateinforecastingfinancialresults.4

Ourplanningandbudgetingprocesseshavehistoricallyprovedtobefairlyaccurateinforecastingfinancialresults.

Adequatebackupsourcesofresourcesarenotinsight.

Weareconfidentthatadequatebackupsourcesofresourcesarelikelytobeavailableinapinch.5

Theboardisnottryingtoexpandtheorganization.

Theboardistryingtoaggressivelyexpandtheorganizationandavailableresourcesaretobeusedforexpansion,includingportionsofitsoperatingreserves6

BoardDesignatedFunds[foroptimalmissionaccomplishment]Thenatureofouractivitiesissuchthatthereisahighlikelihoodthatunexpectedopportunitieswillcomeourway,requiringadditional(available)resourcestotakeadvantageoftheseopportunities.7

Thenatureofouractivitiesissuchitisnotverylikelythatsuchopportunitieswillcomeourwayrequiringadditional(available)resources.

Thereisasensethatachangeinorganizationaldirectionmaybeconsidereddesirableinthenotsodistantfuture.8

Thereisnochangeinorganizationaldirectionanticipatedanytimesoon.

AppendixA ITDEPENDSFactorstoBeConsideredinDecidingWhatAmountofReservesanOrganizationWillPlantoMaintainByRichardF.Larkin,C.P.A.,BDOSeidman,LLP(MemberNonprofitOperatingReservesInitiativeWorkgroup)x Everyorganizationshouldplanforitsreserves.Considerhowthefactorsbelowmightaffectyou.Yourboard,

withadviceofmanagement,shouldadoptaformalpolicyforthereservelevelitwishestomaintain,andreviewthatpolicyregularly.Ofcourseyoucannotjustmakereservesappearoncommand;itmaytakeanextendedperiodtoaccumulatethedesiredlevel.

x Followingisalistoffactorstobeconsideredbynonprofitorganizationsinmakingthatdecision.Inmanycases,nooneofthesefactorswillbedeterminativebyitself;allapplicablefactorsshouldbeconsideredtogether.

*Note:Noattemptismadeheretoquantifyhigherorlowerreserves.Thathastobedonebyeachorganization,takingintoconsiderationthewiderangeofcircumstancesthatimpacttheorganizationsbudgetandoperations.Areservelevelthatmightbeconsideredhighforoneorganizationmaybecompletelyinadequateforanother.ITDEPENDS.FOOTNOTEreferencesinthistablearedetailedonpage9.



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AppendixAITDEPENDSContinued

FOOTNOTEScorrespondingwithreferencesmadeinTableAonpage8.1.Examplesmightinclude:Unexpected,unplannedeventsthatnegativelyaffectcharitablegivingandfeeincome;natural

disasterssuchasearthquakes,floodsandhurricanes;ablizzardthedayofyourbigannualgalafundraiser;generalpooreconomicconditionsorrisingcosts;organizationalproblemssuchasvolunteerandstaffmisdeedsorlawsuitsgeneratingunfavorablepublicitywhichturnsawaycustomersanddonors;overlyoptimisticbudgetingofanticipatedrevenue(verycommon);dependencyononedonorfor10%ormoreoftheannualbudget;shorttermornonrenewableagreementssuchassomecauserelatedmarketingcontractsandcorporatesponsorships;manyotherreasons.

2.Examplesmightagaininclude:Unexpected,unplannedeventsthatnegativelyaffectgivingand/orincreasedemandforourservices(economicdownturn,unusualweatherpatterns)OrganizationsmostlikelyaffectedaredisasterorsituationalresponseorganizationsforexampletheRedCross;UnitedWayorganizations,healthandhumanservicesorganizationssuchasfoodkitchens,homelessshelters.

3.Payrollshavetobepaideverypayday.Theelectriccompanyislikelytowantcash,notapromise,tokeepthepowerflowing.Butincomeoftencomesinspurts,especiallycontributions.Alsotheremaybeseasonalfactors.Forexample,manycontributionsprobablyarriveinDecemberasdonorsdopersonaltaxplanning.Collegescollecttuitionatthebeginningofeachsemester,andthenhavetoliveoffituntilnextsemester.Orchestrassellseasonticketsinthespringtopayforconcertstobeputonoverthefollowingwinter.Ontheotherside,utilitycostsareprobablyhigherinthewinterandsummer(heatingandairconditioning),butlowerinbetween.Expensesofourannualconferencewillbebunchedaroundthetimeoftheconference.

4.Forexample,youhavehadnumerousinstancesofsituationssuchascostoverruns,or,Theprojectthateveryonethoughtwouldsucceed,didnt.Thefoundationgrantthatyouthoughtwasinthebagwasnt.Thebigfundraisingeventfailedtomeetexpectations.

5.ThisisyourPlanB.Fornonprofitsthiscanbesomecombinationof:cashonhand,investmentsandsurplusassetsthatcanbesold,abanklineofcredit,afoundationorotherinstitutionalfunderthatyouknowwouldhelpifasked,someindividualdonorswhocouldbecountedonifthegoinggetsreallyrough,aplantocutexpensestoabareboneslevelforawhile.Ifanorganizationusesthistojustifynotestablishingareserve,theyshoulddefineinwritingthisPlanBwhichnamessources(toinclude:heldassets,organizationsandindividuals)fromwhichfundswouldcome.

6.Forexample,theorganizationcouldbenewandtryingtoreachasustainablesizeorhaveaspecialopportunitythatwarrantsriskingaportionofitsoperatingreserves.

7.Forexample,recentlyanextremelyraremajordinosaurfossilbecameavailableatpublicauction.Museumsknewthatitwouldsellforahighprice,anditdid.Ifyourmuseumwantedthisforitscollection,ithadtohaveresourcesavailabletocoverthecost.

8.Alongstandingprogramjustisntwhatsbestanymore.Communityneedshaveshifted.Resourceswillberequiredtophaseouttheoldandbringinthenew.Theparallelhereistoseedcapitalinabusiness.



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AppendixBNONPROFITOPERATINGRESERVESINITIATIVEWORKGROUPMEMBERSNonprofitOperatingReservesInitiativeWorkgroupmembersrepresentthemselvesandnottheiraffiliations.Positionsonrecommendationsandissuesareestablishedonaconsensusbasis;somemembersmaydisagreeonsomepoints.Workgroupmembersareencouragedtoinviteotherstojoin.TheCenteronNonprofitsandPhilanthropyatTheUrbanInstituteservesassecretariatfortheWorkgroup.Workgroupcoordinators,identifiedwithan(*)inlistbelow,[email protected],[email protected]@gmail.com.Workgroupdraftmaterialsandpaperscanbefoundat:http://www.nccs2.org/wiki/index.php?title=Nonprofit_Reserves_Workgroup.1/13/09

RobBatarla,AmericanPhysicalTherapyAssociationWendyBatkin,NonprofitConsultantElizabethBoris,CenterDirector,CNP,TheUrbanInstituteMaryBuszuwski,ANAGaleCase,RothsteinKassGlendaCognevich,DCCentralKitchenGailCrider,NationalArtsStrategiesLindaCrompton,BoardSourceCamiCumblidge,NebraskaCouncilofSchoolAdministratorsMaryAnndeBarbieri,deBarbieri&AssociatesKeithDanos,JewishFederationforGroupHomesTimDelaney,NationalCouncilofNonprofitsRickDorman,GWSCPAPhyllisEdans,AmericanCollegeofEmergencyPhysiciansKenEuwema,UnitedWayofAmerica(*)BessFoley,NonprofitFinance&AccountingConsultant[WorkgroupCoordinator]CarlosGomezMontes,UnitedWayofAmericaFloGreene,CaliforniaAssnofNonprofitsWilliamHamm,InterimPresident,WartburgCollegeBobHawkins,concernedcitizenMargeHeitbrink,WiseGivingAlliance,CBBBGeorgeHergenhahn,SpecialOlympicsMarylandDeborahHickox,GoodwillofGreaterWashingtonMariaNellyJohnson,SpecialOlympicsDistrictofColumbiaLisaJunker,ASAEFredLane,CenterforNonprofitStrategyandManagement,BaruchCollege/CUNYDickLarkin,BDOSeidman(*)BillLevis,SeniorAssociate,NCCS,TheUrbanInstitute[WorkgroupCoordinator]

ElaineLynch,AmericanAnthropologicalAssnDawnMancuso,AssociationofAirMedicalServicesChristineManor,QuickBooksforNPOsJanMasaoka,BlueAvocadoCoreyMcIntyre,NationalAssociationofIndependentSchoolsChuckMcLean,VPResearchandDataQuality,GuidestarRickMoyers,MeyerFoundationPattyOMalley,Rubino&McGeehinTomPollak,ProgramDirector,NCCS,TheUrbanInstituteDennisRamprashad,MillerMusmar,[Chair,GWSCPAQRTaskForce]CelesteRegan,NationalParkFoundationSallyRudney,TheMontgomeryCountyCommunityFoundationDanielSaat,TidesFoundationSusanSanow,CenterforNonprofitAdvancement(*)JimSchmutz,MerrillLynch[WorkgroupCoordinator]JeffSchragg,Argy,Wiltse&RobinsonCathyStegmaier,AllianceofCambridgeAdvisorsSuzanneStone,SocietyforWomensHealthResearchJanetteStout,SoutheasternUniversityResearchAssnAlanStrand,CaliforniaAssociationofNonprofitsRussySumariwalla,GlobalPhilanthropy&NonprofitsRussellWillisTaylor,NationalArtsStrategiesA.IreneTongelidis,AccountingandConsultingServicesTimWalters,AssociationforSmallFoundationsBennettWeiner,BBBWiseGivingAllianceYonasWeldemariam,SocietyforWomensHealthResearchBrianWilliams,StepAfrika!JackZiegler,MovementAdvancementProject/LGBTJoeZillo,DefendersofWildlifeSteveZimmerman,SpectrumNonprofitServicesLLC



SUPPLEMENTAL STATEMENT OF INTERESTED PARTIESTABLE OF AUTHORITIESINTERESTS OF AMICI CURIAEARGUMENTI. BPs Misrepresentations and Misunderstandings of Corporations with Not-for-Profit Status.A. Corporations with a not-for-profit designation do engage in business activities.B. Not-for-profit businesses do earn a profit/surplus through their central business operation.C. Contributed Income is a vital source of revenue for not-for-profits.D. Calamities like a massive oil spill negatively impact not-for-profit businesses.

CONCLUSIONCERTIFICATE OF COMPLIANCECERTIFICATE OF ELECTRONIC SERVICE