Understanding Restricted Funds

Understanding Restricted Funds

By Bobbi Yeo, Canon for Administration & Finance

There are two types of restrictions which may be placed on certain funds held in reserve by churches. One type is “vestry” restricted. This happens when the vestry votes to designate that funds be held for a specific purpose. The vestry may subsequently take action to eliminate the restriction or redirect these funds to another use.

The other type of restriction is a “donor” designated restriction. This most commonly happens when a donor has designated that his or her gift be used for a specific purpose such as the purchase of an organ. Alternatively, the donor may have designated that the gift be retained permanently, in the form of an endowment, and that only the earnings may be used. These earnings may or may not be restricted as to their use.

In the case of a fundraising campaign, materials used to solicit funds may identify a specific purpose causing the resulting fund to be restricted in use.

In tight economic times, there may be a temptation to utilize restricted funds to pay the costs of day-to-day operations. Even when the intent is to pay the funds back this is a risky strategy, as those in a decision-making capacity could ultimately be held responsible for paying these funds back to the church.

To ensure this doesn’t happen to you, make it a point to become familiar with the nature of funds held in reserve by your church. Each month, a balance sheet should be presented to the vestry outlining net assets labeled as unrestricted, temporarily restricted, or permanently restricted. In addition, you will want to see a supporting schedule showing the names and balances of funds contained in each category.

Questions regarding the nature of restrictions can be resolved by reviewing a copy of the trust document in the case of a donor restriction. In the case of funds resulting out of a fundraising campaign you will want to review the solicitation materials. If a fund is vestry restricted, you can make a motion at the regular vestry meeting to remove the restriction before authorizing it to be used for other purposes.

The key is to become informed regarding financial transactions occurring each month and to acquire a basic understanding of the regulatory environment. One user-friendly source of information is the Guide for Charities which can be found here. While the Attorney General’s role is very restricted in relation to churches, the principles of managing a charitable nonprofit organization are the same. Specific reference to churches can be found beginning on page 32 of this guide.

If you have any concerns or questions please feel free to contact Canon Bobbi Yeo at (916) 442-6918 x211 or at bobbi@norcalepiscopal.org.

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