Navigating the Complications of Pooled Restricted Funds in Nonprofits

Managing finances within a nonprofit organization can be a complex task, particularly when it involves restricted funds that are pooled together for investment purposes. Recently, I’ve encountered a challenging scenario that has raised questions about tracking and utilizing these funds effectively. Here’s an overview of the situation and my thoughts on how to approach it.

The Current Scenario

Our nonprofit, which is not audited, has specific restricted funds designated for three different activities—let’s call them Activities A, B, and C. Recently, these funds were invested in a brokerage account, referred to as Account Y. At the end of each month, I am able to see the total value of Account Y, which includes the sums allocated to each activity alongside any investment alterations such as dividends, interest, realized and unrealized gains. However, rather than posting these changes in the usual Profit and Loss (P&L) statement, they are categorized under an equity line on the balance sheet, consistent with how restricted funds should ideally be recorded.

The Challenge Ahead

As we prepare to withdraw funds from endowment A on a quarterly basis, a significant challenge arises: it is difficult to determine how much of the amount being withdrawn represents the original capital designated for Activity A versus the market fluctuations that might have occurred over time. Complicating this further is the fact that all these funds have been consolidated within a single hedge fund, leading to frequent buying and selling of assets without clear partitioning for specific funding “buckets.”

Unfortunately, the organization does not engage an external CPA, as they do not file taxes and have avoided the auditing process. While we have worked diligently to maintain meticulous records, the constant shifting of funds across three bank accounts and two brokerage accounts—along with managing ten distinct restricted funding categories—has turned into a logistical puzzle.

Moving Forward

As I discuss this issue with our board of directors, it’s clear that we need a strategy. One potential approach I’m considering is the idea that once the reserved equity allocations for Activities A, B, and C have been fully utilized, any remaining funds within the brokerage account, along with any associated investment earnings from the restricted funds, could be treated as unrestricted operating funds. This flexibility would enable the organization to allocate them according to its evolving needs.

However, before taking this step, I’d like to open this discussion to gain insights and strategies from fellow professionals in the field. How do you effectively manage and