Our Ask An Expert series features real questions answered by Claire Axelrad, J.D., CFRE, our very own Fundraising Coach, also known as Charity Clairity.
Today’s question come from a nonprofit employee who want advice on how to budget and pay for capital campaign fundraising expenses:
Dear Charity Clairity,
We just launched the very beginning phase of a capital campaign to create ADA handicap access in our Studio Annex where art classes are held. We hired a Campaign Consultant. We put the consultant fees in our budget which is what we thought was the way to do it according to articles we read on capital campaigns, keeping the expense between 10 and 15% of the total campaign. Now our accountant insists we cannot pay for the consultant, or any fundraising expenses, with donations meant for a capital campaign. We’re told all funds raised need to be spent on the construction project and, if there are leftovers, they need to be returned to the donors or we need to get written permission from each donor to use the funds for something else.
— Between a Rock and a Hard Place
What your campaign plan is coming “between” is an age-old problem; one that can be addressed and fixed with a little creativity and understanding.
The problem you describe is that of accounting and development not speaking the same language.
- You’re speaking the language of “raising money costs money.” And, for a capital campaign, you’ve likely been charged to raise quite a LOT. Common wisdom, as you’ve discovered, suggests spending roughly 10% of the overall campaign goal on campaign fundraising. This is reasonable, and necessary.
- Your finance office has been charged with controlling the inflow and outflow of funds. They’re speaking a language infused with standards from FASB, which requires accountants to record expenses incurred to raise funds to pay for building and renovation as operations in the fiscal period in which they are incurred. Alas, you cannot capitalize the fundraising expenses [13.08 Per FASB ASC 958-720-25-4]
During the period in which your campaign is being conducted, you need to bolster your operating budget to cover these expenses. By how much?
“Our rule of thumb is that you should budget approximately 10% of your campaign goal on campaign expenses, budgeted over three years. You may not need that much, but 10% is a great starting place to get your board on board with your campaign budget.”
While you can’t exactly rob Peter (capital campaign contributions) to pay Paul (capital campaign fundraising expenses), you can recoup your costs by adding the anticipated total amount of the expense to the campaign goal. When your campaign is completed, you can repay what your accountant calls “leftovers” to the accounts from which you drew them. To keep it kosher with your donors, just make sure you’ve accounted for these costs by listing them in any written campaign communications, including your budget and brochure. You should not hide from donors the fact there is administrative overhead, including fundraising and marketing, associated with making your campaign vision a reality.
Let’s go back to the issue of bolstering your current operating budget to cover current capital campaign expenses. One option is to secure a capacity-building grant for this purpose from a foundation. Another is to see if a board member, or the full board acting together, might be willing to fund your campaign operating budget. Since you’ve already begun your campaign, here are some options developed by NACUBO (National Association of College and University Business Offices):
As you see, funding options they explore include: (1) withdrawal or “tax” of a small portion of undistributed earnings on existing donor endowments for general use (i.e., without other restrictions); (2) withdrawals from board designated endowments; (3) a small assessment on gifts generated by the campaign; (4) withdrawal from operating reserves, and/or (5) use of operating revenue. They summarized pros and cons of each funding model, ultimately settling on a combination. Of course, your nonprofit may not have the luxury of all these options.
My best advice, if you have board designated endowment or operating reserves, is to borrow from these accounts for initial capital campaign fundraising expenses. At the same time, designate a small percentage of each capital campaign gift as unrestricted support for operations, including fundraising, marketing, and other administrative overhead. Since this is unrestricted, if you have what your accountant is calling “leftovers,” you can use it to repay your reserves and/or board-designated endowment.
CAVEAT: Please know I am not an accountant, so what I’m telling you is based purely on my lay understanding. You definitely need to pay attention to FASB rules, which change not infrequently. The most recent information I was able to find is here (check with your accountant to see if this reflects what they’ve shared with you.) Since you’ve hired a campaign consultant, they should also be able to advise you on this matter.
— Charity Clairity
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