If you spend decades leading nonprofit organizations, you are guaranteed to have several experiences. You will participate in strategic planning, manage a cash flow crisis, solicit a major gift, have a difficult conversation with a troublesome board member. And you will one day get a letter or email informing you of a large sum of money that you weren’t expecting.
How I learned about nonprofit windfalls
I will always remember my first financial windfall as an executive director, as well as how I didn’t make good use of the opportunity. During my third year as the executive director in Philadelphia, we were facing some difficult budget choices after our fundraising results fell short of an aggressive, stretch goal. This fundraising shortfall didn’t put the organization in a dire situation, but prudent management and governance required that we consider some relatively small budget cuts.
A donor, who knew he was dying, wrote a check for $75,000 and mailed it to us during his last weeks on this earth. The gift was completely unrestricted and also not made with any instructions about his desired use of the funds. He wanted to take this selfless action of donating a large sum while he was alive, but also didn’t want to get involved with minutia of how it would be used. I can’t blame him because I also wouldn’t want to spend my final days negotiating a gift agreement with a nonprofit.
The consequence of not having a windfall policy
With this gift in hand, the following week’s Finance Committee wasn’t nearly as difficult as we originally anticipated. We didn’t ask the hard questions about how we could generate more funds or cut expenses. Instead, we used about $65,000 of this donor’s final gift to plug the hole in our budget, and only added about $10,000 to our reserve account.
This decision resulted in three consequences for the organization:
- Because the $75,000 was a one-time gift, we only postponed tough decisions for a year.
- Our reserve fund did not significantly increase, and the organization was no better prepared for a rainy day.
- This impacted future giving from a major donor who also served on the Finance Committee.
Impact on future gifts
One of our Finance Committee members was a major donor who was later diagnosed with a rare, slow-moving, but deadly form of cancer. Tom* was a truly selfless man who wanted to make some six-figure memorial gifts while still alive but also saw us use that earlier unrestricted gift unwisely. So, when Tom approached us about making an annual $100,000+ per year commitment for multiple years, he wanted to be very clear about the ways his gift could be used. Because he had witnessed us use an unexpected major gift in a way that didn’t have a long-term impact, he wanted to be certain that we wouldn’t make the same mistake with his money.
He also worked with the Finance Committee to develop a windfall policy.
What is a windfall policy?
A windfall policy is a written and board-approved procedure for allocating and investing unbudgeted and unrestricted major gifts that exceed a certain threshold. Many nonprofits with budgets ranging from $100,000 to $5 million will set that threshold at a percentage of the annual operating budget typically ranging from 3% to 10% of the budget.
Benefits of a windfall policy
Tom wanted to ensure that we developed a policy for allocating and investing unexpected, large gifts that would outline the percentage or amount that (a) could be used for general operating; (b) would be added to a reserve or endowment fund while still giving the board the ability to unrestricted such gifts when absolutely necessary.
Thanks to Tom, our major donors gained a sense of confidence that we would invest their unrestricted major gifts and bequests judiciously. And, consequently, we received significantly more of them. The ultimate result of our judicious planning and careful stewardship was an endowment fund that generates revenue every year.
Examples of windfall gifts
When developing a windfall policy, it is important for everyone to have a common understanding of what qualifies as a windfall gift. These types of gifts share these common characteristics:
- The budget process didn’t assume this specific gift would enable the organization to meet its budget.
- The gift is unrestricted and not designated for a specific program or project.
- The unrestricted donation meets or exceeds the organization’s financial threshold. For a $50,000 organization, a $5,000 gift might be a windfall. But for a $10 million gift, a $5,000 gift would never be a windfall.
Additionally, windfalls are sometimes not gifts or bequests. In fact, they could also be unexpected income through a marketing deal, space rental, or partnership.
The following are examples of gifts or revenue that a windfall policy might cover:
- The Cuddly Puppy Foundation has an annual operating budget of $100,000 and receives a $25,000 unrestricted bequest from a late donor.
- The Neverland Legal Aid Society represents indigent clients and can seek attorney’s fees when they prevail in a case. For most clients they serve, the attorney’s fees are $500 to $1,000 per case. These fees typically go to the general operating budget of about $1.5 million). But when they prevail in a lengthy, class action housing discrimination case, the apartment management company is ordered to pay the Legal Aid Society total fees of $500,000.
- Ostrich Place has a unique, 150 year old building that Tyler Perry wants to rent for one week to film portions of a movie. Perry’s studio agrees to pay $125,000 in rent for that week, which feels like a lot of money to an organization with a total budget of $250,000.
Example nonprofit windfall policy
I am often asked for a sample nonprofit windfall policy, so I’m sharing this simple and easy to implement policy:
A “windfall” is defined as any unbudgeted, unrestricted income that represents more than 5% of Ostrich Place’s annual operating budget. If Ostrich Place receives a windfall, it will (a) designate an amount equal to 5% of the annual operating budget for general operating expenses in the current year; and (b) place the remainder of the windfall into the reserve account. The board may elect to reallocate, designate, or further restrict the remainder of the windfall.
While I’ve always been a fan of simple policies, some organizations will need a more substantial policy and Gompers Habilitation Center’s Windfall Policy has an excellent policy that is worth reviewing. By the way – Gompers exemplifies a best practice by making its fundraising and gift policies publicly available to donors.
Don’t wait for the windfall to happen
Too many organizations will postpone drafting a windfall policy until they receive that first unexpected, life-changing gift. Organizations that wait to create a windfall policy, too often use the windfall in a manner that is guided by the “need of the moment” and not by a longer term vision.
Since it’s only a matter of time before you receive an unexpected windfall, send an email to your Board Treasurer, CFO or Executive Director today to begin the conversation about your organization’s Windfall Policy.