Almost every school we work with has had a capital campaign and some schools are currently making plans for another one. There are lots of things to think about in this process, but here are a few things your CPA wants you to keep in mind.
Restrictions Associated with Funds Raised
When a school asks for a contribution to be made towards its capital campaign, the contribution becomes restricted for the use of the campaign. This is true whether it’s a cash contribution or a pledge, so the school needs to be careful it doesn’t restrict itself too much. For instance, if the school had a capital campaign and raised money under the pretense that it would be used for a new gymnasium, but it raised more money than was needed for the new gymnasium, can the excess be used for playground equipment? No, not without consent of the donors. Does it need to be returned to the donors? Probably, unless the school can convince the donors to “re-purpose” the money for other capital activity or for general operating costs.
So how to solve this situation before it becomes a situation? Instead of raising money for “A New Gymnasium”, raise money for “A New Gymnasium and Other Recreational Equipment.” This will allow the school more flexibility in how the money is spent, and can help solve a potential problem of an overly successful campaign. Additionally, consider adding even broader wording into fundraising literature, so funds can be used to pay debt that may be incurred associated with a capital project, or so that funds can even be used to pay administrative costs (e.g. fundraising consultants) associated with the capital campaign itself.
Additionally, let’s say the school collects money in advance of spending it. The school puts it into the bank and earns interest. What does it do with the investment earnings? Are the earnings restricted or unrestricted? Unless the donor has stipulated something to the contrary, those earnings are unrestricted and can be used however the school chooses to spend them. We have also seen situations where the school has had a combination capital campaign/endowment fundraiser in the same campaign drive. In this instance, if the funds raised for both the capital campaign and endowment are invested together in one bank account, the earnings need to be tracked independently; the earnings on the capital campaign money are generally unrestricted, but the earnings on the endowment money must be used for the purposes required by the endowment. In this situation, it might make more sense to use separate bank accounts. The record keeping, especially when funds are commingled, can take a lot of work.
Oftentimes, funds raised in a capital campaign come in the form of long-term pledges to be collected over future periods. If possible, try to limit the length of the future period over which the funds will be collected. If collection terms get longer than five years, funds can be harder to collect, and the purpose(s) they have been restricted for may no longer be relevant or the highest priority for your school.
Another issue associated with long-term pledges is the consideration of a discount to present value. As they say, a dollar today is worth more than a dollar five years from now. Pledges are generally required to be reported at fair value when received. For pledges due in one year or less, net realizable value can be used for fair value (the gross amount of the pledge, less any allowance for potentially uncollectible amounts). To determine fair value for pledges due in periods beyond one year, schools must also discount the pledge using a risk-adjusted discount rate. This can result in relatively complex calculations.
One last point to keep in mind with long-term pledges: because cash collections on the pledges can occur well after the capital project is complete, the school may need to find a way to finance the capital project while it waits to collect the pledge.
Other Accounting Concerns
- Capital campaigns create more work for the school’s accounting staff. Be sure staffing levels are appropriate, considering the extra work.
- Make sure there are good processes in place for communication between the accounting and development departments. The development department often receives contribution information initially, but it is up to the accounting department to properly account for the contributions. Ensuring that the development department tracks information that will be needed for accounting and coordinates getting that information to the accounting department on a periodic basis, and in an appropriate format, will be beneficial to the financial reporting process. Reconciling that information with the accounting records on a periodic basis to ensure that all funds are accounted for properly will also aid the process.
- For pledges, make sure proper documentation is being retained. Signed pledge forms work well for this (information to document would include donor’s name and contact info, date of the pledge, total amount of the pledge, expected payment dates, and any restrictions on use of the funds).
- Make sure the process of tracking restrictions associated with funds raised is well documented. No one wants a donor to later claim his or her funds weren’t used as promised once a project is complete.
If you are planning a capital campaign, talk to your CPA early in the campaign process. A small bit of work now can save a lot of extra work or undesired consequences later.
For more information, please contact Ray Holmdahl, Partner 206.382.7707 or Bob Bowman, Principal 206.382.7806