restricted vs. unrestricted funds

Your discretion –-or theirs?
The issue of restricted vs. unrestricted funds is a tough one. A New York Times article in 2008 spoke of a growing tyranny of donors.
Are things that bad?
What’s this all about, what do the terms mean, and what does it all mean to you – as a donor and/or as a recipient?
According to the article on Managing Restricted Funds provided (in pdf format) by the Nonprofits Assistance Fund, funds received by a non-profit fall under three heads:
Unrestricted: These funds are free from any external restrictions and available for general use. Many individual contributions are unrestricted, as are general operating and unrestricted grants.
Temporarily Restricted: These funds have donor-imposed restrictions that can be fulfilled in one of two ways – passage of a defined period of time (time restriction) or by performing defined activities (purpose restriction). These funds most often come from a grant received to operate a specific program or project or individual contributions given with the intent of supporting a particular program or campaign.
Permanently Restricted: These funds are restricted by the donor for a designated purpose or time restriction that will never expire. The intent is that the principle balance of the contribution will remain as an investment forever, and the nonprofit will utilize the interest and investment returns, such as with an endowment.
Here’s the issue in a nutshell, as quoted from Kathleen Enright, President and CEO of Grantmakers for Effective Organizations in another New York Times article:
A majority of foundation leaders polled in the studies acknowledged that unrestricted operating funds were better and more effective for grantees. But they continue to focus their grant-making on project support, they said, because they prefer its clear-cut results and because their boards often mandate project support as a way to show a foundation’s prominence in a specific funding area.
Enright went on to say:
The presumption is that the donor knows more about how to address a given problem than its grantees, and I think that’s usually not a correct presumption… More operating support can shift the locus of action and ideas to the people who are closest to the problem.
So here are my questions – please feel free to pose further questions on the same topic that fit your own organization, its needs and experiences…
  • Do you find “restricted funding” cramps your style?
  • Are you just, frankly, enormously grateful for any amount of money you can raise, restricted or not?
  • Both of the above?
  • Are there things you have been unable to accomplish because too high a percentage of your funding comes with restrictions?
  • Is the issue for your organization one of general operating expenses?
  • Is the issue the need for greater flexibility in allocating funds to emerging crises in different parts of the world?
  • Do you have “abundance” years and “slump” years when reporting “restricted” funding that’s time dependent?
  • Are the complex legal necessities of accountancy themselves a barrier to performance?
  • Are things differently organized in your part of the world? How?
  • What’s an ideal arrangement, one that both inspires donors and facilitates necessary actions?
Please join Charles (Hipbone) Cameron as we explore the subtle issues surrounding restricted and unrestricted funding.