08 August 2011

Art and cultural assets news - summer: but who will pay for the office furniture? The blessing and burden of restricted funds

Emma Flower
Senior associate | UK

As the cultural sector faces the reality of public sector cuts on a severe and unprecedented scale, fundraisers will have to be more creative than ever to attract private sector support. With few rising untouched from the ashes of the recent economic crisis, there will be an increasing
number of organisations fighting over a reduced number of supporters.
Charitable organisations will be analysing what incentivises individual donors to give away their personal wealth for ‘a good cause’. The arts have always struggled to keep up with those charitable causes which are seen as more ‘essential’, such as humanitarian or healthcare
charities (only 2% of philanthropists give to the arts). Certainly, recognition and a desire to be associated with culturally rich pursuits may attract some; and there are those who do it for the love of the arts, the desire to raise up new generations of art lovers, the regeneration of cities through culture, or perhaps the knowledge that some of their best loved works will be preserved beyond their lifetime.
What these donors will often have in common is a desire to know exactly what their money is put towards. Every donor will want to know that their contribution will be used for the purposes that inspired them to part with their funds. This is entirely understandable, but it does result in a situation where many gifts are given upon the condition that the money is spent on a particular activity. For example, an art gallery might be given funding to purchase a rare painting that is of particular interest to the donor.
When a donor gives on this basis, the funds which are given to the charity will be ‘restricted’ as to purpose. In some cases, donors may be keen to ensure that the funds provided are not spent immediately but preserved. In that case, they may restrict the spending of capital so that only the income generated from the capital can be spent by the charity. This is another form of restricted funding called a ‘permanent endowment’.
Where funds are given on a restricted basis, the charity will be obliged to use those funds in accordance with the donor’s wishes and account for them separately from their ‘unrestricted’ funds (even though they may all be held in one bank account). These restrictions will apply not
only to the funds donated, but also to any interest accrued on those funds.
The problem with donors giving money for a particular purpose is that there are less funds (or, in some extreme cases, no funds) available to spend on office furniture, paying rent and electricity, covering administrative costs and, dare I say it, paying for good professional advice. While the more obvious objects of the charity might be fulfilled, the charity itself may languish from a lack of flexibility on paying for the mundane but essential costs and overheads which every organisation needs. Moreover, an organisation may want to move in a new direction but may be prevented by the restricted funding; or the purposes for which the money was raised may no longer be viable.
In these financially straitened times, fundraisers are often so keen to bring in new funding that they end up inadvertently accepting restricted funds, or creating uncertainty because the purposes for which the donation was given were not clearly recorded.
So we see a number of problems arising: donors preferring to restrict the purposes upon which the funds are spent; organisations accepting funds without certainty as to whether they are restricted or unrestricted; changing needs and priorities within an organisation being hampered by restricted funding; and, as restricted funding increases, difficulties in paying for the ordinary, less aspirational
essentials of running an organisation.
To some extent, these problems are a reflection of the times; donors can be discerning about where they place their funds. There may be a number of artistic charities vying for the same benefactor and, whilst some donors are realistic about a charity’s general needs, many will be
more likely to respond to a request to help save a precious artefact, rather than contributing to the ‘general pot’ (and that much-needed new photocopier).

There are certain options available to charities to help them deal with restricted funds that currently cannot be used in a way which is best for the charity. Furthermore, some straightforward actions by the charity can prevent difficulties arising in future. The following key points should
be borne in mind:

  • Where fundraising for a specific cause, fundraisers should always set out in writing that the funds can be put towards the general purposes of the charity, should the purpose for which the funds are being raised become redundant.
  • A clearly drafted deed of gift or letter of agreement setting out the terms of the donation will ensure that charities and their donors understand the basis upon which the gift is made.
  • If, for example, restricted funds are held for redundant purposes or a charity is reconsidering its funds strategy, the Charity Commission has the power, in certain circumstances, to enable charities to change the purposes upon which funds are held.
  • The Charity Commission can also lift the restriction on capital in relation to permanently endowed funds. Indeed, the introduction of the Trusts (Capital and Income) Bill towards the end of this year is expected to make it easier for trustees to lift the lid on permanent endowments.

In respect of loosening restrictions over funds, charities should act very cautiously. Quite aside from the conditions which a charity would need to overcome to be eligible for such amendments, charities need to be sensitive to donors’ wishes. Therefore, a cogent case must be made as to why this is in the best interest of the charity. The Charity Commission will be mindful of the donor’s wishes and how recently the donation was made.
Charities which advance culture and the arts will be treasuring their donors more than ever. It is extremely important that confusion and possible offence do not arise because a donor’s funds are not used in the way they were intended. It would be all too easy for a charity’s precious reputation to be undermined if word got out that the charity does not respect the wishes of its donors. Following a few simple rules of practice can help a charity avoid these pitfalls.

Emma Flower Senior associate | London

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