Building Reserve Funds: True Sustainability Begins Here
Sustainability lies at the heart of every land trust’s mission, central to achieving our core promise to ensure perpetual stewardship of the land. While land trust leaders regularly address many of the most complex challenges to environmental sustainability, they often find the challenge of ensuring the financial and organizational sustainability of their groups to be much more daunting. Moving beyond mere survival to true sustainability requires building reserve funds. Without sufficient reserves, a land trust puts itself at great risk in both the short and long term.
But how does a land trust begin this process, how is true sustainability defined, and how big a reserve fund is needed?
Michael Daily, executive director of the Executive Service Corps of Northern New England and a nonprofit consultant, looks to the 2008 Nonprofit Operating Reserves Initiative Workgroup when addressing the reserve funds question. The workgroup, including representatives from nonprofits, accountants, academics and watchdogs, engaged in a two-year effort that led to the publication of the Operating Reserve Policy Toolkit for Nonprofit Organizations. Daily writes that their deliberations determined that “all nonprofits should have at least three months of Operating Reserves at the lowest level during a fiscal year. From that baseline they should increase the number of months of reserves to six months based on risks to revenue and risk in controlling expenses. The list of possible risks was so inclusive that virtually all nonprofits would need six months of Operating Reserves.”
Planning for the Future
So how does the average land trust go about attaining such a cache of reserves? Glenn Lamb, executive director of Columbia Land Trust (CLT), which now protects more than 18,000 sensitive acres surrounding the mighty Columbia River in Oregon and Washington, reflects on the decisions that proved most critical to transforming his organization: “First we had to envision a truly inspiring future for the river and its lands — we had to imagine the future for our region in 100 years, and then pull into focus the progress we would need to make in 25 years, then 50, and see the connections between those images and our priorities for the next few years.” From this vision, they developed a plan: “Once the board and our major stakeholders were able to describe an inspiring future, we had to be willing to drill down and develop the concrete business plan that would allow us to move toward that vision.” CLT’s business plan spelled out the major strategies the land trust would pursue and the financial resources the organization would need in order to implement them. It also identified the organizational capacities CLT would require to build its core of donors and handle dramatically expanded acquisition, stewardship and management responsibilities.
Looking back, Lamb recalls how challenging it was for the board to decide to devote both time and money to a series of themselves and each other about the wisdom of devoting resources to planning rather than doing. Today, however, he attributes much of CLT’s dramatic success inn attracting and retaining major donors to the clarity and depth of the long-range vision the board articulated throughout the planning process. But without the business plan, the vision would have remained a dream.
The executive director of the increasingly sustainable North Coast Land Conservancy (NCLC), Katie Voelke, credits much of their success to effective planning as well. NCLC partnered with a consultant to develop a three-year organizational sustainability plan. After conducting an organizational assessment, they recognized the need to expand their web of close relationships and increase visibility in their community. As a result, they chose to expand key committees to include members beyond their board. Voelke believes that expanding the NCLC family was critical to their success in fundraising. Through training and sustained effort, they finally built a cadre of supporters who were proficient in securing major gifts.
Voelke notes, however, that it’s a “very real fact that our board members are volunteers and many are still full-time in their careers, so moving forward with the planning process we had to make sure we built the new capacities at a pace that volunteers could handle.” Every organization has different resources at its disposal, so it’s critical to approach the undertaking with realistic expectations. As Voelke describes, “We did all this over about a three-year period and, although that sounds like a long time, it felt like the fast track for our group, and I don’t believe we could have moved any faster.”
Central to both of these land trusts’ successful experiences was the investment of substantial time and dollars in taking an honest and in-depth look at their organizations’ strengths and limitations; moreover, this process needed to begin with an understanding of the extent to which their organization would be sustainable if it continued operating as it had in the past. And a key part of any effective business plan is the identification, at the outset, of the progress indicators that will be monitored to ensure steady progress toward long-term goals.
How Sustainable Is Your Land Trust?
To begin exploring this question, look at your balance sheet. Hone in on the net equivalent of the business concept of equity or net worth, but mechanically, net assets comprise the difference between your assets and your liabilities. Net assets increase when your land trust’s income exceeds its expenses (equivalent to profit or positive net income in a business) and decrease when your expenses exceed your income (equivalent to a net loss).
Sustainability requires having a positive net worth. If your liabilities are greater than your assets, you will see negative net assets (negative net worth) and know that your ability to continue operations is severely threatened. So while having negative net assets is clearly a sign of weakness, how large do the positive net assets need to be to indicate a sign of strength sufficient to ensure sustainability?
Before you can answer this question, you’ll need to dig a bit deeper to understand the extent to which your net assets are restricted. Only your net assets that are characterized as unrestricted are fully available for use at your board’s direction. These unrestricted net assets will give you a cushion to fall back on when times are hard and will also provide the capital required to seize opportunities and take Seen as a low risk because of the amount of reserve funds it has in the bank, the North Coast Land Conservancy was approved for a bridge loan that enabled it to acquire the North Fork Necanicum River property.
The portion of your net assets characterized as temporarily restricted actually represents unfulfilled commitments that your organization has made to donors. Temporarily restricted net assets increase when you accept donor-restricted gifts and decrease when you fulfill the donor restrictions. Your board is responsible for seeing that your temporarily restricted net assets are used only for the purposes that the donor has specified, so your ability to use these resources as a cushion or to capitalize capacity building or risk taking is limited to the restrictions you have accepted with the gift.
Permanently restricted net assets are most commonly described as endowments. Donors make permanently restricted gifts with the intention that your organization will invest the corpus of the gift and use the resulting investment income, rather than the gift itself, to carry out your efforts. Permanently restricted net assets can contribute significantly to sustainability through their generation of investment income. Each dollar generated through such investment is a dollar that your land trust does not need to devote time and money to solicit. But the extent to which your permanently restricted net assets will actually contribute to sustainability will depend upon your land trust’s success in establishing and executing a wise investment policy.
Boards committed to sustainability will recognize that setting and achieving targets for their net assets will be a key element in their planning. Typically, goals for unrestricted net assets available for operations are set in reference to annual operating expenses (excluding the costs of purchasing land or easements). At a minimum, nonprofits need unrestricted net assets available for operations equal to at least 25% (three months) organizations committed to strengthening their sustainability may choose more ambitious targets, i.e., 80% to 100% (nine to 12 months) of annual operating expenses. Expressing the target as a percentage of grow to keep pace with expanding capacity.
Beyond building reserves for operations, sustainable land trusts are deeply committed to building stewardship reserves. For many land trusts, a portion of the net assets set aside for stewardship will be temporarily restricted (reflecting donor restriction not yet fulfilled); another portion will be reflected in the unrestricted net assets as a board-designated reserve for stewardship. Today most land trusts recognize the importance of persuading donors to make stewardship contributions in addition to their gift of an easement or fee lands. But boards have a responsibility to build overall reserves for stewardship to adequate levels, regardless of how successful their efforts to obtain stewardship contributions may be. So a key part of planning for sustainability is establishing target levels for net assets reserved for stewardship, including both those that are classified as temporarily restricted and those that are board-designated portions of the unrestricted net assets.
Breaking through the Barriers
Once you’re clear about your land trust’s current financial position and begin envisioning the targets you will set, your next step may be taking a close look at some of the most common barriers to making progress toward sustainability. Paradoxically, some of our culture’s widely held beliefs about “good” nonprofits can be major barriers. Let’s start with the idea that “good nonprofits don’t spend money on management or fundraising.” While some charity rating agencies have begun to move away from the concept that looking at the percent of dollars spent on “program” is the best to way to evaluate nonprofits, and recognize that looking at mission-related accomplishments is a much more meaningful approach, repeated messages that equate spending on management with “waste” have created a powerful mentalbarrier to thinking strategically about true sustainability.
Some donors and board members may struggle with an even more basic misunderstanding, equating the term “nonprofit” with an imagined prohibition against having revenues exceed expenses. In reality, organizations are only sustainable if they build their net worth, and increasing net assets requires achieving a positive net income. No discussion about sustainability can really move forward until the full board understands the necessity of budgeting for and achieving a positive net income.
One more significant barrier to making sustainability real is our culture’s addiction to short-term thinking. Sustainable land trusts must continually expand their pool of committed major donors, but building an effective major donor program requires investing energy for long-term results. It requires focusing board and staff time on sustained strategic donor development rather than chasing the short-term quick return of foundation or governmental funding.
Keeping the Promise
Building sustainability is a complex process requiring significant investment of resources. As the Columbia Land Trust and North Coast Land Conservancy experiences illustrate, planning is essential, both for the creation of an inspiring shared vision and for the development of a realistic, detailed business plan to chart a specific course to achieving that vision. Taking the long view is essential to truly ensure the protection of our natural resources and working lands.
Each of us who asks others to contribute to our land trust offers a promise to protect the land in perpetuity. We owe it to ourselves, our donors and the land we love to take the time to chart a judicious course that will make certain that our land trusts possess the leadership, vision and capacity required to deliver on this promise.