Urban Institute Report: Washington-Area Nonprofit Operating Reserves

By Amy S. Blackwood and Thomas H. Pollak

Imagine having expenses of $2,000 and take-home pay of $2,100 every month. You are living hand to mouth in good times. Then your employer cuts your hours by 30 percent to keep its business afloat. If you have some money in the bank—an operating reserve—you can survive.

If not, you could be in dire straits. This is the current predicament faced by many public charities in the Greater Washington area. Major foundations lost a median value of 28 percent of their endowments between 2007 and 2008. State and local governments in Maryland, Virginia, and the District of Columbia are all cutting back, most likely resulting in fewer grants and government contracts to public charities. In addition, private donations and fees, whether from tuition, patient fees, ticket sales, or other sources, are also likely to be down as unemployment rises and the economy continues to weaken.

Operating reserves are an important indicator of an organization's financial health. They provide organizations with a cushion to either maintain their services or enable a relatively smooth reduction in staffing and services if faced with unexpected funding delays or revenue shortfalls. This study, the first of its kind, provides a snapshot of the financial wellbeing of Greater Washington's locally focused charities during a time of economic stability (i.e., 2006). The data also suggest some conclusions about the vulnerability of these organizations during the current economic downturn.

In addition to providing a snapshot of the financial health of these charities in 2006, the study also looked at operating reserves trends for the subset of public charities that filed an IRS Form 990 in 2000, 2003, and 2006 to assess the use of operating reserves during the economic slowdown after the September 11, 2001, attacks.

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