Yes, you usually can use donor restricted funds for overhead – within limits. Although you have most likely heard from several sources that donated funds restricted to specific programs can only be used for program costs such as staffing, client support, and program supplies, absent a specific prohibition by the donor, such funds can be used to pay reasonable administrative costs necessary to support the funded programs.
In non-profit finance and accounting, restricted contributions are those given by donors in which the donor intends the funds to be used for specific programs or purposes. As in all matters regarding donations, the stated intent of the donor rules when it comes to the purposes for which donation revenue can be allocated. If the donor allocates funds for program B, and states verbally or in writing that such funds cannot be used for administrative costs (back office, IT support, human resources, insurance, operations, etc.) to support such programming, than they cannot be used for that purpose.
However, if no such explicit statement is made by the donor, non-profits can use a reasonable amount of the restricted funds for overhead such as administrative costs allocable to the program designated by the donor. For example, the federal Uniform Prudent Management of Institutional Funds Act (UPMIA) and many state laws explicitly state that “appropriate and reasonable” portions of monies donated for endowments can be used to pay for administrative costs associated with managing such funds. It is also allowable for non-profits to use restricted funds to pay for reasonable administrative costs related to program or service implementation.
Donors are increasingly becoming aware that their funds are wisely used to bolster the infrastructure necessary to ensure quality programming implementation. Studies have shown that most donors are supportive of their funds being used for reasonable overhead costs. However, to stand on the strongest legal, donor relation, and ethical grounds, non-profits should approach the use of restricted funds for overhead by emphasizing transparency and donor choice. When applying for grants or other revenue requiring a budget, non-profits should explicitly include the necessary administrative costs in the program budget, either through itemization, or the use of an administrative support percentage (e.g., back-office support @ 10%). If donors object, non-profits can offer donors the choice to fund only direct program costs; however, it could also serve as teachable moment to explain how funding overhead builds sustainable programs.
It is well known that strong administrative infrastructure is necessary for non-profits to provide quality transformative programs and services. Foundations and other donors are becoming increasingly aware that strong financial management practices require non-profits to take into account the administrative costs necessary to support each program. Non-profits should not be hampered in program execution by being prohibited from using restricted donations to fund overhead for programs. Unless a donor specifically disallows it, they need not be.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, PC. To contact Ellis, call 602-456-0071 or email us at firstname.lastname@example.org.