Monday, March 9, 2020

A Primer on UMC Assets: Board and Agency Assets

Today's post is by UM & Global blogmaster Dr. David W. Scott, Director of Mission Theology at the General Board of Global Ministries. The opinions and analysis expressed here are Dr. Scott's own and do not reflect in any way the official position of Global Ministries. Dr. Scott is neither a lawyer nor an accountant, and thus the following should not be interpreted as legal advice.

Having looked last week at the range of sources of income for boards and agencies (hereafter just agencies), I will now turn to the several categories of assets an agency may hold. These categories of assets are not unique to United Methodist agencies but are characteristic of nonprofits generally. In addition to this post, the “Definitions of Assets, Liabilities, and Net Assets” from GCFA is helpful reading on this topic.

First, I will look at financial assets, since these tend to be the bulk of agency assets.

Within financial assets, there are unrestricted assets, which are financial assets that can be used for any purpose and may be stored in a variety of bank accounts or investments until they are needed. When many people hear the term “denominational assets,” this is what they think of: a bank account with money just waiting to be spent on whatever the denomination wants.

It is worth noting, though, that even though these assets are “unrestricted,” agencies may still not be free to spend them in any way they want and may not be free to give them to other legal persons at will. Agencies are still bound by the terms of their articles of incorporation, the legally binding documents that establish them as legal persons. The terms of those articles of incorporation may restrict what the agencies may do with even their unrestricted assets by stipulating that the agency exists for a specific purpose. Thus, for instance, GBHEM may not be able to take its money and begin operating a chain of frozen yogurt shops, since it is supposed to be in the business of supporting education. (I don’t know the specifics of GBHEM’s articles of incorporation; this is just a hypothetical example.)

Beyond undesignated assets, there are board-designated assets, which the board of directors has taken from unrestricted assets and earmarked for specific purposes. Again, these board-designated may be stored in a variety of accounts or investments.

In some instances, these board-designated purposes include meeting legally binding financial obligations such as paying for retirement funds. Thus, while a future board of directors could theoretically change how this money is designated, it may not be possible to re-allocate all of that money without a board or agency defaulting on its legal financial obligations. Boards of directors could not ignore these obligations without violating their fiduciary responsibility to the agency, and the agency could not ignore these responsibilities without risk of a lawsuit.

Together, unrestricted and board-restricted assets function as “reserves,” a cushion of money that allows for some fluctuations in spending and emergency expenses, in the same way that individuals often have more in their checking account than they intend to spend in the next month. GCFA recommends that all boards and agencies have 3-6 months of operating expenses in their reserves. If an agency is left short of reserves, it could end up in a situation where it was in danger of not being able to pay its bills.

Next, there are endowments, which are a specific type of investment wherein the principle is preserved, but the interest from that principle can be placed into unrestricted funds. Such endowments are subject to a variety of state laws, but these laws often prohibit the principle of the endowment from being spent. Thus, while the interest may be spent at the agency’s discretion, the agency may not be able to spend or give away the principle.

Agencies also have donor-designated assets, which a donor has stipulated how they are to be used. Some donor-designated assets are intended to be used within the near-term, and some of them are long-term investments, the interest of which is to be used for the purpose designated by the donor. These designations are legally binding, especially when gifts are given as part of a will. Were an agency to use a designated asset for a purpose other than that originally intended by the donor, it might be sued for doing so, especially by relatives of the person who gave them money. US law has a long and strong tradition of upholding such restrictions.

Finally, there is tangible, physical property, which includes land and buildings, but also things like computers, desks, books, etc. Without going into the details, there are different approaches to assigning monetary values to such physical property. For buildings and land, there is a difference between the “at cost” value and the fair market value. Moreover, while land and buildings may make up the majority of the physical property assets (for those boards and agencies that own them), it’s important not to forget about other forms of physical property. Finally, depreciation affects the financial value of physical property, but may or may not be included in a description of assets.

While there are conspiracy theories that agencies are secretively hiding money, a variety of information about agency finances is publicly available, including through the GCFA website. In particular, GCFA provides a report on general church reserves, a summary of General Church assets, liabilities, and net assets. GCFA also lists the at-cost value of agency headquarters buildings, for those agencies that own their own headquarters. Additional financial information about the income, assets, and expenditures can be found in agency reports or auditing statements and sometimes in IRS 990 forms filed by the agencies.

Aside from Wespath, the largest pools of net agency assets are those held by Global Ministries and UMCOR, GBHEM, and Africa University. Many of these are in the form of endowments and donor-restricted assets. Pension obligations eat up a significant amount of the non-restricted assets as well.

Thus, a large portion of agency assets across all agencies are not general assets that can be spent at will but rather assets set aside for specific, legally binding purposes. According to GCFA, the apportionment-funded agencies collectively have $589 million in net assets (assets minus liabilities). However, only $86 million of this is money that is not tied up in endowments, property, or pension obligations.

$86 million in cash is not nothing, but it is worth setting in three contexts: The first is the scope of the overall budgets of these agencies, which in 2018 was about $263 million dollars. $86 million is about four months’ operating costs in reserves, in line with what GCFA recommends. The second is the legal complexities around what agency money can legally be used for, even when it is unrestricted. The third is the over $50 billion in local church property owned by local congregations, which still represents the overwhelming majority of United Methodist assets.

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