Assessing Gifts “At Risk”
Why would we want to know what financial resources are at risk in the life of the congregation? In the past, we have just gone on about our business, building budgets, engaging in capital projects, adopting new programs and the money has sort of taken care of itself. People die. New people join and become contributors. People move away. People move into our neighborhoods and find our church. What is the problem?
Careful fiscal management includes being able to “look forward” into the future when making financial decisions in the present. A part of that forecasting is assessing gifts at risk. For our purpose we will assume a gift at risk is any gift that we currently receive that has the potential or likelihood to not be continued past the next three to five years.
There are a number of categories into which these gifts fall. Some of them are income streams that are under contract and have a definite ending date. Others fall into the realm of “best guess” based on circumstance and pastoral knowledge.
One obvious consideration around the subject of gifts at risk must include circumstances surrounding donors to the annual campaign. There are numerous factors to be evaluated, most of which ultimately fall under the “best guess” category. Among the obvious considerations is the age and general health of your donor base.
Aside from age and general health, there are other factors that are often “in play” relative to the risk. A donor may be thinking of moving closer to children/grandchildren or simply desire to be in a different region of the country. In this case, it may not be the advancing of years or health, but the opportunity afforded by retirement. A donor may wish to remain in the area only for a portion of the year – this will also likely impact giving. Generous donors who are able to maintain two residences are often regular attenders who will become regular somewhere else for as much as half the year. It is logical to assume that your congregation will likely be sharing at least a portion of their regular annual gift.
This is an area where we may begin to find information gathering difficult when congregations have policies (or tacit understandings) that keep donor information completely private (usually between the Financial Secretary and the donor). Information is sometimes needed that only the pastor may be able to provide. (While it is beyond the scope of this article to talk about the problems such privacy policies create, it is important to find a way to release vital information to the finance team so that accurate risk assessments can be made.)
Not all contributors are older. This fact is often hard for other older donors to appreciate and is often overlooked by stewardship and finance committees. It is all too often assumed that only “The Greatest Generation” give generously. While the Greatest Generation does, in fact as a demographic group, give larger amounts to more non-profit organizations (with the church being their top priority), members of other demographic groups sometimes give very generously as well. You may have several young families that believe in practicing faithful generosity and are among your top ten giving units. They may be on a career path that has them living in your area for 3-5 years before the company that employs them moves them to a different city. There may be changes coming in their marital status, their choosing to have both partners working, or needing to adjust family budgeting concerns because children are going to college or have other needs that require “redistributing” their assets. While we assume a parent would be more likely to move closer to adult children, sometimes it is the children who move closer to their parents so that care taking and life management is easier.
This is why the pastor needs to be involved in this discussion, which can create tension with policies that enforce a culture of secrecy. We advocate that for realistic income forecasting, the pastor is a key source to understanding the life circumstances that influence the level of risk to all gifts. If we can trust the pastor with other confidential matters relative to the life of church members, they should be trustworthy of having some information about the source of financial gifts. (For more discussion on this issue, we recommend the book Not Your Parents’ Offering Plate by J. Clif Christopher.)
Other factors that impact your donor base include local employment stability, market volatility, and general contentment of members with the direction of the congregation. Whether or not a member is satisfied with the leadership at both the local and denominational levels can impact generosity and longevity. This does not mean the congregation’s vision, mission, and stance of issues of importance should be subject to the desires of a single contributor (or group of contributors) – it simply means that if disaffection is a possibility, it needs to be a part of the risk assessment.
Next, let’s look at the income streams that are fairly easy to assess. Income you receive from rent, fixed lease payments, and investments are the “low hanging fruit” in the data you are gathering.
Many congregations are fortunate enough to have an endowment fund or a permanent fund from which they draw income. Remember, investments have a level of risk, as the period between late 2008 and early 2012 made clear. Assuming church funds are put to work prudently, you can forecast the income by using a three or five year rolling average. How have the funds performed over a reliable period of time and what can we expect, should current conditions continue? Are there extenuating circumstances that can impact the funds in the short term that merit further caution in assuming the earning power of the funds?
Using the rolling average, you can smooth out the highs and lows that are a part of the volatility of the market, allowing you to be neither overly optimistic nor overly pessimistic about what to anticipate. It is important as well to evaluate the level of return you may be drawing from permeant fund income. In this case, it is not simply the rolling average, but also considering the industry standards relative to the size of the percentage drawn. More conservative economists are suggesting that the 5% level which has been a standard for over a decade may, in fact, be too high to properly preserve the principal over time against inflation and lower expected returns. If you are using 5%, you may wish to evaluate the benefits of reducing the size of the draw, which then means that your forecasts for income may likely be reduced going forward1.
We want to be mindful too of the one-time “just this once” draw where we may take more than the percentage that is recommended to meet a shortfall. While the funds may be unrestricted and therefore may be used to balance the budget – it is very important to understand how reducing the principal now reduces income earning potential forever going forward – which will be experienced immediately at the beginning of the next draw period.
Contracts, rental agreements and leases usually have both fixed payments and specific end dates. If, for example, you are renting space to a local pre-school, you should have a contract that determines the amount of the rent and the period of time the contract is valid. (Fixed period of time agreements are preferable to open ended agreements as they allow for both parties to evaluate the terms in a prescribed interval of time.) To assess the income stream beyond the basics of the contract itself, you need to consider how successful the program is. Does your space fit their long term needs? What is the fair market value for the space (usually determined by the square foot)? In what direction are square foot costs for rentals trending? The pre-school may be doing very well and the square foot price of rental property trending upward, but if you will not be able to meet their future needs without modifications or cost adjustments, this may be a gift “at risk” going forward.
Knowing this information gives you the power to negotiate with the best interest of both parties in mind, including perhaps, a longer term contract with the church in exchange for specific conditions or provisions. In this way we have not only determined the “risk”, but we have proactively sought to mitigate that risk. It is possible that the pre-school is not doing well and may be at risk of closing or not able to sustain the level of payments for space and still remain viable. This assessment also allows you to be prepared for the potential loss of income and to perhaps begin to seek an alternative tenant, or negotiate a different rate for a change/adjustment in what is provided by the church under the terms of the agreement.
These circumstances should not just be considered when looking to adopt new program initiatives, but also in the capacity to maintain current funding levels during the next five years of planning. Assessing “gifts at risk” is a part of a sound fiscal policy that creates financial stability and lowers congregational anxiety about future. Knowing our vulnerabilities prepares us to meet the challenges they present.
1 This should not be construed as financial or investment advice. The Center for Faith and Giving is not a licensed financial investment service provider or counselor. You should consult with a trusted and proven financial professional before making this decision.