A church is an entity.  We report on such an entity when we prepare financial statements.  Some church organizations create and report on many “funds”.  Separate reports on the general operating, capital, flower, organ, family retreat, needy family, and many other “funds” are sent to the Board (perhaps).^[1]  While there are serious interests which must be respected in earmarking the use of gifts to a purpose, it is not necessary to physically isolate the monies.  That is the reason for accounting.

I have been in conversation with congregations with multiple bank accounts, each established in pursuit of having good control over particular gifts, or monies raised for a particular purpose.  Every time a member of the congregation would give a special gift for some purpose, for example, or if the Board decided to “set aside” funds for some longer term purpose, this was understood to mean a new bank account.  Sometimes various committees have separate bank accounts — perhaps because they had charged a fee and wanted to keep “their money” separate.

All these separate accounts were given the name “the X Fund” and reported on separately to the board, if at all.  Most congregations, in truth, have at least an Operating Fund and a Building (or Capital) Fund.  Historically it may have made sense to manage various pots of money this way.  It may have been easier “way back when.”  It is not easier in the new millennium.  We have good software which keeps track of transactions in a more complete chart of accounts.  So, why would we still want to conduct our affairs as though we operate out of several shoe boxes?  It is clumsy and confusing to create several different bank accounts for a church simply because someone believes some money needs to be protected and controlled.  And in truth, the Board members at such churches will usually tell you they feel they have less control, not more.  The church is a single entity; report on it in a single, consolidated format.

I don’t understand an accounting paradigm which values a set of fairly arbitrary financial distinctions ahead of the immediate responsibilities of salary or other bills.  Let us be clear here:  This is not a call for setting aside the intended uses of funds, such as might be recognized by a separate account.  Rather, a church budget controls how money will be spent, for what, and when.  The congregation holds the Board accountable for ensuring that both the income and expenses fit the budget.  If that is not happening a basic management failure needs to be addressed.  If the Board is doing its job, separate accounts are distracting and irrelevant.

Attractiveness of Single Fund Concept

1)         It is easier to understand the fiscal affairs of the church if they are consolidated.  It is easier to see all the support coming into one place.  It is easier to keep track of how money is used as it flows out of one place, and it is easier to see that it is used as intended.  It is easier both for those who are in responsible leadership roles and for members who simply want to stay informed.

2)         It is easier to manage the cash resources of the church if they are pooled.  If not, a church might have perpetual problems in meeting its obligations during the summer, while having a great deal of cash isolated in dedicated accounts.

3)         It is better financially to have a single large account because of reduced bank charges, or possibly increased interest income on account balances.  Many banks have more attractive arrangements for accounts with more than a $1,000 minimum balance.  If committees have separate accounts, they may not meet that requirement

4)         It is easier for the congregation to understand and meet their priority needs with a single fund and a single annual stewardship drive.  Thus, the community is healthier and more trustful of itself as it achieves better balance in its vision.  When there is a single vision and a single annual stewardship drive, separate funds are an oxymoron.  When there is not, separate funds reinforce the apparent dispersion of interests.

5)         No obligation should be honored ahead of other obligations as a matter of routine policy.  “Funds” contribute to the delusion that such behavior by the congregation is permissible.  For example, the mortgage or loans a church has are fixed obligations.  If the church does not have a successful “capital annual stewardship drive” the obligations must still be paid.  They must be paid whether or not there is cash in the “capital fund”.  The same is true for the salaries of the staff or the bill for office supplies.  All obligations have equal standing; it is unconscionable to not meet the financial obligations of the church while money is available in a separate bank account.

Despite all these good reasons for going to consolidated reporting, there may still be some lingering doubts.  Some readers will be thinking “Yes, but . . . that’s the way we’ve been doing it.”  When pressed, treasurers tell me “that’s the way we’ve been doing it”  because someone or some group fears a loss of control over the way money is spent.  But the loss of control comes from having inadequate accounting records and unintelligible financial reports, not from merging the finances per se.  Good reports make readily apparent how much each committee has received and spent.  Good reports show precisely the total church mortgage, the amount paid already, and the amount due to be paid yet this year.

When church treasurers do not readily convey the information other leaders want to see, there is a desire to isolate the funds of interest and to ask for separate reports.  That’s the only way the untrained know to ask for the information and control they feel is needed.  The job of the financial steward is to show a way to achieve better control through better and more complete information.

The Taxable Income Corporation

We are focusing on the notion that we have a single community entity and want to have the financial expression of that entity reflected in unified financial reports.  There is a circumstance, however, in which a second entity needs to be recognized, created, and separated financially.  If a church (or any non-profit organization for that matter) derives a significant amount of revenue from sales or rentals or in ways which look like any ordinary business, there needs to be a new tax-paying entity created for the unrelated and business-like activities.  The danger in not doing so is that the IRS may declare the church a sham as a church and in reality a small business.  In that eventuality church income is entirely taxable to the church, and gifts are no longer deductible by donors.

So, if you have a church which derives, say, more than 15% of its income in ways that do not have anything to do with the spiritual purposes of the church,  see an attorney.  Set up a Taxable Income Corporation which can then run the bookstore, rent the parking lots for park and ride during the week, rent the building, and manage all the other profitable and less religious activities for the church.  This company will then file a tax return and pay taxes.  The remaining income is donated to the church.  The directors of the Corporation can be the trustees of the church.  The administrator of the Corporation can be, and probably should be, a distinct appointment.

Endowment Fund

An endowment fund is a special creature which is established with a separate standard of prudence:  It is to last perpetually and provide continuous support for some activity.  For example, when a donor gives stock and bonds to the church and asks that the income from the portfolio be used to bring aesthetic enhancement to the worship service, the gift has a decidedly different character than a regular monthly payment.  While the gift has a purpose of general church support which might also be found in the ongoing budget, it also has a special requirement of stewardship of the principal in perpetuity.  Because it has a different standard of prudence associated with it, it must be isolated in a separate fund.  When understood from this perspective, it is fairly easy to see why an endowment fund is isolated.

On the other hand, a gift designated to a particular purpose, such as the purchase of a pipe organ, calls for spending it entirely rather than producing an income stream.  The gift can be reserved within the general church accounts until the money is used for its designated purpose in the future.  The reserves may exist for several years, but the money is not subject to a standard of perpetual existence.  The gifts given for an eventual spending need are given for a purpose which does not require a more rigorous standard of prudence or care.  Therefore, the establishment of a separate Organ Fund or Building Fund is unnecessary, burdensome, and inappropriate.  The creation of an Organ Reserve Account within the operating fund is entirely appropriate.

Many churches set up an endowment fund even if the fund has no money in it.  The existence of the fund brings a focus to the membership for particular enduring gifts the community might want to make.  It need not be complicated.  The following points should be integrated into the design of the endowment fund.

1)         Establishing an endowment fund need not involve the entire community.  A simple Statement of Governance and Processes can be adopted by the board.  (See sample in Appendix 9.)  It is appropriate for the endowment to be separately governed; but the church trustees can set up the endowment with that objective in mind.

2)         Establishing the programs or objectives of the endowment fund, on the other hand, must involve the entire community.  Every time an enduring program is debated and identified as worthy of the endowment fund, it must be done in a process that involves the entire community, rather than allowing a small sub-group or individual to determine the priorities of the community’s enduring gifts program.

3)         Every endowment fund must have specific, identifiable program objectives which benefactors can focus on.  For example, a congregation might decide that it wants a campus ministry at the nearby community college.  It is determined by the Finance Committee that such a program will cost at least $20,000 each year and that an endowment fund of $250,000 could generate $12,500 annually dedicated to this purpose.  The congregation adopts an enduring gifts objective of raising $250,000 by the year 2020.  Every subsequent report on the endowment fund includes that enduring gift objective as well as the amount actually collected.

Without naming specific enduring programs in the endowment fund, the congregation is engaged in fantasy — the implication is that there will be enduring gifts for support of basic programs.  “Then we’ll be on Easy Street.  We won’t be short on the budget anymore.”  This is a strange pattern of thought.  It should be fairly evident that the church which has perennial problems with its budget is hardly going to obtain huge enduring gifts so that future members can commit to even smaller amounts than are required to support the current programs.

Most enduring gifts are not given so that the congregation can be relieved of the need to support itself.  They are given almost always because the benefactor wants to empower some very special activity.  Thus, it is more difficult to attract enduring gifts when no attractive ideas for the use of such gifts are offered.

4)         The Statement must establish that the endowment fund will be isolated from the regular funds of the church.  It should be stipulated that there will be no borrowing of principal from the endowment.  What benefactors want to know above all else when they make such gifts is that the gift will endure through any hard times the church may encounter.  Thus, the church must be precluded from access to the corpus of the gift.

5)         The Statement must define income.  My preference is to name a percentage of the average (quarterly or monthly) fund size over the prior three years and define that as income.  The standard can be either fixed or variable as in the following two examples:  a) “fixed at 5%”, or b) “Equal to the 10 year Treasury Bond rate on each December 31”.  Defining income in this way will enable the fund to produce income every year, whatever the cycle of the investments produces.  For the long term, this is a conservative and preferable way of determining income because it allows for more broadly diversified investments, including those which do not yield current interest or dividends.

It is also helpful to state clearly that all income will be reinvested and not spent until some threshold is passed — for example, “No income shall be used to support enduring projects until at least 75% of the required principal is obtained.”

6)         Finally the Statement must define who is responsible for oversight of the endowment funds and how the eventual income will be disbursed.

I suggest appointing rather than electing endowment fund directors.  A church community is a relatively small and homogenous collection of values.  Separate elections creates an impression that there are complex, diverse interests that need to be accounted for.  More frequently the problem is one of assuring there is a coordinated effort by the entire community in pursuit its multi-year plans.  The enduring nature of endowment gifts requires the development of bylaws to protect the intentions of benefactors; that is different, however, from programmatic fracturing that can result too easily from endowment directors who believe they are doing their job only when they are questioning the intentions of the board leadership, or mistakenly thinking that the only way to serve the congregation is by creating a unique program.

An endowment committee might consist of five members.  One should be the pastor or minister, or their appointee.  I suggest that this appointment, if there is one, be done annually and that there be no limitation on the time served.  Two members can be appointed from among the board members.  These members will incur a natural turnover based upon the turnover of board membership.  Finally, the board should appoint two people from among the membership at large.  While I am not a fan of term limits, I understand that many are.  If there are to be limitations on the service of the at-large members they should be for a single term which is fairly long, due to the very specialized knowledge which develops on an endowment committee.