When Can You Tap The Building Fund?
In this website we try to address real life questions that we receive from churches. This question came from a church with $45,000 in its building fund. The fund was built over an eight year period from monies coming from (a) special offerings, (b) faith pledge-type drives, (c) memorial donations which the family asked to be designated for the purchase or building of a new church and (d) interest that was earned on the fund over the last 8 years. The church presently rents space and is not in a position to build or buy right now.
The church does have a current need to move its offices in order to save on operating expenses. The planned move of the office will require some renovations to the new office plus moving expenses that together will cost several thousand dollars. Can the church use the building fund monies to renovate the new offices, pay the moving expenses and maybe even help some with the rent?
To answer the question, we need to first look at each source of funds and determine exactly what the restriction is and whether the restriction can be removed. If the restriction can be removed, then the funds may be used by the church for any legitimate church purpose.
For the special offerings, the church could go back to the tapes of the worship service when the offering was taken and listen to what was actually said to the congregation. There also may have been verbiage in the church bulletin that month which will provide evidence of what folks were expecting when they wrote the checks to the church.
Faith pledge drives are similar to special offerings, however, there is usually a better written record of what was promised to motivate the pledge. The donation receipts are also part of the record. It is possible to write a donation receipt that gives the church some leeway on spending the funds for similar purposes, but that apparently was not done here.
The memorial donations probably represent the greatest “wiggle room” in terms of abstract legal principles, as it is the donors, not the family, that have the right to set restrictions. Potentially, these funds are not even restricted. A good question is whether the obituary said: (1) please make memorial donations to First Church or (2) please make memorial donations to First Church for its building fund.
Legal “wiggle room” aside, the memorial donations are probably the last source the church would want to tap without explicit permission from the family.
The reason is that a decedent’s family is the most likely candidate to object if memorial funds given for their loved one are not used as they had expected. At some level, a memorial fund set aside for a lasting purpose may cause a family member to feel that their loved one continues to be with them. In the case of memorial funds, issues of grief get intertwined with the question of how to use funds. Grief is a powerful emotion.
The interest earned in eight years on the building fund is a reasonable fund to tap for the renovation expense. The argument can be made that the interest has accumulated in the fund because of a board designation, not because of a donor designation. That distinction (coupled with the fact that it normally would not be that difficult to get a “cy pres” determination approving the use of building fund earnings for the renovation of rented offices) should give the board some sense of comfort in tapping the earnings.
If the church wants and needs to tap more than the earnings from the building fund for purposes that are not for purchasing or building a new building, then it will need to bring a cy pres proceeding in a local court and/or get state attorney general approval. Cy pres is a common law doctrine that says: if it becomes unlawful, impossible, impracticable or wasteful to apply all of the funds to carry out a designated purpose, then the court may direct the application of the property (or a portion of it) to a purpose that reasonably approximates the designated purpose.
In some states, cy pres may only be granted by a court. In other states the process may be streamlined so that permission may be obtained with a simple application to the Office of the Attorney General. Your state's rules are likely to be referenced in its law known as the "Prudent Management of Institutional Funds Act." For more information, please reference our page on the Management of Institutional Funds.
Even though cy pres may require court approval and/or attorney general approval at the state level, it is commonly pursued and frequently granted. You might not want to pursue cy pres for a couple of thousand dollars, but you would pursue that route if you wanted to free up a substantial sum of Ten Thousand or more.
Borrowing From The Building Fund
A temptation to be avoided is for the church to borrow from the building fund for a non building fund purpose. This is really a new issue for churches and it is important to understand that legal norms do change over time. In the era when churches and charities never failed and the economy always went up, debt was considered a tool, not a risk.
Many churches and charities thought that borrowing from a restricted fund was fine, so long as the church or charity documented the transaction with a note and paid interest that was greater than that paid on CDs at the local bank. Given the limited investment options available to most churches on account of the nature of a church (most congregations have "zero tolerance" for investment loss), we understand why a church might have thought that borrowing from the building fund was a smart use of cash.
Today though, it is different. We do know that churches and charities can fail. If a church borrows from the building fund in the context of potential insolvency, then there is a genuine possibility that the building fund will never be repaid. If that happens, the church board that allowed the church to borrow from the building fund may face some liability. Our view at Love Your Law is that borrowing from restricted funds is unwise and a potentially source of liability for the board.
When Bills Exceed Your Unrestricted Cash
If you cannot use the restricted cash and cannot borrow from the restricted cash, what do you do if you cannot pay the bills that you owe, such as rent on the new office space? The answer requires some good boundaries on the part of the church.
Unless you are able to contact the donors and obtain a release of the restriction on your funds, your immediate solution is to refrain from spending money. Paying bills with money you do not have a legal right to use is an unlawful act.
When we overstep legal boundaries, we are committing a public wrong. Moreover, honoring boundaries is biblical. Tapping the fund we have no right to tap is a covetous act. Fundamentally, it is a lack of faith in God's provision.
Fortunately, there are practical long term solution to this church's dilemma. If the church gets to the point of not being able to operate without tapping funds that are not legally available, it can consider a number of legal alternatives. These include (1) merger with another church, (2) asking a court and/or the attorney general to apply cy pres, (3) reducing staff to a level that fits the size of the congregation or (4) downsizing space to a level that fits the size of the congregation. With grace, these measures will be successful and hold the church steady until growth in income takes hold. The key is to look for your solution before you enter a financial crisis.