What factors should be considered when determining reserve levels?
While some watchdog agencies have developed their own standards for determining appropriate reserve amounts — and many of these standards are very good — there has not been a national standard established that takes into account the full range of factors that can affect reserves. These factors include, but are not limited to, the following:
- Mission and long-term plans or strategies
- Type of organization — higher education, religious, social services, museum, cultural, association, foundation or other
- Corporate structure — sole entity, parent/subsidiary entities, brother/sister entities, loosely affiliated groups, etc.
- Investment in the physical plant — the facilities owned and/or leased
- Complexities of the debt structure
- Current and future commitments
- Funding sources, including fundraising activities
- Types of programs provided
- Self-insurance
- Workforce compensation and benefits issues
A “prudent-person” measurement should be considered in assessing the appropriateness of reserves: Would a prudent person, exercising due care and proper stewardship over the organization’s resources, set aside such a level of reserves? The organization also should use an independent and competent board of directors or advisory committee as a safe harbor in determining whether the prudent-person rule has been followed.
The ultimate objective of maintaining appropriate reserves, of course, is to ensure the long-term viability of the organization and the sustainability of the programs it provides.
Frank Kurre is manager partner, not-for-profit and higher education practices, at Grant Thornton LLP.





