Who Observes Your Reserves?

Governance Associations Now March/April 2015 By: Mark Athitakis

Most financially healthy associations have reserves invested for a rainy day. But who keeps watch over the nest egg? Small associations are less likely to use finance and investment committees, but they might benefit the most from extra eyes on the bottom line.

Everybody feels invested in an association's finances. Which isn't always a good thing.

Eight years ago, Dale Blackwell was a member of the board of the California Rental Association, which serves the state's party and industrial rental industry. Its finances were in disarray—indeed, its investment chair resigned, predicting that CRA would soon need to close its doors. The problem was an abundance of financial ideas combined with a lack of strategy.

"In the past we have lost money, and it's happened because we've had individuals that tried to take their personal investment ideas and use the association's money to do that," he says.

Blackwell, now the association's CEO, leads a three-person staff and an investment committee, drawn from the board, that now regularly consults on financial strategy with an outside financial expert. Today CRA has more than $1 million in reserves, and Blackwell credits close interaction among the board, the dedicated committee, and a third party.

Such robust and layered structures are relatively rare at small associations. According to research from the ASAE Foundation and ORION Investment Advisors, while a strong majority of associations with large reserves (more than $10 million) assign primary responsibility for those funds to an investment committee, associations with smaller reserves are more likely to rely on the board or staff. (See chart on page 54.)

The lack of finance or investment committees—typically, four to eight members drawn from the board or other volunteers, charged with enforcing the association's investment policies and hitting its reserve targets—may reflect the reality of how hard it can be to find financial expertise to serve small organizations. But some rethinking of the volunteer structure can close the gap.

Going without can be a risky move. Douglas M. Kleine, CAE, president of Professional Association Services, says leaning on best guesses about good investments can sink an association's strategy. "I think they all think they know more than they know," he says.

Checks and Balances

Why do small associations often lack designated investment committees? To some extent, the problem may be political. Andrew S. Lang, CPA, a longtime nonprofit accountant, says that, at small associations in close-knit industries, volunteers are timid about getting involved in finances, for fear of public embarrassment if things go south. "Who is it who's going to want to take that risk?" he says.

Who has the primary responsibility of oversight of your investment reserves?

Reserve Size

Board of directors 22% 12% 6%
Staff 36% 34% 19%
Investment/Finance committee 42% 54% 76%
Source: Association Investment Policies, Practices, and Performance, ASAE Foundation, 2014

The problem may also simply boil down to practical expertise—who knows enough to take on the responsibility? "If you're going to have a finance committee or it's going to fall to the executive committee, it's very, very helpful to have at least somebody or several somebodies who have an accounting background or finance background," says Kim Robinson, president of Frontline Association Management. "And not just accounting, but not-for-profit accounting."

One of Frontline's clients, the Illinois Homecare and Hospice Council, recognizes that difficulty and has long drawn its treasurer position not from the community of providers but from allied accounting firms. "We have [homecare and hospice] provider members on the committee to make sure we have the provider member viewpoint," says Terry Cichon, a former longtime IHHC treasurer. "But in many instances we rely on our allied members—the accounting firms and consulting firms—to provide the expertise that's needed."

The committee provides a crucial element to financial stewardship at associations: a layer of oversight of finances. In IHHC's case, the board and committee routinely supervise spending, based on reports that Frontline provides. Frontline also takes charge of orienting the board on finances, something that many associations tend to neglect, Robinson says.

"I'm fascinated by how willing board members are to go along with whatever's presented on financial reports," she says. "There's a real pressure to not ask questions. That's staff's responsibility to ask, am I providing the information in a context, framework, and format that people with very limited time can quickly look at this and grasp what's going on?"

How Much Is Enough?

It's common practice in associations to say that an association should plan on having reserves large enough to cover six months' worth of operating expenses. But is that enough for a small association?

Kim Robinson, president of Frontline Association Management, has seen many small associations work to boost their reserves well beyond that. "Six months of money in reserves isn't a lot of time to turn something around," she says. "Most of my clients have policies that are closer to a year."

Larger reserves may be more urgent at small associations, Robinson says, because their revenue options are likely to be less diverse. The liquidity of those reserves is a key issue that committees and treasurers should address with their financial managers or association management companies. Tami Bringman, director of financial administration at VTM Group, sees a distinction between investment strategies at the corporate and small-association levels. "Associations want to maintain a different style of liquidity," she says. "Corporations have lines of credit, while associations are more cash-focused."

However you invest, Douglas M. Kleine, CAE, president of Professional Association Services, stresses the importance of setting policies that rein in individual committee members. "Investments is where I've seen finance committees get way too involved," he says. "It's like insurance: You can pick the broker, give the broker guidelines, and let the broker do the shopping for you, or you can do the shopping directly, but you can't do both." —M.A.

That level of education distributes knowledge and responsibility, reducing concerns about individual responsibility that Lang says some small associations may face. The board, staff, and committee need to take the reins, Kleine says. "Otherwise, the treasurer may be a lone voice in the wilderness."

With a treasurer, "you're relying on one individual to make these decisions for the group," says Tami Bringman, director of financial administration at VTM Group, an association management company. "And while that's helpful in some regards—it provides flexibility and agility—money is money, and you need to manage it wisely."

Proceed With Caution

For all the concern at small associations about appropriate stewardship of funds, the most effective investment strategy, experts agree, is a cautious one.

IHHC's investment policy, says Cichon, is "totally conservative. We're not allowed to engage in any risk at all in investments." That means federally insured accounts, low-risk mutual funds, certificates of deposit, and the like. It's not splashy, but it's given the association plenty of financial security. "We have built up reserves and are positioned so that we could lose all our revenue and still operate for several years," she says. (See "How Much Is Enough?" above.)

Similarly, at CRA, the investment committee recommends a conservative investment policy to its advisor. "We feel that we have a pretty secure policy that the committee is in charge of that makes them responsible for that money without risking everything," says Blackwell.

So, the most important charge for an investment committee at a small association may be less about selecting investments than about setting policies on what kind of selections can be made. Both IHHC and CRA ran into financial trouble because they lacked such attention. "We learned our lesson by not having the written guidelines relevant for protecting the organization," says Cichon, who characterizes the committee's role as more of a watchdog of the association's financial standing than a group of investors.

Bolstering financial expertise in the leadership pipeline can help preserve that care and attention. Kleine recommends that finance committees include past treasurers or presidents, given their experience with the association's particular finances. Moreover, he says, any candidate for president should be a past treasurer. "If you don't understand where the resources are coming from and where they go, you're not going to accomplish what you want to accomplish as president," he says.

Years away from its financial struggles, CRA now finds itself in the opposite of the predicament it was once in: Instead of board members imposing questionable investment philosophies on the association, the board now looks to the committee for best practices on investing.

"They're great contributors, and they ask great questions, and they have the proper knowledge," says Blackwell. "I think the checks and balances work pretty well."

Mark Athitakis

Mark Athitakis is a contributing editor to Associations Now.