Article Archives >> To the Point

Our Pastor of 30 years is retiring soon and we did not provide for his retirement.  We have two funds available, one we call our future building fund and one we call a retirement fund.  However, the retirement fund has only enough money to pay the pastor for one year.  May we borrow money from the other fund to offset the difference, with intent to pay it back over 3 - 5 years?

This is obviously a state law question that may vary from state to state, but I think the answer depends on whether the restriction on the use of the building fund was created by the donor(s) who gave the money, or merely by the Board.  If the fund was restricted only by the Board placing the restriction on previously unrestricted money, the Board can probably “unrestrict” it and use it for any purpose consistent with the mission of the church.  

The issue is more difficult if the Board created a “restricted fund” to which donors subsequently gave gifts knowing of the restriction.  I would consider that donor-restricted money since the donors accepted the restriction, although I think you may be able to find some authority to the contrary.  If the donor(s) gave with specific restrictions, you have a problem using it for retirement purposes.

If you spend restricted money outright for the retirement benefits, you may find yourself subject to prosecution.  In Pennsylvania, a hospital CEO was convicted when he used funds restricted to scholarships and research for the general purposes of the hospital.  (See Nonprofit Issues®, September, 2002.)

Charities lend money from restricted funds all the time when they buy corporate bonds for their investment portfolio.  I think, however, that the directors have a conflict of interest in borrowing from one purpose to pay for another.  We have found virtually no case law on the consequences of failing to pay back a “loan” from restricted endowment.  Even if the directors made a good faith determination that the loan for the other purpose were “safe” and reasonable, however, if I were the attorney general, I would argue that a trustee who had borrowed from one fund to support another has breached a fiduciary duty of loyalty to the lender fund and would have personal responsibility to restore the money lost.

We have been involved with cases in which a charity has obtained court approval to “borrow” permanently restricted endowment for certain current purposes when it appeared to be necessary for the operations of the charity and was reasonably likely to be repaid.  If you can satisfy a court on the repayment, of course, you may be able to satisfy a bank lender, borrow from a bank, and avoid the issue of personal liability.