On-Demand: 2021 Not-for-Profit Outlook

We also have a few people from California, which are registered and not sure if they're actually attending but thank you and I'm sorry that this is so early for you, so I get it so that you're used to with additional use case meetings. But by means of introductions, my name is Jimmy Mo. I'm a partner here at EisnerAmper and here in Philadelphia and I oversee our offices Not-for-Profit Practice. I've been in the out of the school for about 21 years or so, majority of which I've been in Not-for-Profit. This is what I believe I'm knowledgeable in and hopefully I can share some of that experience and knowledge here with you today.

I'm going to let Clare and Evan introduce themselves in a little bit before I hand it off to them as well. So, just by means of introductions for this CPE, if you recall, Evan and I spoke on this in about a one hour webinar session in the end of October. And that was meant to be a little bit of a primer for our discussion today. So, Evan spoke about market expectations and anticipations if certain things were to happen in the election, which at that time was unknown.

So, he presented some scenarios, it feels like Republican or Democrat president and then a Republican or Democrat controlled Congress or if there was bipartisan across the avenues of government. So, now that the dust has settled and it's been a crazy three months since then and Evan and I, I just can't believe that it's already been three months since we last presented.

And even unfortunately, and January had a lot of things, kind of needed to let the dust settle. So we were waiting for everything to happen and to basically present to you some specifics now. So Evan and Clara will first discuss a little bit more about market implications now that the government has settled, now that there is some stimulus that has passed. And then for the second part of this CPE, I'm just going to talk about some considerations that has also occurred since October from the accounting standpoint and some of a few business standpoints as well.

And then also just to talk about, just about a few reminders for the 1231 year on financial statements as you are in the process of finalizing the financial statements and going into your audit. So in the meanwhile, please feel free to ask any questions that you have throughout. We'll try to get to them after Evans and Clair's session as well.

We're going to pause and answer any of those specific questions related to them as well, but please feel free to ask any questions throughout. We'll definitely try to get as many as we can answered and addressed before then. The question from last time were extremely very good, extremely valuable knowledge, some of which I didn't know either. So yeah, keep them coming and yeah, if there's anything, please, again, feel free to ask questions throughout. Evan, I will turn it over to you now.

Evan Linhardt:Thanks Jimmy, thanks for having us. Thanks for partnering with Bernstein on this. Clare has had a little bit of a family emergency, so I'll introduce her here and she'll join us when she can come back in a little bit and I'm starting off the presentation so that should work just fine. Yeah, so Jimmy introduced our prior session.

We came together because we thought that the nonprofit community could really use some information and some advice given the uncertainty leading into the election, both from an investment standpoint and certainly from the stimulus and PPP side of things. And so we thought we'd come back here to provide a little bit more with some of our clarity. So just by way of background, Bernstein is a global firm that is really rooted in research and analysis. We use that research and analysis and to forecast and help us provide the best investment advice to clients.

I'm in the private client channel, I'm a wealth advisor. My practice focuses in the nonprofit and foundation space. I come from the nonprofit side previous here, I was a leader in a non-profit in Philadelphia where I work at the Bernstein office and run their nonprofit and foundation advisory for the Philadelphia region, including South Jersey.

Clare and one of the big reasons I joined Bernstein was because Clare runs our national office for endowment and foundation advisory. So Bernstein integrated into our private client channel, has a whole think tank dedicated to nonprofits foundation and mission-driven organizations. Clare leads that out of Chicago and she'll bring the more national perspective to the conversation.

So in this first part and I'll pull up the agenda in just a moment. We're really talking about this year's transitions. That's what we labeled this, a year of transitions. Jimmy brought up the election, clearly that's a big transition but also we're still dealing with and we'll continue to deal with COVID-19 and hopefully we'll be transitioning to post-COVID-19 this year and we'll show some data on why we think and are confident in that.

And so those are obviously the two biggest things on the horizon and we'll talk to how we see those progressing over the next year. So we'll talk both about the election and on how we see investments moving forward in our market outlook. So I'll do that first in about 15 minutes, we can pause for a couple minutes of questions there.

So as Jimmy said, please put them in the Q&A, and then Clare and I will take the slides down. You can minimize the slides and Clare and I will talk a little bit about how we're counseling and advising nonprofits this year based on last year and moving forward. And Clare can again bring that national perspective as she works with over 200 advisors in with Bernstein. And I see Clare has joined us, so glad to have you Clare. I hope I did you justice in your introduction but I'm not you heard.

Clare Golla:I did not hear it, I have all the confidence in the world that you did it justice.

Evan Linhardt: Great, so let's get started with the market implications. And like I said, it'll be about 15 minutes we'll go through here. And then we'll bring Clare in for a conversation around some strategic implications. So for the market implications, we're going to answer really four questions of course, around the administration and what to expect there, what we're monitoring and that's providing us with our forecast and analysis. What we should expect in 2021, what's likely to happen based on what we know and where and how should advisors really be putting their money to work. And we'll talk about this both from a macro standpoint in the beginning and then how it really impacts nonprofits. So let's first take on the administration here.

It wasn't the blue wave that many people thought, obviously there is a democratic control of the Senate when it comes down to the tie breaker. So, Joe Biden's agenda is going to be more centrist than progressive we understand. That's where he is at his core. And now that he might not be beholden to a full blue wave, he might not be pressured into some of the more progressive sides of the agenda. We shall see, but we believe it's going to be more centrist than progressive.

There's a lot on this page, I'm not going to go through it all. I think the two main points I want to talk to from the previous session that we did was that this is going to be very stimulus heavy. And so over the next couple of years, that is where we can really see, again, the continued buoying of the economy through a number of this stimulus processes that Biden's administration really wants to bring in.

There's only so much you can do by executive order. And you've seen some rollbacks certainly from him already, from the Trump administration but the big stuff needs to be done through legislation and that's where the negotiations happen. And so we say, as the headline, we believe he's going to accomplish some but not really all of his policy agenda, so this is his policy agenda. The first part really talks about the infrastructure and climate, the investment in as well as the stimulus. And we believe more is to come there.

The second piece talks about the taxes. This is a place that in many cases when you see rising taxes in the business community, that you could think detracts from their investment within their own companies to grow. And that's a downside risk that's possible as Biden and his administration moves forward. We don't know if that's going to happen immediately because of the issues that he's dealing with COVID right off the bat.

So in 2021, it's not likely that some of these major legislations are going to be passed. Again, trade relations hopefully will be warmed up, which could benefit the United States as well as more global trade and as the economies open up as well.

So moving forward here, there're three major things that we are monitoring. Of course, number one is the vaccine rollout. Although it's not a silver bullet, it is certainly going to turn the tide of the healthcare crisis. Turning the tide of the healthcare crisis allows the economies to reopen at a larger scale. And to the third point, then you can really look at where do the earnings recovery come from after that point. So let's look into each of these and how we're forecasting them.

Well, I didn't want to shame anyone into the less pollution but I'm interested to see that all three are somewhat even. And so there are some things that I'm sure we all want to pull forward and we'll see how 2021 in the back half hopefully, we can see how those new normal comes to be. So thanks for answering that question and it'll be pointed to one of the next slides that we have.

So let's talk about the vaccine rollout because I think this really precedes the other two. If you look at the chart on the left, this is charting the different vaccines that are coming into play over the next four months. In January and February, you see we only have the Pfizer and Moderna, and I say only 10 months later, science has provided two vaccines that are out for distribution. I think that's incredible. When we were sitting here last March, the confidence that by a year we would have vaccines and the amount of people vaccinated at this point was very low. And so this is a huge, huge progression here.

And if you saw the announcement yesterday, J&J looks like it will be approved relatively soon which will join the party as will a few others. This is the progression we see and this is a really positive development. We believe that 200 million people will be vaccinated by the end of May, the J&J single shot not having to be frozen will be a big part of that. And you can see how they build on each other on the graph to the left.

Now, how does that effect on the right case counts? Our base case is that blue line and you can see it's peaking right now. And then as vaccines come out, the distribution is smoother. The pharmacies are getting those into their hands. More people are going to become vaccinated and so those case counts start to peter out over time, end of May into June, into the summer. Still a lot of social distancing will happen, but these are really positive pieces to our economic outlook.

The downside case is of course, the new variant. How does that impact the vaccines? How does that impact infection rates? And so there is obviously a downside case that we've shown here as well. And that's putting that into play. So this is big and this is showing that by June the world is going to look and start to look potentially a little bit different than it is now, and that's really positive for the economic outlook.

So this year, it was a tale of two economies. There were the winners and the losers. The winners certainly were tech and those places that could go online easily, so all the e-commerce places did really well. The downside were really entertainment, leisure, travel and those pieces. And so from a market outlook, it really is a tale of two economies.

And also, a lot of people in the entertainment side and travel and leisure, which is about 10% of our GDP but about 20% of our workforce were acutely affected by COVID losing jobs and not being able to find new. So that's the big part, it's really the tale of two, those who could work from home and I'm very fortunate to be able to do that were better off than those in that part of the economy. And that's the tale of the two economies. And so what we're seeing moving forward as the economies reopen is that economic recovery.

So here's two charts again, left side is where we think we'll be in mid 2021 getting back to where we were at the of 2019, that's the chart on the left, which again is very positive. This is our forecast moving forward. We believe we'll get back to that peak in midsummer as again, the economy starts to open up due to some of the healthcare solutions that are rolling out. But still, if you look at the right, we're still not back to where we thought we would be back in 2019 January before COVID-19 hit. So we're going to continue to lag for some time, but you can see over the next couple of years, the trend line, our forecast is likely that the trend line is going to continue to go up. And so that's positive for investors in the public equity markets and those invested in companies.

So what should we really expect in 2021 based on all those forecasts? We believe it's conducive. You're hearing positive notes from me here and that's what we believe is coming. But it's really about identifying, moving forward those winners, not identifying those from the past. And I think we have another question coming up. I'm really interested in your market implications. And maybe I tipped my hand a little bit with some of the slides before, but how are you feeling about the markets in 2021? How are you feeling about your investments, your organization's investments, your personal investments, interested to hear?

Well, there's no right answer to this. This is about how you're feeling and we'll go through and move forward to show and talk with Clare a little bit more about how we're feeling. But certainly over the short run, as you've heard, we're feeling that there's a conducive environment for a positive market over the next couple of years and we'll talk about even longer moving forward what our forecast and what we feel is likely to happen. So thanks for answering that question. In the Q&A, I'd be interested in why you believe it's positive or negative or if you have any questions around that.

I put this slide out here because I think it's an interesting comparison to the great financial crisis on what came next in recovery. And that's where we believe we really are in recovery. So we overlaid the blue line is the downturn that we've just had in March. If you look at starting in January through December of 2020, the blue line is present. The gray line was the recovery from the great financial crisis in 2008/2009.

So we overlaid those two and actually happened almost over the same time period here. So over the same time period, you can see that the recovery was actually quite similar just after the major drop and sell off in the market. You can see that obviously in the COVID-19 in March, we had a steeper drop, but you can see that there's a 68% gain since the bottom in March. And so this again tends to lead us towards and think likely that we're back for the short term, at least into a recovery period in which the markets will do well overall. There's still going to be volatility, there's still uncertainty, there's still downside risk but over the next couple of years, we're likely to see some positive outcomes.

So, why is that? So if you take a look at the right side, you can see our forecast for 2020. Obviously, a number of those numbers are in parentheses, which means that they're on the negative, they're on the downside. Moving forward, you can see into 2021 that they're positive and those positive numbers are again, our forecast moving forward because of some of the things we mentioned already. The continued economic rebound, not only United States but globally and that's due to vaccine rollout and healthcare solutions.

It's also due to the monetary policy with extremely low interest rates. Borrowing is much easier and you're seeing companies and others do that to stay afloat during this time, that's why the housing market has been positive. So a very accommodative policy when it comes to the markets and the economy. And a healthy but level of inflation around the 2% mark that stride to cap by the fed.

Again, the downside risks are the vaccine rollout hitting a really bumpy road, the variant of the virus continuing to spread and not be solved by the vaccine. Those are things that could close us down again and there is obviously that downside risk to moving forward. So where should we put our money, okay? We're likely to be positive. Where are the places to put it? You can't just throw darts at the wall here.

But really we're still preaching diversity in your balance, in your portfolio, okay? There's no crystal ball moving forward, but there are areas where we think there's opportunity. So growth has clearly been a winner. It's been a winner in the really in the past 10 years and more acutely in the crisis as tech stocks have been a huge part of the market this past year. And so if you were in some of those tech stocks or even in an index, a SB index fund that had that large part of that being there, you did very well and value on the other hand, did not do well.

Although there is some of the smaller companies, some of the undervalued companies there, they did not do well because they were hurt by the shutdowns in a larger way. But we saw at the end of 2020 that value started to gain momentum. And we believe, based on our forecast, that there's a potential for something relatively rare where both growth and value do well. And we think some of those drivers are available. We're in a recovery, yet grow stocks are still going to progress based on the spending that's coming from pent up savings that much of the economy has. And so we think that there's some potential there to make some big gains.

We also are looking at the international markets. This is something we were preaching before COVID was happening, that we believe that the international markets are an opportunity. There are a cheaper valuation than U.S. And also, we always have to remember that 50% of the market cap is actually outside of the United States. And in order to get a balanced portfolio making sure you're taking advantage of what's out there you need to have international and even emerging markets in your portfolio. And we believe that this is a real opportunity right now as the recoveries happening around the world because of the value you can get in the international.

So this is a question we're getting a lot. "Okay Evan, you're telling me there's some opportunity. You're telling me there's some positivity, but every headline I see says the market's at a high. And I remember, you're not supposed to buy high. You're supposed to buy low and sell high. So, how can I get in the market now?" Well, we really took a step back as we've continued to hear this and said, is this really true? What does that mean the market's at a high?

And what we did is we took a look from about 1949 to the present time. And we looked at how the market has done? And you can see it on this chart, it goes from the bottom part of your screen to the top. It's positive moving forward over a long period of time. There are bumps, we saw one in March, we saw one in 2008/2009 and 2000, et cetera, et cetera. There is volatility. That's the fee you pay to get into the market. But it's on a positive track moving forward.

And actually what we found is 43% of the time the market is at or near a market high. So the headline, you really have to understand the context behind that headline because that headline is happening quite often because 43% of the time at or near that high. And so joining into the market at that time, if you joined in in 1949 and now you're here, the market is quite low in 1949. And so it really depends on when you're getting in and the positivity that the market does over time. And this really quantifies it because you still might not be convinced.

 "Well, I still don't want to buy high. I want to buy in one of those dips. I want to time the market in one of those dips." Okay, if you are the best investor you've timed the market in the bear market, at the bottom of the market every time there's a steep decline in equal tronches really since World War II, you're that blue circle, 11.5% you've gained. If you're the, "Worst investor." You've invested at every market high in equal tranches, you're getting 9.6 return.

Now that 2% isn't insignificant, but it's not this wide crater that I think we all believe would happen if we always bought in at the highest point of the market. And you're not either one of these, you're not always going to be the worst investor and you're not always going to be the best investor. So really you're going to be in between.

And I think the biggest point is if you held cash because you were worried or leery about getting into the markets over that same period of time, you're only earning about 4.3%. And Clare and I are going to talk a little bit about how we're counseling nonprofits in this space, but this is a really big and interesting data point that shows the drag cash can have for people's hesitation to get into the market.

Now, this is always a case by case basis, and we'll talk about how we dimension your cash needs for spending now, your medium and long-term, but this just really quantifies how people are feeling right now but what the actual data shows and what we're forecasting moving forward. So we talked about the short-term, really 2021/2022. We think there's a conducive ability for us to have positive markets potential based on some of the background things that we were seeing and the clarity that we have.

But let's look at a little bit longer time horizon, because a lot of people have also been asking us and talking to us about, "Well, we got to pay all this money back. We have to pay this stimulus back. This is trillions and trillions of dollars. Our economy has been hurt." This is true. And so when we do look 10 years ahead, we do believe there's going to be more muted returns than the past 10 years. And you can see some of our forecasts here of some of those returns.

This is I think, really powerful for the nonprofit and foundation community because overall they're looking to hold principal and are generally in more conservative allocations and are hopeful, especially on the endowment side, that a bond portfolio can provide enough income to pay some operational support. If you look all the way to the left, you can see that we're forecasting bond returns of less than a percent. That is going to be really hard to meet some of your spending needs if you have a heavily risk mitigating portfolio.

 Even if you're a hundred percent stocks, which you can see has clearly more risk and volatility, we're still forecasting just under 6%. Many foundations, right? You have to give your 5% per year, they're going to be challenged to get that. So what do we do? How do we make this mix? How do we balance portfolios to be able to account for this? And this is what we're looking at 10 years forward, because right now, in the next couple of years, between the buoying of the economy, the low interest rates, we see growth on the horizon.

But over the next 10 years, those earnings have to catch up and we believe there's going to be a more muted return environment moving forward. And so I wanted to set that stage for Clare. And I'll bring Clare into the conversation now to really talk about how all this both short-term and long-term is affecting nonprofits and foundations. And we're going to talk really and focus on three things. So you can keep this slide up I know you have a way to maximize and minimize. I'm thinking about this next part with Clare to be more of kind of a conversation, so if you want to enlarge us and put the slide deck away for a little bit, we're not going to be moving through any slides moving forward on our part of the presentation here. So Clare and I are going to talk through three issue areas, really to consider, asset allocation, you're spending and then certainly how the stimulus and fundraising is impacting.

But I do want to take a second before we get in to conversation, if there's any questions about the market outlook, we can take a couple of minutes to answer some questions. I see one question in the chat, which is, do you think the power of retail investors will cause a market correction or change the market landscape for corporate investors? So I think this is towards what's just happened recently with game stock and some other stocks that have risen and been inflated as those companies, their fundamentals are not doing well. Look, this is certainly going to cause the federal government to look into and regulators to look into what's going on. I think the retail investors throughout this year who have gotten involved have certainly put investment firms and regulators on watch and I think there will be some changes moving forward.

Do I think it's going to dramatically change the landscape? It's still to be said and we're not sure, but we certainly see the power of retail investors and in applications like Robin Hood and others, they're able to really be a force in the market, that they maybe were not previously because of the access that they now have. So yes, I think there's going to certainly be some changes being made. Do I think there's going to be a major market correction because of that? No, I don't see a market correction just from that. One more question we got, do you expect inflation to negatively impact returns in the next few years? Look as inflation rises, that actually works in the positive for equity markets and they've said that, they're going to look to keep it around the 2% even maybe allow it to go a little bit higher and I think that's a positive as we move forward. So I'm not too concerned about inflation negative.

Now, if we have runaway inflation, that's a whole different story, but we don't see that. We actually don't see inflation rising much over the next couple years, it's remained at low levels and we see that likely moving forward. So we don't see that as a negative at this moment and of course we'll be monitoring that. I think one thing around inflation that we've seen and interest rates that we've seen is that the fed is going to be very clear and give us a long runway as they start to think about raising rates at any point. They've made that really clear that a big mistake they made in a great financial crisis was they started moving without a runway. So that spooked the markets, markets like things to be predictable. We like to plan for things and so they've made some statements to say that they're going to be very clear about those numbers and where they're moving forward. So we should have a lot of data on that before anything changes.

There's some other questions about how safe Robin Hood is as a platform. I'm not a Robin Hood employee, I don't know their cybersecurity. So I'm not sure about that. I see we're getting a couple other questions and I'll try to go through one or two more and then I want to bring Clare into the conversation. What arguments are there to stay in long-term bonds? Well look, bonds serve a purpose, just because they're not getting the returns that they might have gotten over the past 10 years, they still serve a real purpose in your portfolio. They're a way to mitigate downside risk and you're still earning income from the coupons of those bonds. So there is still a purpose and a place for them in portfolios. You just have to decide and understand your situation and how holding that in your portfolios meets your goals.

So your goals could be a less risky portfolio, your goals could be a growth portfolio. You have to really understand where you are and the purpose of your portfolio. So I think there's still a huge argument to keep bonds, high quality bonds, and long-term bonds in your portfolio and have a diversity there as well to make sure you have the full landscape cover. All right, please keep putting your questions in, we'll stop after Clare's at the end of the presentation to move forward, but I really want to get at least the next 20 minutes or so with Clare, so she can bring the national perspective and really talk to how we're counseling and advising clients across the country. So Clare, I'll bring you in, although this isn't Zoom, so you're not coming off.

Clare Golla:Sure.

Evan Linhardt:But thank you so much for joining and taking the time to join this presentation. We talk about this all the time and I really want to hear your insight maybe first just an overall what you're seeing, obviously from 2020 and then how we're thinking about 2021, and then maybe we can work through some of these topics on the screen.

Clare Golla:Sure. So, I mean look, broadly speaking it's interesting. Some of the questions that have been posed to you are obviously the same questions that we're receiving from clients across the country, 2020 was a quite a year, as we all know. So I think earlier in the year, our conversations with not-for-profits and foundations really focused on a couple of issues. Number ones are cash position because there were a lot of concerns earlier in the year about programs needing increasing needs out there in the economy for a number of the programs that are a not-for-profit client support. Coupled with concerns that fundraising wouldn't be as robust as maybe it had been in prior years and uncertainty around what type of stimulus would really come in for different types of organizations. The contingency planning was all around what I'm sure many of the CFOs and executives on this call do on a regular basis, which is what's our budget, what's our plan A and what's our plan B?

What's that sort of keep the lights on budget that we can live with, if we have to weather a crisis? Fortunately, as you described earlier, Evan, we saw major rebound across global stock markets, as well as credit markets and it's early innings but it's appearing that the fund, even though number of donors did lean in earlier in the year, this did prohibit them from year-end giving as well. So we saw a lot of one time additional gifts from foundations in particular and other individuals particularly ultra-high net worth individuals really digging in and giving back in a significant way. So what that has led to is probably the most common conversation we're having with clients right now, which is, look we're actually sitting on more cash than we typically do, and we're not sure how much is enough, how much we should be investing and whether our investment policy today is still appropriate. So those are some of the questions that we're receiving.

Evan Linhardt: Let's talk about asset allocation. We see non-profits across the country, we talk to investment committees all the time. Let's talk about how that cash conversation starts and how we can lead non-profits through that and how that fits into maybe their overall asset allocation. So how are you having conversations with nonprofits around cash, putting that to work and how are you counseling them to dimension those funds?

Clare Golla:Absolutely. So I think it starts with Evan, a basic framework. There are certain best practices that are evergreen, so we recommend that our clients have an investment policy statement and that we're reviewing it on an annual basis. Not necessarily that they'll change it but there may be tweaks from an asset allocation perspective and they sort of a target allocation perspective over time. But then in addition to that, what we're finding is that a number of organizations, what they're lacking right now is sort of that framework. Decision makers are looking for a framework. So above what amount or how many months’ worth of a bare bonds operating expenses or whatever it might be, should we then invest dollars in a longer horizon portfolio? So typically we see organizations with traditional endowed funds buy donors that, stating these should be in perpetuity subject to UPMIFA , they should be long horizon and how to spending, which is appropriate to that.

Then we have board designated long horizon reserves, oftentimes and there's a lot more flexibility in terms of the allocation and the spending but typically they're longer horizon. Then we often see sort of an intermediate or short-term reserves and that's where the sizing of those pools of assets are becoming strategic conversations we're having with clients. On the asset allocation piece, as you asked, look you highlighted a few things that we might recommend to clients, in terms of tweaking the investment policy statement. So some of the key red flags that we see really in any environment, but probably particularly now, as we've seen certain market behavior over the course of a number of years where we're in the midst now of a bit of a rotation, we've seen for instance, the US outperform international stocks for a number of years.

We've seen alternatives like hedge funds, I'll give you an example for many years, trailing the SMP and investors scratching their heads and saying, why am I paying for this? Why am I locking up funds when it's trailing an index bond? We're seeing things like inflation, having been in incredibly low and for a number of years and some inflation sensitive assets actually underperforming. What would if they had otherwise had those services and equities? Because of some of the significant transitions in the capital markets environment, we're encouraging clients more than ever to take a look at your investment policy, the target allocation, the expectations around risk and return, as well as the expectations in terms of how much you can and should spend and still be able to, for instance, maintain your inflation, adjusted value of your portfolio. We're finding that if organizations are looking prospectively ahead where we're expecting slightly lower returns across traditional publicly traded asset classes. We're expecting to see some continued volatility over time and not extraordinary. We do expect to see inflation tick up a little bit from nothing.

There are certainly red flags that we see when we look at an investment policy, frankly, that hasn't been updated for many years. Make sure that you're accounting for global investments. Both on the, I would argue the equity side, as well as the fixed income side. One of the questions was about bonds. Should we have bonds in the portfolio? What taxable bonds, global bonds dipping into credit a little bit? There are a wide range of opportunities out there for non-for-profits to have income generating securities in their portfolio that can really help boost returns when we're seeing that volatility in the stock market. So absolutely there's a whole world out there, not every country has the exact same interest rate conundrum that the US does.

So it's important to really think globally there as well and really into intermediate duration. You're not going to earn much from your short duration bonds. So if you're continuing, we often see a red flag where there's so many restrictions on the types of bonds, the credit quality, the duration, those sorts of things. Organizations are going to need to give themselves a little bit of flexibility, I think in that fixed income part of the portfolio. Then finally, I'll just mention inflation sensitive assets. For a while now on some of those inflation sensitive assets, they're basically assets that tend to outperform when we see a tick up in inflation that is more so than expected in the market. So inflation sensitive bonds, real assets, like real estate, commodities, commodity based stocks, some of the things have not necessarily done particularly well recently, as you've seen some disparity across the market. It's not a bad idea to have inflation protection in portfolios that are long horizon looking ahead, because while we don't our base case isn't that we'll see any sort of run-up in inflation.

All you need is for inflation to increase a little beyond expectations for those assets to be very protective. So that's really the short term sort of asset allocation piece, but it all goes back to reviewing on an ongoing basis on an annual basis, looking at today's capital markets environment prospectively not looking in the rear view mirror. I think you gave great examples of why we shouldn't just be looking at what performed best in the rear view mirror, in order to make our decisions going forward and thinking about how much cash do we need to hold. I'll just make one more and we can go into the conversation about cash. I get very excited about this stuff, as you can see, but when donors, when they contribute to an organization and you receive funds in, their expectation for fiduciaries is that those assets will go towards mission of the organization either immediately or sometime in the future.

What donors are not expecting is that those funds will actually lose purchasing power. That you're over overtime before they are used for programming purposes. So it's really important to right-size that cash bucket when we're in an incredibly low interest rate environment, because cash will not keep up with inflation. We've so many organizations right now that are sitting on more cash than usual, this is a drag on the purchasing power collectively for the assets of any institution overtime.

Evan Linhardt:Thanks Clare. I think the there's two points you made that I think are really important that I think I've seen more this year than any other year, which is let's dust off that investment policy statement and let's make sure that it's updated for where we believe we're going. I think that's a big place that we can come in and really think through that dimensioning, because there's been some tailwinds, both in the non-profit side as well. I mean, we've seen clients that we've had food banks and those who have gotten a huge influx of cash and for the first time are able to think about it differently. Others who are now thinking about how do we use our endowments and others to really meet the challenges that are ahead of us and I think it's so important to make sure to your point that the investment policy statement has that flexibility.

I just updated actually an investment policy statement with a nonprofit client who was only could allow for treasuries, couldn't be more conservative. So now how do we help them not only use the language, but get into the right asset classes specific to them? And I think one of the questions was, what do you see as one of the most common asset allocations for nonprofits? You won't like this answer, but there is no common. Clare can say differently, but there really is no common nonprofit allocation. It really is to your goals and your mission and it's really dependent on how your progressing. Some are in perpetuity, some have a time horizon, some are trying to get money out every year, some want to build an endowment. I mean, there's just so many different places.

So happy to take those conversations offline and get in touch with us. Those are the types of conversations we're having every day with boards and nonprofit leaders and we can look at your specific situation to make sure, that you're set up in the right way to Clare's point and making sure you have the right cash management plan, but then the short, medium and long-term buckets are allocated appropriately.

Clare Golla:Yeah. I will mention Evan that, your one area where we're doing quite a bit of forecasting and work with organizations is on their traditional endowments. So those funds that are subject to AMIFA and they need to grow in the future and have their allocation and their spending aligned in a way so that they really do maintain their purchasing power over time. Look, you can't have the old traditional sort of vanilla 60/40 portfolio and spend 5%, it's not going to cut it. So that's often what we see, you need to look at ways to eke out a little more return, as well as think about, what range is really prudent spending to maintain that risk, adjust that, excuse me, inflation adjusted value over time and that's something that we use our forecasting tools all the time with clients to help them make decisions.

Evan Linhardt: Yeah. So let's talk about not the common asset allocation, but what we're seeing non-profits really look at when it comes to their asset allocation, and I'm thinking, you mentioned alternatives, I'm thinking responsible investing and we had a lot of conversations about that. How should we think about those two things or how are you seeing people think about that? Even in this time, when we would think people are maybe being a little bit more defensive or thinking a little more conservatively. I've actually seen maybe the opposite is that they're looking at the broader tool set and really thinking about how to align their mission to their investments, but also looking maybe outside of some of the traditional investments that we make. So interested in your perspective of that.

Clare Golla:I would say the cash conversation incorporation of alternatives and responsible investing are three of the top conversations we have. I'll start with alternatives and then I'll turn to the responsible investing piece. So when I talk about alternatives, let's sort of level set here, we'll just define alternative investments as those types of investments that have different sources of both return and risk than traditional publicly traded, long only stocks and bonds. So we'll just kind of very broadly put it out there. Typically these types of services come with some type of lockup. There is a premium or having some sort of a liquidity saying, yeah investment manager, you can use these funds over a period of time and I will be paid a little bit more for that.

They also often come with different types of fee structures and reporting structures and so absolutely if you run the forecast or different types of income producing alternatives, I think private credit, growth alternatives, like private equity, other types of hedge fund to funds, or hedge funds. You will see the optimal allocation over the long-term and what we see from a lot of very large institutions is that the incorporation of some of these types of assets makes all the sense in the world from a risk adjusted return perspective, particularly looking forward. How much return are you receiving for the amount of risk you're taking? because they do, they just tend to help diversify the portfolio and boost some return at times when the public markets just aren't there for investors. So here's the thing though with not-for-profits and with foundations, the optimal allocation from a quantitative perspective may not always be the right allocation for a specific institution and where we see some of the risks or the concerns of the frustrations from organizations that we work with isn't necessarily around the risk return, trade off over time.

And by the way, I should say most of these assets are available too, so institutions that have $5 million or more are accredited investors. So that opens up their world in terms of, I would say the plethora of investment opportunities out there for them and then at $25 million or more in the portfolio an institution is a qualified purchaser. It's a little different than individuals who it's 1 million or 5 million for this. So in any case where we see the most frustration is I think especially if an organization is considering dipping their toes into alternatives for the first time, we are seeing a little bit of confusion, for instance, when they're typically used to seeing time-weighted return publicly traded assets, they're valued on a daily basis. Then you're dipping into the private markets and, Oh my gosh, these aren't valued daily.

There's a lag in reporting for instance and so I can deliver to the board, I can deliver to stakeholders, the returns at quarter end for all of our investments, except maybe our hedge funds, our private credit or private equity. From there, the returns may be measured as internal rate of return versus time-weighted return just a different way for many illiquid assets, it's a different type of return stream, they're delivered separately. Another hiccup for the controller at an institution who has been doing the same reports for quite some time and now they're saying what, how do I even think about this? And then the third is capital calls. How do we think about that we're not investing all of this at once, but capital will be called and invested into these services over time.

And then finally key structure. Really understanding what is being charged for these different services and how does it affect the overall cost for the organization? Again, I'll go back, there is absolutely a huge benefit and I believe looking ahead, there can be a really great benefit, particularly with income generating alternatives, I think for not-for-profits and foundations, because you don't pay income tax on that. So the returns can really be outsized for you as long as you're not paying unrelated business income tax and you're in the right vehicle or structure for alternatives, but they're different. They're different and communication is key with your investment advisor, with your audit team to make sure that they can value the assets quickly and appropriately at audit season. So yeah, I think the communication is key and figuring out what the right allocation is, what the right decisions are for your team versus the optimal for the investor, from a quantitative perspective. So I'll stop there and see if you have any questions on the alts piece.

Evan Linhardt: I'm not saying any particular in the chat, but I think one of the interesting things that you mentioned is really being comfortable with it and I think that's a big part. Non-profits have boards, they have investment committees, they have different perspectives, people are coming from their own personal investment experience or from the business they come from. So what I think we're really saying is you got to look at the toolbox and the alternatives need to be part of that conversation and there might be an education piece to that conversation in learning what all that means, just like the cash data that I showed previous. I think that there are some misconceptions around what those really are and how they work to your point about lockup and return.

So I think really kind of understanding that with your board and taking the time to walk through that and I think the same is for responsible investing. So maybe we'll turn there for a second to talk about, how we're counseling, how nonprofits are coming to us around mission-driven, purpose-driven investments. This is something that gets me very excited about, how can we have this double bottom line, this return and responsibility piece. I think that too comes with, for some traditional investment committees that we've worked with, comes with a little bit of hesitation. So love to hear kind of how you're seeing that.

Clare Golla:Yeah, sure. So I've been with Bernstein 11 years and prior to that, I managed a department for a community development bank of CFI or community development financial institution, where we were actually the cash allocation in very large institutional SRI or socially responsible investment portfolios for a number of years. I would go to the conferences every year and it was the same group of people, very small preaching to the choir and I thought, wow when is this ever going to move from talk to really building scale and low and behold investor demand over time in our industry has really and as times have changed, we've seen this just explode, as a part of the investing universe for what I might term sort of mainstream investors and that's fantastic.

I'm a huge fan, as well as you know Evan, there is a huge misconception out there even though research has absolutely disproven this, but there's still a huge sort of misconception out there that if you opt for investments that may align with your mission or that are focused on environmental, social, governance factors alongside traditional financial metrics, whatever that might be, that you will necessarily forego or give up some of the return.

That there's this give up, there's this trade off there from a return perspective. The old school notion of this was well with responsible investing, you're just going to have to restrict out the sin stocks like tobacco and alcohol and gambling and all that stuff. While restricting stocks is certainly a part of the methodology, there is a whole universe of opportunity out there for investors to better align their investments with their mission or their values or at a very minimum avoid undermining the work that they're doing every day through the companies that they're investing in. So the way that we think about it at Bernstein, with our responsible investments to date, we're really operating in the publicly traded markets. So we have a fantastic suite of a globally diversified multi cam, equity portfolios and we do have fixed income portfolios as well, where really there is an integration and a leaning in to companies that are either really leading the way in terms of their stewardship of the environment, treatment of employees, good governance, all of those sorts of things.

We're measuring very specific data points and we're tracking over time to see that the needle is moving or we see companies that frankly have an enormous amount and or we have enormous amount of momentum that we're seeing positive momentum at a company in that way. We also have some portfolios that are thematic and I know in Philly there were where you are Evan, I believe one of our portfolio managers for our sustainable thematic funds is there. That is that we have funds that are aligned with the UN sustainable development goals, focusing on things like environmental sustainability, access to healthcare empowerment of women and girls and companies that are really reflecting these things as a part of our portfolio. All that being said, whereas it used to be common thought that as fiduciaries of an organization, really we just want to look at the investments and then if we're a foundation and we'll give away money, in terms of distributions and that's where we're going to set our mission and it was very separate.

Today the notion really is okay number one, research has dispelled the myth that you have to give up return for aligning investments with mission and number two, the role of fiduciaries is really to ensure you're stewarding the assets to ensure that the mission of the organization continues to thrive and live on. So if you are not as decision-makers at least considering responsible investments in some way or aligned investments with your mission in some way, you may be falling short, but you've got to consider it. As you mentioned, Evan is at least part of the toolbox to look at. With us with committees, there are so often one or two or more individuals on the committee that are passionate about this also that it comes up consistently. Our platform has done phenomenally well from a performance perspective as well, so that doesn't hurt but what we see as the number one asset allocation that are not for profit and foundation, clients are moving into either transitioning into or are opening as a new client of ours is really a combination of our purpose driven portfolios as well as some passive exposure. Just low cost ETFs because as fiduciaries, you should be mindful of cost also. But what it's enabled us to do is provide a package that I would say meets each of the committee members where they're at. Some are dogmatic indexers. Others want to align mission with the portfolio and have the opportunity of research in active management to outperform over time. So this combination is really a cost effective way that checks all the boxes and really meets the needs of a number of different committee members, which is not always easy to do. So I know I went into a lot there, but it's the fastest growing part of our entire platform at Bernstein.

Evan Linhardt:Yeah. Thanks. That's really helpful, Claire. And I want to turn it over to Jimmy here in a moment, but I want to hit our last point, the Stimulus And Fundraising piece. I think the biggest part of this, and we could go on and on about this as well and how we're talking to clients about fundraising and plan giving and all of those strategies that they have. But I think the biggest thing that I want to just get across is for those who don't know, the extension of the Stimulus that was just passed extends some of what we like to call the stars that are aligning for donors around giving to nonprofits. So the cash deduction still at 100% is big for donors and for nonprofits. And some of the other pieces that were in the legislation in 2020 have extended to 2021.

So Claire, I know we're talking a lot about that. I know we're counseling our nonprofit clients to make sure people know about this, because these are really opportunistic times for donors to be able to give and give the way that's most convenient for them. And these will expire at some point. And so really take advantage and take the messages out there and be talking about that with your donors so that they know. With your board and your development committees so they know that those have been extended because a lot of people didn't realize that those were extended past 2020 in the last Stimulus package. So I don't know if there's anything you want to add in that.

Clare Golla:Yeah, no, I will. And I recognize you've gone over. I think both of us are so passionate about this stuff. Number one, I think it's important. It could be a once in a lifetime opportunity for donors to give more. Increasing the deduction for cash donations from 60% to 100% of an individual's AGI, that's big, for someone who has the ability to contribute that. But I think the bread and butter piece of that legislation is the increase with the standard deduction to $600 for joint filers for deductions for contributions. So those are important. From a market perspective though, what we're seeing most, because we also have a very robust, bursting private client business with individuals and families who are incredibly philanthropic, given the massive dispersion across the market, the stock market last year, we are seeing individuals with very, very large gains embedded in certain individual stocks.

And frankly, as investors, they know that won't last forever. These deals don't last and so it's a huge opportunity today for donors to donate appreciated stock. They wanted to give anyway, they want to decrease their now outsized exposure to certain securities. Donating those securities to a not-for-profit organization, enables the donor to eliminate. And there are a lot of tax folks on this, so well aware of this, but it enables donors to eliminate the gains that they would otherwise pay, if they were to go and spend those dollars. And it creates an enormous, in some cases, a game changer for the organizations they're supporting. So really an interesting time, whenever you see some run up or anomaly in the market. There tends to be some sort of opportunity there from a charitable giving standpoint. So that's a key, I think right now in the markets. So I'll stop there Evan, and see if you have any, but I just want to thank you for having me join.

Evan Linhardt:Oh, please. We appreciate you coming in and having the conversation. I think that appreciated stock point is huge. I think again, I'm surprised many times when we're talking to boards about donors not knowing about the appreciated stock piece, because it's so easy to write the check, just the easiest thing for donors to do. But when they realize that they can gift appreciated stock and you can help walk them through that, that is a huge win for them. And just in an association, I was just talking to, they put that out to their donors and donors felt like they could give more because they were getting the tax breaks. So it was a benefit on both sides and they saw that happen very quickly. It doesn't happen all the time, but that was a real big win for them to be a thought leader and present that to a number of their donors because they just were not aware of that. So I appreciate you bringing that up.

Well, look, we're going to turn it over to Jimmy. I think we have two last poll questions, but I hope you saw from both, the market outlook and from our discussion here with Claire, some of the things that we're looking forward to in 2021 and beyond and how to navigate both the opportunity and the risks that are upcoming and of course there are unforeseen. So you've got to be ready with your teams to be able to navigate and that's to the point about making sure your investment policy statement is updated. Make sure your teams are on the same page because nobody has the crystal ball, but when you can bring the right advisors and experts in to have the conversation and educate the teams, you can really see positivity in some of these crises.

So we're hopeful for everyone. Please reach out to Claire and I, our information is part of the presentation. You should feel free to email, call at any time, just to be a thought partner. I'm happy to provide our perspective. If we didn't get to any questions, sorry, we'll make sure we answer those through email. So thanks again. I'm going to pass it over to Jimmy after these. Next to Jimmy, appreciate you having us. We're going to stay on for any questions at the end. And so I'll pass over to Jimmy to give some information about PPP and some other things that he's going to share.

And again, based on these answers, I can't see who's answering what, but if you have questions on any of these three feel free to reach out, happy to talk through them and why that's your concern moving forward in 2021?

Clare Golla:We need something like that these days. All of us, I think.

You see people are with me. We want to see the silver lining, glass half full.

Jimmy Mo:Wow. Oh, before I get to my slide, I do want to say a few things. Every time I talk to Evan and some other individuals, it's just captivating. I think the theme that I'm sensing from Evan and Claire, and they mentioned this a couple of times, even in the last question is the word, opportunity. So unfortunately there was a lot of issues and concerns and bad things that happened with the pandemic but now, as we're in a recovery, there is opportunities that exists. I want to share two quick stories before I move forward and I think one of them is kind of humorous. Personally, my wife and I made it a goal that when our kids turn five, that we opened individual savings accounts for them at our bank.

And it's not necessarily to generate interest, but it's more of to be safe and to teach them financial, how to spend money, just to help them deal with financial management. I have a son right now that he just turned 15, so if you think about it, we've been putting about, say about $20 a month in his savings account over these last 10 years. And one thing that the Penn deck had got me looking at around the early part of this, around March, April timeframe of last year, was to like, you know what? Looking at this, I'm thinking, he's probably earned and it's not him because now for those of you don't know me, I have five kids we've done this times five.

What's interesting about this is that they're earning a penny. I kid you not, a penny of interest every other month. So, we made the decision, you know what, as much as we want to teach them money management, looking at the slide that Evan showed about the yield over time and the cash yield and how Evan said it was about four point something percent of cash outs. I'm thinking, you know what, there's no way my kids earn 4% on their savings accounts, earning a penny of interest every two months. So over the time, last year we actually opened 529 accounts for them and basically transferred all that money in. Now we had to tell the kids, "Hey kids, we're literally taking your spending money and we're putting it in accounts that you can't touch until you start going to college or some other qualified purpose."

They fell back and I was like, "Okay, we're going to do it anyway and I'll tell you why in the next day." So we did it, we shifted all their money. I waited one day at market. I was guessing 50 50, the market went up. So I showed them their account balances. One day all of them earn about $5 on their account, which isn't as much. But I said, "Kids, it would have taken you, at your rate of interest, a thousand months to earn what you earned in literally one day." And obviously, the market has dipped and at times it's gone down so I didn't tell them that they're at risk of losing their earnings. I try to just tell them and you put that in the perspective that there are some opportunities right now, even in this positive.

And the other thing, I didn't want to just share stories on this is fundraising outlook. So, as individuals set on this, the majority of the individuals did share a fundraising outlook look as positive.

And, one of the unfortunate issues that was an issue related to the pandemic is that a lot of the not-for-profits in person, fundraising events had to unfortunately be either postponed or canceled. And when I say canceled means that we can't physically go there. We can't have the same identical event. And, I think a lot of not-for-profits view this as an opportunity to, in exchange hold virtual events. And I'm not sure and I did mention to ask about some of the fundraising opportunities, right around the pandemic by insurance to fall off with my clients now, especially the ones that have been having them around the December and January timeframe, because yes, unfortunately you can't go there in person, but what the opportunity looked does and in virtual environment is number one, I'm not sure, again, this is all just me speculating, but you're saving costs.

You don't have to pay the deposits on the hotels or assuming you may have negotiated somehow to get out of those contracts. Didn't have to pay for the catering bills, et cetera. And you allowed for possibly an endless virtual environment, an endless amount of possible donors that can attend virtually versus just going there and Philadelphia in person. So I am curious to see how those fundraising events and how they turned down in terms of not just top line revenue, but bottom line revenue. Ultimately the bottom line impact is what is the additional available resources that you can go and put into your purpose into your mission. And I'd always prefer to listen to this stuff more than my stuff too. My stuff is a little bit more boring.

So what I did want to do then is talk about the other concerns. So there's a whole series of slides that I just skipped between that Stimulus side and the Poll Questions slide to now. Those are meant to be resource materials that Evan and Claire has provided. So again, if you have any additional questions related to that in the future, please don't hesitate to reach out. I will make sure that there are some time as well for additional questions after this also. But, as Evan did mention, my discussion topics, some of them are not applicable to everyone on this webinar. Some of them are a little bit dry. Some of them are just reminders. So there is some humor into this at the end, so just stay tuned for those. But these are the discussion topics I wanted to discuss.

And we'll just say maybe for the next 20 to 25 minutes. And just more reminders, some of this is more just meant to be discussions in general as we have some additional webinars related to that, especially I'm referring to the PPP loan especially round two and just some things just to be mindful of as you're heading into your year ends. The first thing I did want to refresh everyone on is this accounting standard that was in effect for all December 31st year ends last year and then the June 31st, 2020 year ends. So basically this is called ASU 2000 1808. There is a transition to this, to the next topic. So the main purpose of this ASU was for the FASBI to clarify and streamline the accounting associated with certain contributions received and contributions made. But the main focus point on this is related to grants, both private and governmental grants.

And what has happened prior to this ASU update is that the grants, there has always been a difference in how grants were accounted for. So the private foundation grants were more recorded as a contribution where you recognize it, when you sign it, it was unconditional promise. However, the governmental grant were recognized typically, as you provided the service, or you incur the expense, if it was a cost reimbursement. So in those situations, a lot of times revenues equals expenses. You would not recognize the revenue until the expenses were incurred. So resulted in a zero bottom line while the private foundations you recorded those revenues immediately, when it's just unconditionally promise. At times they would be restricted, but the bottom line and total net assets is you recorded the revenue immediately while you recognize the expenses the time of the grant.

So there was a difference. Feds, they wanted to end that difference right or wrong. They want to make sure that the grant accounting was streamlined. So what they said is that this impacted more on the governmental side is that if you received a grant, regardless who the source is, and that the grant tour does not have any direct reciprocal value going back, it is a contribution. Meaning that if I received a grant again, forget about who the grant tour is, I received a grant. And I am servicing the general public, or I am servicing my consumer base since the grant tour does not receive any direct reciprocal value back, that is going to be a contribution. So what does that mean? So that means that a lot of governmental grants were recognized as exchange transactions in the past are now deemed to be counted.

This is an important for a variety of reasons, but number one is that it changes the mindset shift in terms of how to record these. Over the last year, when I'm presenting these to the boards into management, a lot of shaking heads, a lot of pushback on this. Issue two will fix that in a minute but what they basically said is that even if it was meant to help the granting agency, meaning like going towards their mission or their feel good. So if you received a grant from the Department Of Health And Human Services, and was helping people related to those, in that situation then it doesn't matter. It's not a direct reciprocal value back. So they are now considered to be contributions.

So that goes to Issue Two, that this ASU clarified is that distinguishing between conditional and unconditional. If you recall the trigger now is that in order to recognize a contribution, it has to be unconditional. So what they define in this issue is that in order to be a true condition, it has to have a right of return. Or at least if you don't do this, you have to pay us the money back, or we're not giving you anymore, number one. Number two then is, the agreement must include a barrier and the barrier must not be administrative in nature. The barrier must be related to the purpose of the grant. So without going into too many logistics, if one of the grants just require you to submit an annual audit report that they have determined to be administrative in nature, so that is not a true condition of the grant, in doing so that makes the grant a contribution.

But both of these bullet points and issue two must exist. The other thing I wanted to just mention related to governmental grants is a lot of them are subject to certain expenditure requirements like the Uniform Guidance. They have deemed those because they are a barrier that is related to the program, that those are a true existing condition, which has a right of release. If you don't use those within the allowability rules of Uniform Guidance where you'll have to pay back the money. So they did deem that those requirements did determine to be a condition. So if you think about it from the governmental grants side, you can't recognize a contribution until the condition has been met. Well, the condition is spending it based on qualifying expenses, expenses subject to the Uniform Guidance, for example. So you don't recognize revenue until you incur the related expenses.

So what does that mean? That means the way that you recorded these governmental grants didn't really change. You just classify them as a contribution now, where in the past, it was an exchange transaction. The one thing that did change as rule all of this is that there are additional footnote disclosures that you are required to include because it is a contribution now. If there are any conditions and any money that's set aside, like in a liability account, you are required to disclose those and what the condition is to basically recognize the revenue related to that. So the reason why I say that is I wanted to get into the accounting for the PPP loans. So there are two different treatments for the accounting person. And I touched about this in October, but the situations have shifted a little bit.

So the accounting guidance that has been interpreted has not changed, and that has been provided by some literature from the AICPA, which they vetted through the FASBI. So the FASBI has not provided any additional guidance related, specifically targeting the accounting for PPP loans. But basically the substance of the literature from the AICPA is the foundation for the metrics of the PPP role. Number one is, when we all signed a PPP loan, you signed a note, you signed a loan agreement and that loan agreement, you have to incur certain expenses, qualifying expenses then you would file an application to the bank who would review it and say whether or not the amount is forgiven or not. And then after that, then they would then send it to the SBA who would make a determination as well.

Once that happens, the amount is forgiven and it converts into a governmental grant. And if you recall my previous slide, that governmental grant is deemed to be a contribution. So this is where the foundation is. And in order to recognize a contribution, it has to be unconditional. So then what the AICP is in determining is, what is the true condition? And that is going to be on the second and third bullet point.

Share the unshaded bullet points. Number one is, there was a distinction that you signed a loan. So the final for the forgiveness is that the bank and the SBA has to approve it in order for it to be forgiven. That is option A. It's basically, you recognize the PPP as a loan until it's unconditionally forgiven. And then you have to accrue the interest and then when it's forgiven, you basically write it off and recognize the credit for it.

But if you do it that way, you have to disclose certain loan requirements as well, because it's a loan on the books. Option B though, is that some in the AI CPA and others and industry have felt that the forgiveness is more administrative in nature, especially now given the recent stimulus if your loans are under $150,000 you're going through a simplified process. And today we do have clients that have loans under 150, actually to date and most of my clients that are forgiven have been under the million dollars. I've not heard any pushback from the bank or the SPA right now on changing those amounts. So what they're saying, and the argument is that the forgiveness is more administrative in nature and the actual condition is you have to meet certain qualifying expenses.

So when that is happening, just like my previous example, you're recognizing the revenue when the expenses have been incurred. So in my example here, as of your end, you've incurred $400,000 in qualifying expenses. So you don't record any, there are no loan amounts, unless you don't feel the entire mount's going to be forgiven, but you recognize the remaining balance and deferred revenue. In this situation, you do not have to recognize any interest related to this. But doing this way, there will be disclosures related to contributions. In either situation, because this is a management policy that management needs to elect, you would disclose management's accounting policy in these policies section of your financial statements. So any policies, internal policies, you need to disclose in the policy footnotes on your financial statement footnotes.

So what we saw here is that, And as an auditor, I have to remain independent. So I can't tell you one way or the other. I can make recommendations, I can give my opinions, but ultimately it's going to be up to management to make this decision. We have the majority of our 630 year ends recognize that using option one as a loan, because everything was still unknown at the time. We did have a handful of not-for-profit clients actually do it based on option two, both ways, again are acceptable. But what's interesting is for the 1231s, because of forgiveness, the eight or 24 weeks has already happened. A lot of companies have already been filing and received forgiveness.

A lot of 1231 are shifting more towards option B. So there has been a shift, but again, both ways are accurate per the AICPA and as long as you document your rationale document in your policy, as an auditor, if it's reasonable there's no way I can contest it. I will say though, that if you do option B as an auditor, I have to review to make sure a few things. Number one. Is that you do have enough qualifying expenses so, you don't have any salaries over $100 000 that you're including in here and we'll talk about some of the other things in a minute as well.

Okay. Wow. So, okay. No, this is a very good mix. So it looks like a lot of companies are doing and then yeah, certain companies also don't have a PPP loan so. Again, I promise to try to in the interest of time, the one thing I did want to mention is that in regards to the PPP loans, our firm does have a PPP Updates Webinar that took place about a couple of weeks ago. It is on demand now. So the purpose of this is not meant to be PPP metric related. I can discuss very high level on theory. My clients know I am more knowledgeable than the average person on PPP, but if you're going to come to me and ask me about applications or forms, that's when I need to defer to someone else. So just know that.

But there are some very basic principles that have come out throughout this. Number one, is this concept of Double-dipping. Expenses reportive to forgiveness should not be directly reimbursed by another source. And that other source can be a governmental grant, a state grant for example, city grant, or it can be a donor but there is expressly prohibited, you do not double dip. From the governmental side, there is one place that we saw last June that basically talked about this, and this was basically related to the uniform guidance and it was almost the opposite relationship, but what it basically said is if you are planning on using payroll cost to be applied for, in a forgiveness application in the PPP, you should not include those in your current awards on your schedule of expenditures of Federal Awards or SEFA, which is the financial report you would include for the uniform guidance. So, this is one of the earlier areas where I saw that you cannot double dip.

So what's interesting is a lot of 630s, they reported a hundred percent of certain payroll costs on their SEFA. So, it's almost, again, the reverse relationship. They need to be careful and make sure that the costs that were reported and have been already requested for reimbursement from an agency does not get included in the PPP forgiveness application. So again, just kind of related. But one thing I did not want to mention, as a result of the recent stimulus that was passed around the holiday break, was that related to PPP 1, in addition to the one, two, three, four, the top four bullet points that is out there, the bottom five bullet points are additional expenses that are allowed for forgiveness. So, if you have not applied for forgiveness now, there are additional, more costs. But what we're actually finding with our clients is that because initially, when you applied for PPP, you use the metric of two and a half months.

So, about 10 weeks of payroll. And since in June, that the covered period went from 8 weeks to 24 weeks, that most of my clients are having more payroll than anything else, that you don't really need anything else except for payroll. The one thing I didn't want to say is even if you have these other expenses to 60, you still have to have a 60% out of payroll allocation that has not changed. These costs do apply to both the first loans and then the second round of loans as well. So some of the additional things that has come up that the government has allowed for PPP forgiveness is number one is basically any certain software costs or cloud computing costs that help companies go from live in person to remote working environment.

So examples of this, you can see at the bottom are Zoom, QuickBooks cloud, QuickBooks online, but anything that allows you to not have to be there in person. The second thing they recognize is that unfortunately, some insurance may not cover this, but especially what happened over the last January timeframe, but basically what happened is anything that may relate to physical property due to public disturbances or riots that occurred in 2020 that may not be covered. This does not include any natural disasters.

Some other things, just so you're aware, any kind of supplies, any POs that was done for contracts that you needed in business for operating businesses that was made prior to the pandemic is now covered, and then any kind of PPE materials to help get your businesses up to the required code to allow you companies to work again is also allowed. So yeah, I guess I'll turn over to the next PPP question.

Well good. And I think the way that I learned from the last webinar is that the PPP round two is meant to be more restrictive. So the way that I'll explain it is that the first PPP loan was meant to try to keep employees working to second round of PPP loans is meant to try to keep businesses from going under. So in doing so, I believe that there is going to be more scrutiny from banks and other financial institutions related to the approval of a PPP 2 loan. Just want to make sure everyone is aware of that.

The one thing that had me pause a little bit when I listened to the webinar from our national COVID folks, is that they said that if there's any issues with PPP 2, it may open the door for organizations to review a little bit more in detail, the amounts forgiven in PPP 1. I wanted to make sure that everyone was aware of that, but in regards to PPP 2, as a result of stimulus, it did allow for certain organizations, including certain non-for-profits to apply for and consider a second round of a second draw. Some of the things is that the maximum loan amount is $2 million dollars.

And that you have to have basically 300 or less employees. And the issues that we've had a lot is our regards to our clients asking is this concept of 25% gross receipts decline in any quarter comparable to the same quarter last year, the quarters, basically our calendar year quarter. So if you have June 30th, it is still January. You can pick a quarter from January, 2020 till December, 2020. And the way that we are interpreting the guidance related to not-for-profits is gross receipts here for a not-for-profit is basically how it is defined on your 990. And also that the basis for that, if your 990 is reported on an accrual basis that in general, that these quarters need to be on an accrual basis, which unfortunately it does create some challenges at times, just because not all not-for-profits report on accrual basis throughout the year, you have to have used the full amount of your first draw prior to the receipt of the second drawing, keeping in mind that it does not say you have to have received forgiveness or you have to have not filed for a forgiveness application.

It's basically if you used it. So it's based on use. The amount is calculated very similarly. You can use what you did for PPP 1, but it can be based on 12 consecutive months prior to the application, or you can use your 2019 payroll and the terms are fairly much the same 1% interest, 5% maturity of the amount that's not forgiven. You can see it's still between the eight and 24 weeks covered period. And then just know that if you are considering this, you have until the end of March to do so. Although there I've heard some initial, just individual concerns that the money may be run out beforehand, but again, not knowing if that's actually happening or not, but uniform guidance. So for those of your organizations that are subject to uniform guns, or could be, and I will stress why I'm discussing this now is that note that on this slide, there are some additional reporting requirements, both on the SEFA scheduled spenders of federal awards.

 And then also on the data collection form, just knowing that this is buried within one of the appendixes in the compliance supplement for this year issued by OMB. This is a fun one. Have you ever double dipped? The question here relates to not necessarily governmental funding, I'm asking if you've ever double dipped in general. Taken a chip and then in a public setting. And double-tap, so question here is, have you ever double dipped? I'm not referring to the accounting or the cares act. Have you ever double dipped period in your life?

Evan Linhardt:Trying to get people in trouble here. I'm thinking about my chicken nuggets in my ketchup or something. I will admit that I have been known to double dip at times. I try not to now, but yeah.

Jimmy Mo:Yeah. You know, I'm downing the 65% never, but you know, you can only put what you certify or what you put on there, right? But you know, again, I do want to stress, especially for uniform guidance. You do not double dip. And every time I think of double dipping, I think of Seinfeld that episode right now, Seinfeld is only on, I think it's on midnight on TBS or something. So yeah, don't double dip. It is extremely important that concept is ingrained in your minds related to from guidance, PPP, anything related to governmental funding.

The one thing I did want to mention related to the uniform guidance is that the PPP loan is not subject to the uniform guidance. So therefore should not be included in your SEFA even though it has a CFDA number. When you see the subsequent pages, there are some additional programs, and this is why I wanted to caution why this needs to be a reminder on this, is that if you received any other funding through the federal government, and you may be subject to a uniform guidance or additional audit requirements, we actually had a client yesterday that just informed us they received a loan that does not have a uniform CFDA number. So most likely it is not subject to uniform guidance because there's nothing in the chronic remit that they've provided so far that indicates that. However, it is from the Pennsylvania. I'm trying to get the full name right. The Pennsylvania department of community and economic development, DCD. And typically these agreements include an audit, a separate audit requirement once the grant is over.

And so just because your grants or funding that you receive may not be subject to a uniform guidance, make sure you read very carefully. What else that it may be subject to. Again, I'm not sure if this client knows that they may have to have a separate audit related to these funds because DCD typically requires an audit due 120 days after the end of the contract period. There was a COVID supplement, a denim that was issued around on December 22nd.

Government tends to issue things right before holiday break. But what this does is there is some additional requirements that relates to a uniform guidance. Number one is that if there is, if you do have any funds with COVID related to them, you are granted a three months extension. No COVID, you don't get the extension. So just keep that in mind. You are required to include a footnote now, which it can be marked on audited based on the amount of the estimated fair value of the amount of the PPP you received related to federal from federal assistance funds. This amount does not go into your SEFA amount for consideration and can be unaudited. I will also say that there is a gap difference too, because if it's material and the receipt donated equipment on front, on your financials, you record those as an in kind contribution.

So just keep that in mind, there may be some differences between the financial statements and the SEFA. These are a lot of the new programs that you may receive. We do have clients that have these provider relief funds, which are from healthcare and Pennsylvania, random healthcare organizations got notice of free money that they were supposed they got, and they could accept it, or they could decline to accept it. But those actually STEM from the provider relief funds. And what I did want to stress here is that for the provider relief funds, there is some additional requirements in the SEFA that in addition to reporting the base amount of the funding, you actually have to include on your SEFAs if your December 31st year end, you have to include the lost revenue that you submitted to DHHS on the SEFA.

Those two amounts combined equal your reportable amount. And that is the amount that is subject to possible testing. So for example, if you got provider relief funds of 500,000 and you reported loss revenues of 300,000, the total is 800,000. That is above the $750,000 level for what is known as a major program. That program is subject to audit. And most companies haven't gotten this money in first year before. So most likely you're going to get a uniform guidance audit possibly for the first time ever. So I did want to make sure that that is something that is really out there. And this concept of loss revenue reported on a SEFA. There is some additional reporting requirements related to the federal funding, accountability and transparency act. This was actually a one of the requirements around 2008, 2009, when the era of funding, the American recoveries act funding came as well.

But basically if you're a direct recipient of federal funds, have you got money directly from the federal government and you are then providing 25,000 or more to a sub recipient, you have to basically report that on the system. And it is now a reporting requirement. I will also say that this reporting requirement is not only related to COVID related funding. If you deem that your reporting requirement is directed material for any major program for this year for the compliance supplement, you have to consider this as part of the requirement and determine if this is applicable or not. The last thing I wanted to cover is going concern. And unfortunately times still are tough for certain organizations and it is an accounting requirement that management assess going concern. Again, it is not an auditing requirement. And what I will say here is if you get to the audit, and this is the first time that you're assessing cash flow and you are in dire straights, unfortunately this is something that probably should have been done earlier and something that you should have been communicated to the boards about.

So this is something that is probably has been going on for some time and as your auditor we need to audit it to determine its reasonableness for going concern. And basically determine how the impact of that is going to follow. I will say one thing is that if your organization is reliant on third-party support. So if you have an operating deficit and you have another organization that that's going to foot the difference and make sure that your organization stays afloat, it is now an audit and requirement to testify ability of the third party support to make sure that that organization is also in good financial shape as well. So before we get to the questions, I do have one last polling question I guess, and sorry, I guess I don't know what happened to the last quote, but as I'm very optimistic, I'm hoping that everything returns to normal eventually based on Evan slides, hopefully that starts somewhere mid-summer as everyone is starting to get the vaccine and hopefully the variants are becoming worse, but I'm just curiosity.

What are you most eager to do whenever hopefully everything goes back to normal?

Okay. No, this is again, very good mix. Going back to work, I don't know what that will be like in the future. I think that will be very interesting and it's funny because when we talked about Evan just coincidentally had a slide rule. It's the last one, but yeah. I mean, I don't know between you and me and everyone. I am pretty much zoomed out. So yeah. I mean, that's one thing I'm looking forward to it just being in person and seeing everyone smile and just having regular conversations with everyone.

Evan Linhardt:And I said, Jimmy, I'm going from no handshake, just going to be hugs. I've only hugged like six people in 10 months, my immediate family and stuff, it's just going to switch over from that. I'm excited to have the balance. I think Zoom is going to be leveraged really well, especially for clients who it's difficult to travel or if you just want to have a quick chat, I think it's going to be great. I'm hopeful for the balance at least.

Jimmy Mo:Yeah, no, definitely. So I do see some great questions on here. I wanted to kind of address some of which is unfortunate. Just my opinion with the necessity certificate required for PPP loans, what is the SBS position related to liquidating endowments as a source of liquidity can not-for-profits make that certification if they have significant endowment assets. I think unfortunately I'm going to give the answer of it depends here, endowments, and really depends on the type of endowment if it's a board clause dominant, which means that the board has the ability to for make it available.

I think the SBA may have an issue with that. If you recall, when PPP 1 started in regards to the shake shacks and some of the others, Harvard was one that was under scrutiny as well. And I think that that was the interpretation of this is that Harvard was applying for PPP lab and they had a lot of endowment related assets. I think one of the other arguments is that, especially with donor endowments, had you attempted to have the donor change their designation. If you have an endowment with an active donor and the donation is meant to be in perpetuity, well, if you're a business, that's not going to stay around forever, like forever, meaning in a year, then the donor may have a sense to change their mind.

So I think, especially with PPP 2, they're going to make sure that they review all sources before they ultimately go forward with granting a second loan. Again, they are going to have more scrutiny with the second loan. If a not-for-profit picks option a for PPP 1, can it take a different approach for PPP 2? The short answer is no, but the long answer is maybe. So you know, that if you develop a policy in regards to selecting option one for option a for PPP 1, and you change the option for PPP 2, then you know, it is a change in accounting principle. So doing that, the standards allow you to make that change. In one of my concurrent reviewers is going to be proud that I'm not just saying yes, but I think you do need to consider the ramifications of a change in accounting principle.

Specifically, if you change it, you have to consider the impacts in the prior financials. So the answer is yes, but there are certain ramifications that you need to consider. Are there any double-dipping restrictions on payroll costs that are reimbursed by state and city grants? The answer is there's nothing definitive and writing, but the concept of double-dipping applies to everything. So if you have a city grant and again, it has to be direct. So it's not a fee for service type it's direct. So you reimbursed payroll costs from a charismatic funding from a grant, from a state. Those costs should not be included in the PPP for federal funding again. So just trying to avoid that, double-dipping, we do have clients that have, for example, like real estate that get reimbursed through cam charges, tenant charges, those monies can be included in PPP forgiveness as well.

So you really need to adhere to that. Again, you have to weigh that to risk of audit and I'm not here to tell you that if you do this, your loans really amount, you're safe just like an IRS audit for your taxes. What is oppressed here that you need to consider here. But the bare principle of this is you do not double dip. One other question, if a donor has provided a restricted gift for which we have used salaries to meet the restrictions, can we use those same card salary cost for forgiveness on the PPP? The black and white answer is you should not hell however you need to consider other things. So for example, let's just say the salary costs are for an ED where the individual makes over 100,000.

Let's say the donations only 50,000 and the individual makes 150. Well, there's no argument that you can use the 100 prorated for the PPP and the remaining 50, you can apply to the donation because you know, that part is not eligible for forgiveness for any way. So there are some differences that you can consider, but the short answer is the concept of double-dipping, you should not be doing it. With that said, I think that is actually all the questions.

I see that we have two minutes left. So I think we can give everyone back a couple of minutes. I just wanted to thank you for your time. Also want to thank Evan and Claire, as well as this extremely valuable information. Some of which I can take in my personal finances as well. Although my risk tolerance is definitely on the more conservative side, but no, I did want to thank everyone for their time today. And if there's any questions, please let me know, or please don't hesitate to send additional emails in the future, but thank you to everyone and hope you have a good day.

Evan Linhardt:Thank you and have a good one. Thanks Jimmy.

^{Transcribed by Rev.com}