Restricted funds are monies set aside for a particular purpose as a result of designated giving. They are permanently restricted to that purpose and cannot be used for other expenses of the nonprofit. By contrast, unrestricted funds may be used for any legal purpose appropriate to the organization. One of the most important points to understand about restricted funds is that they can only come about through designated giving. A nonprofit is free to set aside a portion of general operating revenue for any number of reasons, and may even create policies to make it difficult for those funds to be used for any other purpose.
But even if that happens, those funds are not truly restricted in the legal sense. Real restricted funds are the result of a donor giving with specific strings attached as to what the donation may be used for.
It may be the result of the nonprofit soliciting or fundraising for that purpose. Donors can also designate that a gift be used for a purpose they choose, completely independent of any fundraising campaign.
It may or may not be for a legitimate purpose. These gifts can be a challenge to deal with. If it accepts the gift with the strings attached, that money becomes restricted to that purpose. The good news is that a charity is not obligated to accept designated gifts. Most donors are trying to help the organization, and such a request is usually granted.
Rarely, a donor may have a personal agenda, or is seeking some type of influence, and is not willing to lift the designation. At this point, the nonprofit can accept the donation and agree to the restriction, or it can refuse the gift altogether. Once money is restricted, that restriction is permanent. The funds cannot be redirected to other purposes, even if the budget picture becomes bleak. It seems logical that the money could be moved in an emergency.
