If your church or ministry participated in the PPP program, you have probably read about increased scrutiny on the program and most specifically on the good-faith certification required by the PPP application: “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.”
The Treasury announced this scrutiny, which includes audits of any recipient of more than $2 million in PPP funds and “spot checks” on other for-profit and non-profit participants, after increased public pressure over publicly traded companies like Ruth’s Chris Steakhouse taking large sums from a finite pool of PPP funds. In a recently published FAQs document (see #31 and #37), the Treasury Department included this question: “Do businesses owned by private companies [or ministries] with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?” And, here’s the answer, “…Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”
I will note that, prior to April 23, 2020 (when the FAQs were issued), there was no guidance on how to assess the elements of the certification; and, at least one company has filed a lawsuit over the Treasury changing the focus of the certification after applications have been filed and funds received. The PPP has, since its inception, posed a dilemma to ministry leaders because of the lack of clear definitions and the practical reality of participating right away or forgoing the assistance entirely. That stated, this recent guidance does appear to shift the focus of the certification from “economic uncertainty” to whether or not the loan is “…necessary to support the ongoing operations of the applicant.” So, what should ministry leaders do if they participated in the program?
- Document Uncertainty. Your ministry should carefully document the financial uncertainty your ministry faced when the application was signed, including but not limited to a decrease in giving, the loss of members’ or donors’ jobs, uncertainty about the length of stay-at-home orders, uncertainty about the effect of social distancing requirements on in-person services for the near future, changes in staffing requirements due to COVID-19, and disruption due to moving to online services.
- Document Necessity. Project your organization’s financial position from the date of the application to June 30, 2020 and then December 31, 2020 so that you have a comprehensive financial forecast. Then, run the same analysis without the PPP funds. The necessity element now appears to focus on other sources of liquidity and specifically cash reserves on hand. So, document cash reserves that were immediately available to cover ministry expenses on the date of the application (but exclude funds specifically designated by donors toward projects such as a building program and restricted to that use). You should also compare these financial reports to similar reports from last year as a baseline. Then ask this question, “When your ministry applied for the PPP, did your ministry have cash or other readily available funds (such as a line of credit) sufficient to cover ministry expenses and specifically payroll without the effect of the crisis becoming a significant detriment to your ministry efforts?” A “significant detriment” could include but is not limited to laying off staff, canceling ministry programs, postponing capital improvements or building projects and curtailing community service projects. If your ministry had cash reserves when you applied for the PPP but (1) those funds would have been expended quickly in covering payroll or other expenses or (2) the use of those funds for payroll and other expenses would have canceled or diverted major ministry plans, then those developments could be considered a significant detriment to your ministry.
- File Your Documentation or Return Your PPP Amount. If this analysis supports the certification, “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant,” then file your documentation away. Your ministry is prepared to address any future scrutiny. Further, it is wise to save offerings and other sources of revenue during this period until your ministry has applied for and received forgiveness of the PPP loan/grant (since it appears to be a bit of a moving target). If your ministry has significant cash reserves and you focused on the uncertainty element when filing the application, then consider returning this amount by May 14th to avoid any questions about your application (the SBA just extended this safe harbor from May 7th to May 14th). I will note that additional guidance on the uncertainty and necessity elements may be forthcoming in the next week; so, you may want to wait a few days for further clarification.
In summary, I do not see this is a significant development. The SBA and the Treasury Department have issued this guidance to ensure that organizations that desperately need the assistance receive it. If your ministry participated in the program, your ministry should be prepared to explain the necessity of the funding if requested.
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