by Evan Tucker
TL;DR: Please don’t use restricted funds for General Operations. And the story of ZeroDivide — a San Francisco nonprofit that raised $50 million and was dissolved by court order — explains exactly why.
Please don’t do this.
I mean that earnestly. Of all the financial mistakes I see nonprofits make, misusing restricted funds is the one with the most severe and irreversible consequences. It violates donor intent, breaches your fiduciary duty, and in serious cases can result in exactly what happened to ZeroDivide: dissolution by order of the California Attorney General.
Let me tell you what happened.
The ZeroDivide Story
ZeroDivide was founded in San Francisco in 1998 with a mission genuinely ahead of its time — bringing internet access and technology to low-income communities. Over eighteen years they raised more than fifty million dollars from some of the most respected funders in the country: the Ford Foundation, the California Endowment, the California Wellness Foundation.
By the mid-2010s the organization was running two flagship programs. Digital Bridge helped nonprofits and libraries adopt new technology. The Renaissance Journalism Center advanced equity in news reporting. Foundations had given money specifically for these two programs — restricted gifts, designated for Digital Bridge and Renaissance Journalism and nothing else.
But ZeroDivide’s unrestricted revenue — the money available for general operations — was drying up. And rather than making hard decisions about cutting expenses or finding new revenue, leadership made a different choice. According to the California AG’s findings, they began using restricted program funds to cover general operating costs. Salaries for employees not working on those programs. Expenses that had nothing to do with Digital Bridge or Renaissance Journalism.
Slowly, at first. Just a little. Just this once.
The board knew. According to the AG’s complaint, budget documents gave directors clear notice that restricted funds were being misused. They discussed — apparently in actual board meetings — the risks of “dipping further into restricted funds.” They acknowledged what they were doing was wrong.
And they kept doing it.
In April 2022, California Attorney General Rob Bonta announced a settlement. ZeroDivide was dissolved. Two officers were prohibited from leading California charitable organizations for three years. And ZeroDivide and its directors and officers were required to pay over $460,000 in damages, penalties, and fees.
AG Bonta said simply: “Donor intent must be honored.”
Note: The California AG pursued this as a civil enforcement action. The settlement included language that directors and officers did not admit to wrongdoing — standard in civil resolutions. However, the conduct was found to have violated California’s charitable trust laws, and the consequences were real and permanent.
The Two Types of Restricted Funds
When a donor gives money with conditions attached, those restrictions take one of two forms.
Temporary restrictions require that the money be used for a specific purpose or within a specific timeframe. Once the condition is met — the program is delivered, the grant period ends — the restriction is released and the funds move to unrestricted. This is the most common type you’ll encounter.
Permanent restrictions are rarer, typically applying to endowments where the original gift must remain intact permanently and only the earnings can be spent.
The most important thing to understand: unrestricted funds are gold. They pay for everything else — general staff salaries, rent, overhead, the costs of keeping the organization running. One of the most common financial traps in small nonprofits is having plenty of restricted grant revenue and not enough unrestricted operating funds.
A Practical Tip Worth Using
When you’re building a budget for a restricted grant, capture as many of your real organizational costs as possible as direct program expenses. Your executive director likely spends a portion of their time on that program — include it. Your program staff occupies a portion of your leased space — include it. When legitimate fixed costs are captured as direct program costs at the proposal stage, your restricted funds cover more of your real expenses and you’re less dependent on scarce unrestricted revenue.
Read the grant guidelines carefully, follow the funder’s rules, and when in doubt — ask the program officer directly. Funders are partners. They want you to succeed.
How to Track Restricted Funds in QuickBooks
For organizations working in QuickBooks Online or similar non-fund-accounting software, here’s the basic framework:
Book restricted revenue to a dedicated set of accounts — typically labeled Temporarily Restricted — separate from your unrestricted revenue. Track expenses associated with each restricted program using Classes, which allows you to pull a program-specific Profit and Loss report showing restricted revenues and direct costs at any time.
Every expense charged to a restricted program gets coded at the time of entry. Not retroactively. Not when you’re writing the grant report. At the time of entry. When the grant period ends and the conditions are met, you record a release from restriction — the funds formally move from restricted to unrestricted in your books.
If you ever find yourself looking at your restricted fund balance thinking “just this once” — call your accountant. Call the program officer at the foundation. There are legitimate solutions to unrestricted cash flow problems. Drawing on restricted funds without authorization is not one of them.
ZeroDivide’s board discussed the risks in their own meetings and did it anyway. Don’t be that board.
Tucker Business Services helps nonprofits set up accounting systems that track restricted and unrestricted funds clearly and correctly. If you’re not sure your current setup is serving you well, reach out.
Sources
1. **California AG Press Release (Primary source)** — Official announcement of stipulated judgment, April 7, 2022. Direct quotes from AG Bonta used in script.
2. **The Chronicle of Philanthropy** — Sector reporting including direct quote from Jan Masaoka, CEO of California Association of Nonprofits.
3. **Renaissance Journalism Center response** — First-person account from one of the programs that lost restricted funding.
4. **State AG Report / JDSupra** — Legal analysis including board knowledge of restricted fund misuse.
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