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poppies in a fieldRather than make a proposal and advocate for its adoption, this article looks at some of the varied developments in the emerging movement to change/reform foundation and donor-advised-fund giving. CalNonprofits continues to participate in and to learn from many strands in this movement. 

With re-opening and global affairs dominating the news, it might be easy to overlook the emerging movement to transform institutional philanthropy. The movement carries ideas for delivering more funds to nonprofits, curbing mega-wealth, altering the charitable tax deduction, and more. 

We are potentially at a pivotal moment, one that was perhaps inevitable given how big philanthropy has become and the degree to which inequality is deepening.

"Philanthropy is having a reckoning," said Edgar Villaneuva, author of Decolonizing Wealth, at a recent national town hall on philanthropic reform.

Foundations and Donor-Advised Funds (DAFs) are big business

Today, nearly 120,000 U.S. foundations hold $1.2 trillion in assets. Although donor-advised funds (DAFs) began in community foundations, today the field is dominated by funds associated with global investment funds such as Fidelity, Schwab, and Vanguard. DAFs now receive 13% of donations made by individuals, and just one donor-advised sponsor – Fidelity Charitable – receives more donations than any other nonprofit in the U.S.

Because only a small share of the dollars in those foundations and DAFs flow to nonprofits, the mainstream press is raising questions that were once discussed mainly among nonprofit leaders or in the nonprofit press.

Last June, for example, the Washington Post published an article examining donor-advised funds, declaring that, "The rich have stashed billions in donor-advised charities – but it's not reaching those in need.” Forbes announced in September that it changed its criteria for identifying the "most generous" Americans, no longer counting donations to private foundations or to donor-advised funds in their calculations – indicating their recognition that since the donors still effectively retain control of the funds, they aren't a good measure for "generosity."

In another example of skepticism about DAFs, the temporary universal charitable deduction of $300 passed last spring in the Cares Act explicitly excluded donations to private foundations and to donor-advised funds.

An emerging movement

Overall, we are seeing the emergence of a movement to overhaul how philanthropy works – and like any movement in its early stages, it is decentralized and disparate, with all kinds of ideas springing up. Some of the ideas will become important themes, and others will be discarded. At the beginning of other movements, we have seen similar enthusiasm and energy combined with skepticism and competition among points of view, so it’s worth paying close attention to these debates.

Many efforts focus on donor-advised funds (DAFs), popular financial/giving vehicles where individuals obtain an immediate tax deduction for their donation to a DAF (often held by nonprofit affiliates of commercial investment firms such as Fidelity or Vanguard, or by community foundations, universities, and other institutions). The funds can stay in the DAF indefinitely, awaiting donor instructions ("recommendations"). 

Voluntary approaches

The spectrum of approaches under discussion is impressive. Some advocates hope they can produce change by inspiring donors to do more to help active nonprofits or by offering them new tax incentives. Some of these efforts focus on voluntary pledges and standards. Some are clearly inspired by Warren Buffet's Giving Pledge – now ten years old – in spite of mixed results.

A newer smaller effort is the Half My DAF campaign started in the wake of the pandemic by a wealthy California couple. They pledged to match donations of people who distribute half or more of the dollars in their donor-advised funds.

Another effort, the Crisis Charitable Commitment, was initiated by foundation leader Alan Davis and supported by Patriotic Millionaires. He urges donors, donor-advised fundholders, and foundations to commit publicly to giving more to charities over the next few years.

Taking a different approach is the Council on Foundations. They established the National Standards for Community Foundations which include "best practices" related to working with donors and donor-advised funds. An example: "A community foundation educates and engages donors in identifying and addressing community issues and grantmaking opportunities."

The problem – of course – with these voluntary approaches is that they are, well, voluntary. Calls for voluntary action typically engage people who are already doing the right things. There are no legal or reputational consequences for not engaging in voluntary campaigns or for failing to fulfill pledges.

What about COVID-19 giving?

It has been heartwarming and even thrilling to see how foundations and individuals – directly or through their DAF accounts – have given so much to COVID relief. Although COVID-19 is a bigger crisis than other natural disasters, giving is following the familiar trajectory: disasters spark huge increases in giving which decline relatively quickly. We in California know this trend all too well from our fires, earthquakes, and mudslides.

And Philip Rojc writes in Inside Philanthropy:

"Overall giving from Fidelity DAFs actually increased a lot more in 2019 [before the pandemic] than in 2020 – 39% versus 24%. And even though the average grant size did rise in 2020 from $4,358 to $4,614, that’s an increase of only 6%."

Other researchers have sharply criticized the math used by the National Philanthropic Trust and others in calculating how much is being distributed to nonprofits (and not simply to other DAFs).

Despite the large outpouring that donors gave through their DAFs, overall DAFs hold more money than before the pandemic

COVID giving isn't an argument against philanthropic reform, including changes to DAF policy, it is a reminder of what nonprofits already know: when people's hearts are moved they are motivated to give more. Disaster giving is a reminder to us nonprofits that people and institutions can and will give more in a disaster than we expect during ordinary times.

The case for government regulation

In contrast to voluntary good practices, government regulation applies to everyone.

What’s more, it serves as a reminder that private philanthropy is hardly just private. Donations to private foundations and donor-advised funds provide immediate tax deductions for donors – meaning lost revenue for governments – even if money doesn’t flow directly to charities for decades or centuries. One estimate is that for every dollar donated to charities, the federal government loses up to 74 cents in tax revenue. In other words, the public has a financial stake in "private" philanthropy.

In California alone, an estimated $340 million each year is lost to state government revenue solely because of the deductions state residents take for their gifts to donor-advised funds. Because the overwhelming majority of charitable tax deductions are taken by the 10% of Californians who are the wealthiest, these millions in tax breaks benefit that 10%.

With communities scrambling for funds, it can be hard to see $340 million in tax money used in tax breaks for the top 10% of taxpayers.

National reform ideas

At the national level, two efforts to promote new regulations are especially notable.

One is the Emergency Charity Stimulus (ECS) plan, championed by the Charity Reform Initiative of the Institute for Policy Studies, Patriotic Millionaires, and the Wallace Global Fund. The ECS would require both foundations and donor-advised funds to give at least 10% of assets each year for the next three years to active nonprofits. In addition to being temporary – and perhaps more passable – an advantage to this proposal is that it would deliver an estimated $200 billion to nonprofits – without costing the government a cent as the tax deductions have already been taken.

Another effort led by Ray Madoff, a Boston College tax-law professor, and the philanthropist John Arnold, is a complex, multi-component approach that would create different classes of donor-advised funds, place a floor on the charitable deduction, and provide financial rewards to private foundations that pay out 7% or more of assets, rather than the federal minimum of 5%.

Proposals under discussion at state and federal levels can be generally grouped into three areas:

Change payout rules to get more money to nonprofits faster

Proposals include:

  • Increasing the required payout rate for foundations to higher than the current 5%
  • Instituting minimum payouts for donor-advised funds
  • Changing the tax system to give donors an incentive to distribute funds from their DAFs more quickly
  • Eliminating the current provision where foundations can count staff, rent, and other expenses towards the payout minimum
  • Stopping private foundations from skirting payout rules by transferring dollars to donor-advised funds

Change aspects of the charitable deduction

  • Pushing for more generous charitable deductions for donations that deal with COVID-19 or for other specific causes, such as climate change
  • Changing the deductibility rules on stock, artwork, real estate, cryptocurrency, and other non-cash items to close loopholes and minimize abuse
  • Shifting the timing of the tax deduction so that it happens when the funds move out of the DAF to an active nonprofit, not when funds are placed in the DAF

Require more transparency

Donor-advised fund sponsors would have to report:

  • How much came into each fund
  • How much went out, and to which nonprofits
  • How much was paid in management fees
  • Details about how those funds are invested and who earned what fees as a result

In California, we at CalNonprofits co-sponsored a bill in 2020, authored by Assemblymember Buffy Wicks (15th Assembly District), that would simply bring some transparency to donor-advised funds – without revealing donor names. Although it passed in California's Assembly, it stalled in pandemic-related machinations in the State Senate.

There is legislation now in Minnesota that would require foundations to report on the amounts they transfer to donor-advised funds, transfers that help them meet their 5% federal payout requirement, while still maintaining effective control over those funds and without necessarily moving those funds to an active nonprofit.

No one agrees with all of these ideas, and many people probably don't agree with a single one. The variety of proposals – and the degree of study on the technical details – is again evidence of a movement becoming more visible.

Nonprofits find it hard to speak out

The national efforts have been spearheaded by university professors, think-tank researchers, and a few private foundations – alongside influential public critics like Edgar Villanueva, Chuck Collins, and Vu Le. We nonprofits – especially community-based nonprofits – are conspicuously missing from the leadership. This is a problem given the urgency we feel to get funds to families and communities, to lessen deepening disparities, and to address climate change.

At CalNonprofits, issues related to donor-advised funds are a top priority for our members. When we co-hosted two national town halls on DAFs, there were more than 1,800 participants, many of whom were only newly aware that their views on DAFs were widely shared among nonprofits.

We welcome this growing movement for philanthropic reform. Many nonprofits cannot speak out publicly about these proposals because we can't risk alienating foundations and donors. Nonetheless, these are important public policy matters with billions of dollars at stake for nonprofits and communities, and those of us who can speak up must find ways into the discussions and help shape the movement as it evolves.

We hope the nonprofit sector will emerge stronger and more equitable from the pandemic. We hope the same for institutional philanthropy.

What is a donor-advised fund (DAF)?

A donor-advised fund is an account at a sponsoring organization, generally a public charity, where an individual can make a charitable gift to enjoy an immediate tax benefit and retain advisory privileges to disburse charitable gifts over time. 

This note only begins to explain the implications for donors, taxpayers, nonprofits, and government – we encourage you to learn more

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