Help CalNonprofits refine this working draft!

(Add your comments at the end of this article.)

Just yesterday a major bill in the U.S. Senate was bolstered by the introduction of a counterpart in the House: the Accelerating Charitable Efforts (ACE) Act. We appear to be in a moment when new regulations for private foundations and for donor-advised funds are gaining momentum. The need for philanthropic reform is deeply felt by many community nonprofits, and the California Association of Nonprofits (CalNonprofits) has endorsed the ACE Act and worked for philanthropic transparency and reform in the state legislature.

As the broad movement grows and evolves, we at CalNonprofits are focused on the public policy aspects of how philanthropic organizations are governed. We have drafted "Principles for the Reform of Policies Governing Philanthropy” in the form of a working draft. We have already received useful feedback from several nonprofit and foundation leaders. Please help us improve this draft by sending your comments and suggestions!

Principles for the Reform of Policies Governing Philanthropy

As the "chamber of commerce" for California's nonprofit community, CalNonprofits speaks up not just on behalf of nonprofit 501(c)(3) organizations, but also for the communities that these organizations serve, are embedded in, and represent. We speak up here to offer principles to serve as a basis for public policy work related to philanthropic reform so that donated funds now in the public trust can more quickly serve the public good.

We recognize that a framework is currently in place to regulate charitable organizations, including philanthropic institutions; that framework relies on state attorneys general and the Internal Revenue Service to protect the proper use of charitable funds. However, current laws do not reflect a radically changing philanthropic sector and the skyrocketing use of donor-advised funds and other philanthropic vehicles with practices that can run contrary to the intent of existing laws.

To ensure public trust in these institutions, laws must be updated to reflect current philanthropic realities. We must strike a better balance between donors’ interests in determining when and where donations are made, intermediaries’ interests in benefiting from holding funds, and the public’s interest in prompt and fair distribution of donated funds held in public trust.

At a minimum, greater transparency is needed so the public has ways to track how, when, and where tax-deductible donations are used. These draft principles are meant to act as a guide for emerging legislation and other policy reforms, as a request for strong oversight of the sector, and as a call to philanthropy to act in ways that put the public’s interest first.

1. Because individuals and companies receive federal and state tax benefits for charitable contributions, the public has a direct financial and legal stake in ensuring that such contributions are used for public benefit. The Attorney General has the authority and the responsibility to require reports that enable the Charitable Trusts Section to conduct oversight in this regard.
2. Societal losses due to tax deductions for charitable donations should be matched with corresponding societal gains through prompt distribution of donations to charities to serve their communities. In California, annual losses of state tax revenues due to tax deductions related to donor-advised funds are at least $340 million; we do not know the extent to which these tax revenue losses result in societal benefits through distribution of donor-advised funds to our communities.
3. For policies to support the goal of ensuring societal benefits from donations to charitable organizations, policymakers and regulators must have sufficient information about philanthropic vehicles such as donor-advised funds, including data on distribution of assets from donor-advised funds to communities.
4. Charitable tax deductions should not disproportionately advantage wealthy people over people with less means. Policies that incentivize the growth of private philanthropy should not be prioritized over tax policies that work to reduce economic inequality and strengthen democracy. Funds should not be allowed to remain indefinitely in philanthropic vehicles. Reform must hold at its center a more equitable balance between incentives to donate and prompt distribution of funds.
5. Just as industries like agriculture encompass a range of sizes and types of entities (e.g., small family farms and investor-owned agribusinesses), philanthropy is a sector of small firms, mid-sized firms, and huge, global mega-powers. Small, community-based philanthropy should be recognized as distinct from investor-affiliated entities and protected in reform regulations.
6. Philanthropic entities should not be allowed to be used to hide self-benefit or to disguise inappropriate political activity. Policy reforms are needed to limit the types of expenses that private foundations can count towards payout requirements. For example, payments to family members without staff roles in the foundation should not count towards meeting a family foundation’s payout minimum.
7. Contributions from a private foundation to a donor-advised fund should not count towards meeting the foundation’s payout minimum. Such funds are not being distributed to active nonprofits, and the private foundation maintains effective control over the funds.
8. The current required payout minimum for private foundations was established more than 50 years ago to encourage foundations to rebuild their assets after a period of losses. Today private foundations have experienced astronomical growth in assets due to passive asset increases (such as rises in the stock market). Payout requirements should be reset to normalize the levels of foundation assets and, at a later point, established to maintain the principal but not more.
9. Philanthropic vehicles—including but not limited to donor-advised funds and Type III supporting organizations —should not be used to allow donors to maintain effective control of assets indefinitely, since they enjoyed immediate tax deductions for the donations. Indefinite control of assets by donors runs contrary to the intent for charitable donations to benefit society.
10. We know that private philanthropy cannot substitute for public dollars—in either scale or in accountability to the public. Tax and other public policies related to philanthropy should not seek to replace or circumvent governmental action, but instead to complement it and support the authority of democratically elected government officials over private philanthropy. Public policies and philanthropic practice should promote a society that addresses gender-based, racial, and ethnic disparities, and that challenges barriers to accessing funding by marginalized communities, including charities representing communities of color.

Organized philanthropy is an important and strong force through which people express their values and support their communities. In this context, regulations affirm the aspirations of philanthropy.

Reminder: please work with CalNonprofits to clarify and strengthen this working draft. You can reach Jan Masaoka, CEO of CalNonprofits, at janm@calnonprofits.org

1   The IRS states that a supporting organization is “a charity that carries out its exempt purposes by supporting other exempt organizations, usually other public charities.” The IRS further states that “A Type III supporting organization must be operated in connection with one or more publicly supported organizations.” For more information, see: https://www.irs.gov/charities-non-profits/charitable-organizations/supporting-organizations-requirements-and-types