This article is adapted from a longer version originally published on CalNonprofits.
Amid signs of a new era for the economy, our politics and global affairs, a quiet movement is also emerging focused on transforming institutional philanthropy. And the changes being imagined are not small. They include delivering more funds to nonprofits, curbing mega-wealth, improving the charitable tax deduction, and more.
Given how big philanthropy has become and the degree to which inequality is deepening, this pivotal moment was perhaps inevitable.
“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. Their tax-advantaged cousins, donor-advised funds (DAFs) now receive 13 percent of donations made by individuals. Although DAFs have their roots in community foundations, the field is now dominated by funds associated with global investment firms such as Fidelity, Schwab, and Vanguard.
And today, just one donor-advised sponsor – Fidelity Charitable – receives more donations than any other nonprofit in the U.S.
Even though donors receive an immediate tax deduction when giving to a foundation or DAF, only a small share of the dollars actually flows to nonprofits each year. In fact, foundations are required to release only five percent per year, and DAFs have no requirement, enabling them to grow in perpetuity.
This mismatch is starting to be questioned in the mainstream 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 its calculations – indicating a 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.
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.
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 Buffett’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. It 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.
As 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 percent versus 24 percent. And even though the average grant size did rise in 2020 from $4,358 to $4,614, that’s an increase of only 6 percent.”
Other researchers have sharply criticized the math used by the National Philanthropic Trust and others in calculating how much is 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 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 percent of Californians who are the wealthiest, these millions in tax breaks benefit that 10 percent.
With communities scrambling for funds, it doesn’t seem fair for $340 million to be used as tax breaks for the top 10 percent 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 Charitable Giving 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 percent 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 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 percent or more of assets, rather than the federal minimum of 5 percent.
In general, proposals under discussion at state and federal levels are largely designed to get more money to nonprofits, faster. They can be grouped into three areas:
- Change payout rules
- Change aspects of the charitable deduction
- Require more transparency
In California, we at CalNonprofits co-sponsored a bill in 2020 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 private foundations to report on the amounts they transfer to donor-advised funds, transfers that help them meet their 5 percent 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 might not agree with a single one. But the variety of proposals – and the degree of study on the technical details – is again evidence of a movement becoming more visible.
At CalNonprofits, we welcome this growing movement for philanthropic reform. Many nonprofits cannot speak out publicly about these proposals because they 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.