Wall Street’s Fingers in Charitable Pots

Gordon Gekko Quote

The good news is that charitable giving is up.  The bad news is that once again, the financialist crowd has entered the game.

“Giving to the nation’s biggest and most popular charities grew by nearly 11 percent last year, fueled largely by affluent donors, who are reordering the top ranks of America’s nonprofits, according to The Chronicle of Philanthropy’s annual rankings of the 400 charities that collect the most from private sources. The rankings demonstrate a shake-up in the nonprofit world as groups that raise money primarily from the affluent see their donations soar.” [Philanthropy]

What would “shake up” the charitable realm? Hint: It isn’t just the amount of the donations.  Four of the top ten charities on Philanthropy 400 list are organizations raising money from the upper reaches of the income brackets by offering Donor Advised funds.  So, what is a “donor advised fund?’

The Donor Advised Fund

The donor advised fund isn’t like putting money in the Salvation Army kettle, or writing a check to the charity of your choice.  The DA fund is established at a Wall Street firm, and then the donors advise the firm about which charities to support and how much should be disbursed.   On one hand this arrangement does give donors the option to give during “flush times,” and not worry about tax related deadlines, but on the other hand as Pro Publica points out it’s not a particularly good deal for our society.

For the Ultra Wealthy there’s always the option to establish a private foundation, but the donor advised fund has some advantages.  There are no start up costs, the cash deduction limit is 50% AGI as contrasted to the private foundation limit of 30% of the adjusted gross income, and the tax deduction limits for stock or real property is 30% AGI compared to the 20% AGI for a private foundation.  There are no excise taxes for a donor advised fund; private foundations pay 1-2% annually.  A private foundation must provide full disclosure of grants and other information in public tax returns, in a donor advised trust individual donor names can be kept confidential.

There is one other way the donor advised fund differs from the standard garden variety charitable foundation – the payouts.  A private foundation must pay out 5% of the Fair Market Value of non-charitable use assets annually (with administrative costs included).  There is no such requirement for the donor advised funds.

These donor advised funds have been around for at least 85 years,  but it wasn’t until George W. Bush signed the Pension Protection Act of 2006 that the concept was fully defined. [CalBar]  Both the amount under management and the number of donor advised funds have grown – as of 2011 the total number of DAF accounts reached 177,357, up 17% from 2007; the assets In DAFs as of 2011 were up $5.5 billion. By 2012 the assets in DAFs totaled $7.21 billion. As for total assets under management: “Over the last few years, the donor-advised funds have grabbed significant market share. The total amount of assets under management at donor-advised funds rose to $54 billion in 2013, up 20 percent from $45 billion a year earlier. Fidelity’s alone have skyrocketed to $13.2 billion.” [Trade] The average payout was 16%, compared to the statutory requirement for a private foundation of 5%. [CalBar]   What could possibly go wrong?

The Pay Out Problem

While the current pay out rate is obviously generous, there’s an issue which needs further explication and guidance.   The private foundations must have annual payouts of at least 5% there is no such requirement for the donor advised trust.  Donors can take the tax deduction in a single year, the DAF isn’t required to dispense the money with an immediacy, and the donor could in theory leave their children – and their children’s children – in charge of the legacy in an advisory capacity forever and ever amen. [Trade]

Alan Cantor explains why the increase in DAFs isn’t necessarily good for the general improvement of our philanthropic environment:

“First, if donations to donor-advised funds were dollars that otherwise would not have gone to charity—that is, if the funds facilitated a net plus in donations—then the rise in giving to DAFs would be a positive development.

But there’s no indication that that’s the case. “Giving USA” reports that charitable giving from individuals in recent decades has consistently hovered at around 2 percent of disposable personal income. While overall giving to charity as a percentage of income has remained flat, dollars flowing to DAFs doubled from 2009 to 2012 (reaching $13.7- billion), according to the National Philanthropic Trust’s 2013 Donor-Advised Fund Report, and the percentage of charitable giving going to donor-advised funds also doubled (to 5.7 percent of the $240.6- billion of all giving from individuals, as reported by “Giving USA”). It’s largely a zero-sum game: Money going into DAFs is essentially subtracted from other charitable giving.” (emphasis added)

To put the matter less elegantly – what we have is a situation in which money deducted from taxes as a charitable expense is being warehoused in the DAFs.  Further, those who advocate for DAFs and point to the 16% average distribution rate ignore the fact that many DAFs don’t disperse any funds for years. [Cantor]

The Boston Globe summed up the situation:

“Though legally public charities, they are more like holding tanks that let would-be philanthropists deposit money, collect the tax benefits up front, and then decide later which causes they actually want to give to. Legally, there’s no limit to how long the money can sit there.”

And, yes, there are fees to be earned for the administration of these accounts whether they are active or haven’t dispersed a dime lately. Charles Schwab DFAs of $500,000 or less earn fees of 0.60% of assets; $1,000,000 fees of 0.30%; down to 0.10% of assets on DAFs above $15,000,000.  Fidelity Charitable has both individual and corporate “giving accounts,” which also garner 0.60% fees for accounts of $500,000 or less, or 0.15% (15 basis points) for an account of at least $2,499,999.  Vanguard Charitable also provides for DAF accounts, with administrative fees of the standard 0.60% for a smaller account, reduced to 0.05% in the upper reaches.  (See also: Fidelity Charity guidelines p. 23 pdf)

The Payout Problem could be resolved by requiring the DAFs to disperse money like their private foundation counterparts – at the rate of at least 5% per year.  However, this would mean that those “warehouse” accounts would be required to donate to the approved charities – and the amount distributed wouldn’t be earning fees for the firms managing  the DAF.

The Anonymity Factor

The donor to a DAF can be the epitome of the anonymous donor, and if that’s a family value related to the inherent desirability of anonymous giving so much the better.  However, it’s also an invitation to problems.  There is a darker side:

“DAFs allow for complete anonymity. Grants made from a DAF come from the sponsoring organization, which is not required to reveal the original donor’s name. This might be appealing to people who want to practice humility, be discreet, or avoid communications from nonprofits. But this is not a good thing if people use DAFs to shield their identities and influence from public scrutiny when more transparency would be in the public’s interest.” [Motley Fool]

The anonymity factor creates opacity which may give a charity pause – just who is giving us this money?  Is it a source with which we’d like to be associated?  Imagine for a moment being a charitable organizations board member – Do we accept the donation from XYZ’s DAF? What happens if people start asking questions, especially about a large grant? [NPI]  Are we inadvertently taking money from some “creep?”

Is the Donor Advised Fund being used to hide funding from sources which if publicized would compromise the ‘independent’ nature of the recipient organizations?  The question is a politer way of asking if the DAF is anything from a glorified money laundering scheme to a way to create a network of funding away from appropriate and informative public scrutiny.

Frankly, if the intention is entirely charitable then anonymity can be preserved by having the donor use a “cut out” intermediary to make the donation.  It’s evident that the anonymity issue could be resolved, as in the foundation format, by making all donations subject to reporting.  However, what of the major financial institutions that are earning revenue from their administration of financial products like DAFs?

The Zero Sum Game

There is an argument to be made that the DAFs serve a useful purpose, that they do donate funds to support our charities, and do so at an average rate beyond private foundations.  There is also ample room to question (1) The gamesmanship implicit in donating in one year, taking the full deduction, and then warehousing the money, which might be desperately needed in some quarters; and, (2) The anonymity factor which touches along the spectrum of humanity from utter humility and discretion to invidious intentions.  There is a third factor to consider.  How much of the charitable ground are we willing to cede to financial management?

If philanthropy is a truly free activity, then how do we interpret financial sector management intercession in charitable causes?  This raises two further questions.  First, who determines which charities will receive the donations?  The Fidelity Charity guidelines state:

“Grants can only be made to IRS-qualified public charities. These are organizations that are described in Section 501(c)(3) and 509(a)(1), (a)(2) or (a)(3) of the Code and applicable regulations and IRS authority, or are private operating foundations as described in Section 4942(j)(3) of the Code and applicable regulations and IRS authority. Eligible public charities include the full range of charitable organizations, including hospitals, scientific and medical research organizations, religious organizations and places of worship, environmental and educational organizations, museums and arts organizations, and any other organizations or institutions formed for charitable purposes.”

At this juncture we’d have to ask is an IRS-qualified charity synonymous with an IRS approved charity?  And, what is meant by “any other organization or institution formed for charitable purposes?”

The second issue relates to the general atmosphere in which donations are made.  Heaven help us we do love calculations, and Wall Street is replete with them, including the Return on Societal Investment shorthand.  The very concept incorporates the idea that charitable donations can be inserted in a formula in which we can observe the mathematical impact of a finite input. This notion is a close cousin the of Cost/Benefit Analysis.  It goes beyond telling me that if I donate $20 to the local food bank the money will feed one family of four two meals for X number of days.   It goes beyond telling me that the charity has met 94.5% of its operating expenses. It implies that if I “invest” in some activity there will be a measurable result.

It’s the measurement process that’s disturbing.  We all expect philanthropic organizations to be accountable and subject themselves to periodic financial audits.  However, should we expect a charity to be evaluated by a DAF administrator on the basis of formulaic calculations of the efficacy of funding a wall mural project for kindergarteners?  The Quant mind-set commonly associated with Wall Street, in which winning is calculated by positive gains from point A to point B, doesn’t work all that well when we’re speaking of the impact of a museum’s acquisition of a painting.  Does the painting have to get “X number of looks?” Does patronage need to increase by a specified amount?

How do we calculate the ROSI for a library’s story hour for toddlers?  When do we blur the line between “measurement” and “accomplishment?” [ProPublica]  When this line becomes blurred we’re perilously close to being unable to determine if we are in a game in which the score is anything from Zero to Infinity.

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