Virrage Images/shutterstock
Virrage Images/shutterstock

A recent report from the Council of Michigan Foundations (CMF) about donor-advised funds (DAFs) indicates that the money flowing out to charities from these giving vehicles is astonishingly slow. Behind the bullish aggregate payout rates reported by donor-advised fund sponsors, the more generous funds are providing cover for many funds that give very little, and often nothing at all. And this held true even during 2020, when many nonprofits faced their greatest challenges in memory.

CMF’s report is groundbreaking because it reports on DAFs at the individual account level. Before now, all large-scale reporting on DAFs, such as that done annually by the National Philanthropic Trust, has given us only aggregate statistics for DAF sponsors as a whole. For their analysis, CMF was able to get fund-specific information for 2,600 of the DAFs at Michigan’s community foundations. These DAFs were held by only about half of the community foundations in the state, but accounted for 85% of all the DAFs and 86% of all the DAF assets. This means that for the first time, we can finally get a picture of individual granting behavior for a good-sized sample of funds.

Michigan’s community foundations, like those across the country, have been steadily expanding their use of DAFs as giving vehicles in recent years. According to CMF, in 2013, there were just over 44,000 individual DAF accounts at Michigan community foundations, housing $16 billion in assets. Just five years later, in 2018, there were more than 74,000 DAF accounts and their combined assets had grown by 117% to more than $34.5 billion.

More important than their growth, however, is how much these DAF accounts give out each year to recipient charities. This is commonly reported as the payout rate: the percentage of a fund’s assets that are paid out in charitable distributions. And what CMF found was that typical payout rates for individual DAFs are abysmally low. In 2018, the median payout rate of Michigan’s DAFs was just 3.1%, far below the 5.9% median payout rate of Michigan’s private foundations, and even farther below the aggregate rates reported by national DAF sponsors.

And it gets worse. CMF found that in 2020, only 43% of the DAFs they analyzed paid out grants to charity at 5% or more—the minimum payout currently required of private foundations. Twenty-two percent of the DAFs paid out at less than 5%. And 35%—more than one third—paid out nothing at all to charity.

In fact, on average, 37% of Michigan’s DAF accounts in the study pay out no money to charity in any given year.

In the Charity Reform Initiative’s 2018 report, “Warehousing Wealth,” we looked at the best sources available to get a sense of nationwide DAF payout rates. Estimated aggregate payout rates for DAF sponsors at the time ranged from the low teens to the low 20s. But there was a glimmer of the underlying truth even then, in an IRS study that reported that in 2012, one-fifth of all DAF sponsors made no grants whatsoever. If Michigan’s DAFs are representative of those in other states, CMF’s report suggests that the situation is even worse: that the typical DAF pays out grants at an extremely low rate, and that a third are able to skate by giving no money at all to charity each year.

It is also important to note that most of Michigan’s community foundations require DAFs to make distributions at least once every three years. If this requirement didn’t exist, the portion of DAFs that don’t distribute anything to charity in any given year would likely be even higher.

When we put forward an Emergency Charity Stimulus proposal in response to the pandemic in early 2020, we urged Congress to impose a minimum payout requirement of 10% on donor-advised funds. Among the arguments used against this requirement were that DAF donors were already giving generously, well above the payout rates of private foundations, and that they would naturally increase their giving to meet the increased need.

CMF’s payout findings suggest that the first of these claims is almost certainly not true. As for the second, CMF did report that of the DAFs that made distributions in both 2019 and 2020, 35% of them increased their giving in 2020. But that means that two-thirds either gave the same amount or decreased their giving in the pandemic year, leading to a regrettable lack of what would have been relatively painless additional funding for Michigan’s charities at a time when they needed it most.

CMF’s report is to be praised. It has given us a crucial glimpse into the behavior of a select set of individual DAF accounts, something that has been obscured to the public until now. And it reveals the tip of what is likely a very large and distressing iceberg. CMF was only able to analyze community foundations, and only those in Michigan. There is still no account-level reporting on national commercial DAFs, which have a considerable financial stake in DAF assets staying put.

When a donor puts money into a DAF, they get an immediate charitable tax deduction but are under no obligation ever to move that money to charity. In this way, DAFs provide a huge financial advantage to the wealthy, while demanding nothing back for the public that subsidizes them by as much as 74 cents for every dollar donated. For years, sponsors have claimed that DAFs make giving easier and thereby increase the revenue going to charity, but they have fought tooth and nail against the payout requirements that would ensure it and the transparency requirements that would make it possible to verify.

CMF’s analysis drives home the need for payout requirements on DAFs and the need for visibility into account-level giving, particularly for commercial DAF sponsors. A good start for this would be a bill recently put forward by Sens. Chuck Grassley and Angus King, which would impose payout requirements on DAFs for the first time.

In their report, CMF writes that “philanthropy stands at the center of a fundamental struggle: how to use increasing wealth to address inequities in society.” This is true, in part; philanthropy can be used to right some societal wrongs. But there is another fundamental struggle: how to prevent our charitable system from being misused by those with the means and motivation to do so. We must require more return from these charitable intermediaries to ensure that they serve the public that pays for them.

Helen Flannery is director of research at the Charity Reform Initiative at the Institute for Policy Studies. Chuck Collins directs the Charity Reform Initiative and the author of “The Wealth Hoarders: How Billionaires Pay Millions to Hide Trillions.” They are co-authors of the report, Gilded Giving 2020: How Wealth Inequality Distorts Philanthropy and Imperils Democracy.