Last year, California became a testing ground for the appetite—and resistance—to new regulation of donor-advised funds, the charitable giving accounts that have reconfigured the philanthropic landscape in recent years, drawing both praise and calls for reform.
A newly elected assembly member, Buffy Wicks, partnered with the California Association of Nonprofits to introduce a bill in early 2019 that would have instituted new transparency requirements for DAFs in the state. Called the first of its kind in the nation by backers, the legislation faced stern opposition from the state’s community foundations and the financial service firms that hold most donor-advised funds, who said it imposed undue burdens. Despite several revisions, the bill never made it out of committee.
This January, the effort resumed in a more modest form. A new bill, AB 2936, sought to define terms like “donor-advised fund” and allow the state attorney general to ask for reports from DAF sponsors. The bill managed to pass the assembly, but last month, met the same fate in a senate committee. The cause of death? COVID-19, but with complications.
The bill was one of dozens the California legislature slashed from a calendar overburdened due to the upheaval of the pandemic. Wicks told me she believes she would have won the votes, though judging from the tight margins on which it advanced, it’s unclear whether that’s the case.
The successive defeats demonstrate the challenges facing those who seek reforms to DAFs. But with backers saying they’ll try again next session, and with growing mainstream press attention on the use of DAFs by the billionaire class, it seems likely the debate will continue in California and beyond.
The Case for—and Against—Regulation
DAFs have been around since the 1930s, but recent years have seen a series of developments that has increased public awareness—and scrutiny. In 2016, asset-management firm Fidelity Investments overtook United Way as the nation’s biggest nonprofit recipient of donations. The following year, the new federal tax law led some middle-income taxpayers to turn to DAFs for the first time, using bundled gifts to qualify for the larger charitable deduction threshold. By 2018, Fidelity overtook the Gates Foundation to become the country’s biggest grantmaker, with $5.2 billion in donor-guided grants.
There’s now an estimated $110 billion in DAFs—and each year seems to bring record new contributions. More than $37 billion flowed into DAFs in 2018, representing nearly 13% of all giving by individuals, up from 4.4% eight years earlier.
Like many critics of DAFs, the California effort—whose promoters also included the nonprofit NextGen Policy and banker-philanthropist Kat Taylor—argued for transparency, because although donors receive an immediate tax deduction for their gift to a donor-advised fund, those funds can sit in the account indefinitely without going to nonprofits. “We just have to have more understanding around the money that is sitting in these DAFs,” said Wicks. “We have to ensure that money is getting into communities.”
Other concerns about DAFs include the ability of foundations to meet their payout requirement by transferring funds to DAFs and the potential to abuse the current lack of transparency. For instance, hate groups have used DAFS to raise tax-deductible donations, according to a report by the Southern Poverty Law Center and the Council on American Islamic Relations.
Opponents of additional DAF reporting requirements, which in California included the California League of Community Foundations and sponsors such as Fidelity and Vanguard, say it would be costly. While a payout mandate was not proposed in the California bills, proponents often note donor-advised funds have historically had much higher giving rates than foundations, despite any requirement. Research has consistently shown payouts of around 20%, though such data is in aggregate, and thus that rate does not apply to every DAF. Some have also charged that accounting sleight of hand by hosts has driven up the reported percentage.
Privacy is also a concern of opponents. “A lot of donors give anonymously for very good reasons,” including religious traditions, desire to avoid unwanted appeals, or “giving to politically incorrect charities,” said Sandra Swirski, co-founder of the advocacy firm of Urban Swirski and Associates, whose clients include the national membership group Philanthropy Roundtable, which opposed the second bill.
While many critics decry the secrecy of DAFs, including some nonprofit officers who wish they could do personal follow-up with donors, this was not a point of contention with the California coalition, which had edited the first bill explicitly to protect donor privacy. “We actually don’t think individual donor information should be part of these reports,” said Lucy Salcido Carter, public policy director of CalNonprofits, the state association.
The Debate Goes On
“This conversation isn’t going away,” said Allison Grayson, director of policy development and analysis with Independent Sector, which, in 2005, recommended mandating a 5% minimum payout for DAFs, but in 2014, softened that to a recommendation that sponsors release aggregate giving data after reexamining the issue. The organization followed the California bill, but did not take a position.
Independent Sector, which has nearly 500 members, would like to see the broader nonprofit sector come up with measures to address the concerns about donor-advised funds, Grayson said, calling it an “important conversation to have.” She argues that voluntary compliance could achieve many of the desired outcomes, citing a set of principles her organization formulated in response to a broader reform effort several years ago.
“We’re spending a lot of time defending donor-advised funds” rather than promoting their benefits, Grayson told me. “It might be a better use of the sector’s resources in the long run to face the questions that are being raised.”
For backers, building a bigger coalition seems like a must. Nearly 400 nonprofits signed a letter in support of the most recent California bill, some even joining with community foundations sending letters to discourage them from doing so, Salcido Carter told me. But she’s concerned about familiar power dynamics.
“Nonprofits have the ears of legislators, but they’re not in the position of power that community foundations are,” she said.
Wicks, for her part, says her focus will be finding common ground with community foundations. While the format of the next bill is still up in the air, she said she’s had good initial conversations, and believes there’s a way forward.
“They are not the enemy here,” she said. “No one is really the enemy, per se, it’s just making sure the money is going where it needs to go.”