“America is in an unprecedented crisis. The world of philanthropy must step up and do more, faster.”
Emergency Charity Stimulus Basics
Over $1 trillion is held by private foundations
Over $1 trillion is held in private foundations1 that are required to pay out just 5% of their assets each year. A further $120 billion is held in donor-advised funds2 (DAFs), which have no payout requirements.
$200 billion in increased charitable spending
For each one percent increase in payout from foundations, an estimated $11 billion to $12.6 billion3 will flow to charities annually. Add in requirements for donor-advised funds, and over three years a 10% payout requirement would raise over $200 billion.
86,000 private foundations
The 86,000 private foundations and 728,000 DAFs in the US are controlled by some of the wealthiest families and individuals in the country.
Donors have already taken tax deductions
Wealthy donors have already taken tax deductions for the funds in their foundations and DAFs, yet much of the money they put in won’t be paid out for years, or even decades.
Prevent a drop in Charitable Giving
If foundation asset values drop, as they do when the stock market dips, the 5% they’re required to give drops as well. A recent analysis of foundation giving after the Great Recession found that domestic giving by the 1,000 largest foundations dropped 11% by 2009 and didn’t return to 2007 levels until 2013.
Foundation and DAF funds are taxpayer-subsidized
Wealthy donors are allowed to deduct the money they contribute to foundations and DAFs from their taxes, and the wealthier the donor, the more tax breaks they take from charitable giving. For every dollar donated to charity, the government loses anywhere from 37 to 57 cents in tax revenue, meaning taxpayers essentially provide the matching funds for a private donor’s choice.
Charitable Giving protects jobs
The nonprofit independent sector, funded in large part by foundations and DAFs, accounts for over 12 million jobs and 12 percent of the private sector workforce. Increasing charitable giving keeps those people employed during an economic downturn, and keeps charities from the Boys and Girls Club to Meals on Wheels to local social service organizations afloat,
Q & A: Charity Stimulus Legislation
Q: There are already voluntary initiatives to increase foundation payout and move money out of DAFs. Aren’t foundations and DAFs already stepping up?
Some are, some aren’t. A group of philanthropy sector leaders has called on colleagues to significantly increase their giving during the crisis, and not just seek to safeguard their endowments. As one sector leader put it, “if yours is a perpetual foundation, you have literally forever to get back to whatever your endowment was at its peak.”4
The largest DAF sponsor, Fidelity Charitable, has announced that they have already given out $100 million in March and are looking to double that by May. But $200 million is less than 1% of the $27 billion in DAF assets they hold according to their most recent filing.5
Q: Why is it important to extend these recommendations for three years?
Large endowments should enable foundations to provide counter-cyclical funding in emergencies. But if history repeats itself, without any intervention we can expect giving to drop dramatically next year. A recent analysis of foundation giving after the Great Recession showed that domestic giving by the 1,000 largest foundations dropped 11% by 2009 and didn’t return to 2007 levels until 2013. Half gave less in 2009 than they had in 2007, and the very largest were even worse: 63 of the top 100 foundations gave less in 2009 than in 2007.6
Q: Is it appropriate for the government to dictate standards for private philanthropies?
The law already imposes requirements on philanthropies, such as the five-percent payout mandate, in return for the significant tax breaks given to donors. And the wealthier the donor, the more tax breaks they generally take for charitable giving. For every dollar donated to charity, we lose anywhere from 37 to 57 cents in tax revenue, depending on the donor’s tax status.7 In other words, we taxpayers provide the matching funds for a private donor’s choice. Since we are subsidizing charitable gifts, there is a public interest in ensuring that the money is not stuck in the system or warehoused in a donor-advised fund, especially at a time of unprecedented crisis like this.
Q: Aren’t the funds raised insignificant? $200 billion isn’t a lot of money, compared to the trillions of dollars required to fix the economy.
$200 billion is a lot of money if it flows into the nonprofit sector. Charities helped will include community-serving organizations that are on the front lines of COVID-19 responses and are about to face an alarming drop in giving support. Donations3 from individuals are still significantly larger than foundation gifts, but as unemployment rises, donations from low- and middle-income donors will decline. Increasing the flow of funds from private foundations and DAFs will help offset the inevitable decline in individual giving.
Q: Would an Emergency Charity Stimulus Save Jobs?
Yes. The nonprofit independent sector accounts for over 12 million jobs and 10 percent of the private sector workforce. Representing the third largest workforce in the U.S., behind only retail trade and accommodation and food service, and on a par with manufacturing, it is reeling from job losses in the face of COVID-19.8 Charities ranging from Boys and Girls Clubs, Meals on Wheels, to local social service and arts and culture organizations are preparing for further declines in charitable donations and public support. Moving billions of wealth off the charity sidelines will help sustain this vibrant sector.
Q: If we mandate an increase in funds, how can we be sure the funds will address the current emergency?
Private foundations and community foundations are mobilizing in an unprecedented way to respond to the COVID-19 crisis. They are sharing best practices and forming local, state and federal response networks. At the regional level, Community Foundations and United Ways, with their fingers on the pulse of local needs, have set up emergency response funds in every state in the country. Donors seeking to channel additional funds have to look no further than these effective grant-making intermediaries.
While Congress should mandate an increase in emergency payout, it would not be appropriate to specifically direct charitable entities to fund particular organizations, solutions and responses. One of the benefits of an independent nonprofit sector in a pluralistic society is that charitable organizations can pursue a variety of strategies, serving as laboratories for innovative response.
Q: Why should we double the minimum foundation payout requirement as part of a stimulus plan?
The CARES act provided some increased tax incentives for charitable giving this year, including an above-the-line deduction of up to $300 for non-itemizers (section 2204) and lifting the percentage of AGI cap on cash gifts for itemizers (section 2205). As with past relief bills, new gifts to private foundations and donor-advised funds do not qualify, since it may be years before those funds ever get to working charities. But new gifts aside, those foundations and accounts are currently sitting on over $1 trillion dollars in assets for which the donors have already received tax deductions. We need to move those funds off the sidelines now.
Q: Aren’t endowed foundations reeling from having their asset values go down? Why require a greater payout at this time?
It is true that some foundations will see their investments take a hit. But based on the 2009 experience, financial investments and Wall Street are going to bounce back much faster than the rest of the economy. The stock market will rebound faster than the unemployment rate, home values, and worker wages.
Q: Won’t this hurt foundations that want to be around in 100 years?
Even in normal times there is a debate as to whether our tax laws should encourage the creation of perpetual private foundations.9 But in these extraordinary times, this emergency provision encourages foundations to balance their interest in creating a perpetual institution with the urgent needs of the current crisis. One justification for creating a perpetual institution is to have funds set aside for a “rainy day.” The rainy day has arrived. As one nonprofit leader put it, “Imagine if there’s a famine, and you have seeds for crops that would feed people. Would it be ethical to give out only five percent of the seeds, because you want to save 95% for future famines?”10 It is appropriate for taxpayers and the government to require donors who have already taken significant tax breaks to move funds more urgently in a time of extreme crisis.
Q. How have annual foundation payout requirements been addressed in past times of crisis, like World War Two? Is there anything we can learn from the past?
This is an unprecedented situation. The era of mass organized philanthropy is relatively recent. The current framework of rules governing charitable giving and private foundations was passed in 1969. It is time to modernize these rules both in terms of changing distributions of wealth and the current emergency.
Q: What would be included in the increased payout? What would be excluded?
A 10 percent payout rate should boost the flow of money to active charities engaged in charitable missions. In determining what is counted toward payout, we propose to exclude: 1) donations to donor-advised funds; 2) impact investments and program-related investments, and 3) overhead that exceeds 0.5 percent of foundation assets (or more than one-twentieth of the funds being paid out). These activities are not prohibited but won’t be counted toward the 10 percent payout.
Q: Why are you concerned about foundation overhead and program expense?
To prevent self-dealing and abuse. Currently, private foundations can include overhead and program expenses in their five percent payout. Our research indicates that payout is an estimated 0.7 percent of annual foundation assets, but in some foundations it is much higher. And some foundations have abused this provision by 5 having the foundation purchase expensive properties and cars, or provide salaries to family members, reducing the amount of funds that flow to qualified charities.
Q: Why include foundation overhead at all in payout?
Because foundations have legitimate operating expenses both in terms of professional staff and important programs implemented by the foundation. The goal is simply to prevent extravagant expenses being counted toward payout.
Donor Advised Funds
Q. The imposition of a minimum distribution requirement for donor advised funds (DAFs) is new. Why is it necessary?
Donors to DAF sponsors receive preferential tax advantages compared to private foundation donors, since they can deduct based on the appreciated value of donated assets. Yet those DAFs are under no legal requirement to distribute funds at a certain rate or within a certain period. The largest sponsor that houses donor- advised funds reports that over 60 percent of donations are in the form of non-cash assets, including cryto-currencies, appreciated stock, and stakes in limited partnerships.11
Q: Don’t Donor-Advised Funds already voluntarily payout more than 10 percent?
Some clearly do. According to some reports, DAF annual average payouts range as high as 15 to 18 percent. But this is based on self-reporting, and the figures are aggregated, preventing us from identifying funds that give way below those rates. These estimates may also include DAF-to-DAF distributions, which should be excluded from being counted toward DAF payout. We know some DAFs, especially those run by community foundations, encourage their donor-advisors to move funds in a timely way. Other funds can sit warehoused for years, long after the tax breaks have been taken.
Q: Isn’t a 10 percent mandate low for DAFs?
We think so. But it’s a start. Some in the sector believe that DAF payout requirements should be much higher. DAFs were not designed to be perpetual institutions like some foundations. When they were started, they were considered temporary holding funds and short-term intermediaries. A DAF gave some donors who experienced a windfall and wanted to donate a lot to charity a temporary holding account while they figured out a thoughtful giving strategy.
DAFs have changed from when they were largely housed at community foundations. Large financial industry firms, such as Fidelity, Goldman Sachs, Vanguard and Charles Schwab, all have created DAFs for their clients. They have an incentive to 6 promote a “perpetuity mentality” with DAFs. Some encourage donor-advisors to do “impact investing” through their DAFs. The longer funds sit in their managed accounts, the greater the fees they collect.
Q: Shouldn’t we reform DAFs whether in an emergency or not?
Yes. The fact that donors can claim a full deduction at appreciated asset values and then not have to move the funds to an active charity is a fundamental design-flaw in DAF incentives and should be fixed permanently. DAFs have also become attractive for donations of appreciated complex assets, such as art, real estate, jewelry and private business equities. This has allowed for the gaming of appraisals and deductions and potential abuses of DAFs.
There are two ways to fix this: 1) mandate a payout within, say, three years, and; 2) allow the tax deduction only when the funds exit the DAF. This would change the incentive system problem and reduce the gaming of donations of complex assets.
1 Helen Flannery and Chuck Collins, “Increasing Private Foundation Payout,” Policy Brief, Institute for Policy Studies, April 2020. https://inequality.org/wp-content/uploads/2020/04/Policy-Brief-April2020-IncreasingFoundationPayout.pdf
2 National Philanthropic Trust, “2019 Donor-Advised Fund Report,” 2019.
3 Helen Flannery and Chuck Collins, “Increasing Private Foundation Payout,” Policy Brief, Institute for Policy Studies, April 2020. https://inequality.org/wp-content/uploads/2020/04/Policy-Brief-April2020-IncreasingFoundationPayout.pdf
4 Phil Buchanan, “Supporting Our Unsung Heroes in a Moment of Crisis: Part 2,” The Center for Effective Philanthropy, March 18, 2020
5 Alan M. Cantor, “Save Lives Now, Grant Makers and Donors,” Chronicle of Philanthropy, April 14, 2020. https://www.philanthropy.com/article/Save-Lives-Now-Grant-Makers/248511
6 Ryan Schlegel, “By the numbers: How philanthropy responded during the Great Recession,” March 13, 2020, National Committee for Responsive Philanthropy.
7 Ray Madoff, “Three Simple Steps to Protect Charities and American Taxpayers from the Rise of Donor-Advised Funds,” Nonprofit Quarterly, July 25, 2018.
8 Bureau of Labor Statistics, “Nonprofits account for 12.3 million jobs, 10.2 percent of the private sector employment in 2016,” August 31, 2018. https://www.bls.gov/opub/ted/2018/nonprofits-account-for-12-3-million-jobs-10-2-percent-of-private-sector-employment-in-2016.htm
Lester M. Salamon and Chelsea L. Newhouse, “The 2019 Nonprofit Employment Report,” Nonprofit Economic Data Bulletinno. 47. (Baltimore: Johns Hopkins Center for Civil Society Studies, January 2019).
9 See resources at the Philanthropy Roundtable on the debate over spending down versus perpetuity foundations: Donor Intent Resource Library.
10 Vu Le, “The ethical argument for foundations to increase their annual payout rate beyond 5%,” August 4, 2019, Nonprofit AF.
11 Fidelity Charitable, “2020 Giving Report,” (2020) p. 5.