By Chuck Collins & Morris Pearl
Originally published in THE HILL on May 5th, 2020.
We’re living through a time of unprecedented challenges — a major public health crisis, a deepening recession, and widespread trauma and hardship. To get through it and recover, we’ll need unprecedented resources.
Already, Congress has authorized trillions in bailouts and stimulus funds. But as the record lines at local food banks attest, millions of Americans are still relying on the support of hardworking local nonprofits. Those nonprofits are going to need major infusions of support from charitable foundations. Fortunately, Congress can help them come up with $200 billion — without costing taxpayers another dime.
We’ve heard many heartening stories of charitable foundations and donors stepping up to fund emergency responses to the COVID-19 pandemic. But this moment also has unmasked a basic design flaw in the U.S. charity system: Donors contribute to charitable intermediaries, but then the funds remain sidelined.
Right now, there’s an estimated $1.2 trillion in wealth warehoused in private foundations and special funds called donor-advised funds. While the donors to these funds already have taken substantial tax breaks — sometimes decades ago — there are few incentives to move the money to the urgent charity work required.
In fact, America’s 728,000 donor-advised funds, or DAFs — which hold an estimated $120 billion — aren’t legally required to pay out their funds at all. While some DAFs, especially those administered by community foundations, pay out in a timely way, other accounts can languish for years. Complicating matters, the largest DAFs are administered by Wall Street giants, firms that have a financial incentive to hold onto that money and charge annual management fees for it.
Restrictions are only a little tighter for America’s 86,000 private foundations, which hold over $1 trillion in assets. They’re mandated by tax law to pay out 5 percent of their assets a year. But this payout calculation includes foundation overhead expenses, donations to donor-advised funds — which, again, have no payout requirement — and even investments in profit-making companies that the donor claims make a positive impact on society.
Some foundations pay out substantially more than 10 percent, but many more treat the 5 percent minimum payout as a ceiling, not a floor. And some fall below the floor, with overhead absorbing a good percentage of their distributions.
Remember: These funds are basically subsidized by ordinary taxpayers. For the wealthiest donors, every dollar parked in their foundation or DAF reduces their tax obligations by as much as 74 cents, leaving people of more modest means to cover public programs.
Those wealthy donors have already claimed their tax breaks. Now, in a crisis, ordinary taxpayers need to see the benefit.
Over 700 foundations have signed a pledge to “act with fierce urgency” to support nonprofit partners and communities hit hardest by COVID-19. And the community foundation sector has set up emergency response systems in all 50 states to channel donations to COVID-19 response efforts.
These are inspiring voluntary efforts, but it’s not always clear how many funds frontline nonprofit organizations will actually get as a result. In this unprecedented emergency, it’s time to mandate an increased flow of funds.
As part of the CARES Act stimulus, Congress increased incentives for charitable giving. In the same spirit, we urge Congress, as part of its next relief bill, to support an “emergency charity stimulus” to inject more than $200 billion into the economy, protect jobs in the nonprofit sector, and help fight the coronavirus disaster.
Congress should enact a three-year emergency mandate requiring private foundations to double their annual payout, from 5 percent to 10 percent. For each 1 percent increase in payout, an estimated $11 billion to $12.6 billion will flow to charities annually.
To avoid abuses, we would exclude three things from what’s counted as payout: donations to DAFs, investments in for-profit companies, and more than a modest percentage of overhead expenses. We propose the payout requirement apply to DAF accounts as well, which have no mandatory payout.
We laud the foundations and donor-advised funds that are paying out substantially more than 10 percent. We urge them to join this emergency effort to ensure that all charity funds get off the sidelines. America’s taxpayers have effectively paid for these donations through deductions taken by donors. Now we need these funds to be deployed to working charities.
Morris Pearl is a former managing director of BlackRock, one of the largest investment firms in the world. He is the chair of the Patriotic Millionaires.
Chuck Collins is a researcher at the Institute for Policy Studies, where he co-edits Inequality.org.
View the full piece in THE HILL.