Carina Wendel and Rebecca GravesDollars that Respond—for Today and Tomorrow

By: Carina Wendel and Rebecca Graves In: Community Foundations| Donor Engagement| Endowments and Investing| Philanthropy

5 Dec 2011

A recent New York Times op-ed by Ray Madoff, entitled “Tax Write-Off Now, Charity Later” poses several theoretical challenges to Donor Advised Funds. The article suggests that donors’ charitable dollars can sit in “holding pens” for decades. Moreover, it suggests that these funds are managed by institutions that may have little incentive to help communities address urgent needs and face difficult challenges.

Dollars that respond
In reality, grant distribution rates of Donor Advised Funds are high, and are much higher than the required 5% distribution rates for funds managed by private foundations. Distribution rates are 14% on average across Community Foundations included in the annual Columbus Survey, and 22% on average across the national programs managed by the charitable arms of Fidelity, Schwab and Vanguard.

In addition, grant distributions responded strongly to the economic downturn according to publicly available Guidestar data. For example, at Fidelity Charitable Gift Fund, the largest provider of Donor Advised Funds in the country, grant distributions exceeded fund contributions during the peak of the crisis. This mirrors the activity of Community Foundation Donor Advised Funds, where grants exceeded contributions by $500,000 on average during the height of the crisis. This suggests that counter-cyclical grant-making can support vulnerable communities when other funds are drying up.

While it may be possible to hold on to assets for decades, in reality, Donor Advised Funds turn over every four to seven years. And they give donors an ability to respond flexibly to community needs and grant-making opportunities.

Local stewardship for today and tomorrow
Turning to the management of Donor Advised Funds, nearly 50% of the assets are held by Community Foundations across the U.S. This amounts to approximately $14 billion in charitable dollars, held in approximately 46,000 separate Donor Advised Funds. These Community Foundations are mission-driven local institutions, governed by community volunteers, committed to building stronger and more vital communities.

Community Foundations view Donor Advised Funds as an opportunity to engage donors in addressing immediate needs and in sowing the seeds of lasting change. As one example, the Community Foundation of Greater Birmingham engages donors every day in directing charitable dollars to important issues. In response to the April 2011 tornadoes, it saw the power of mobilizing Donor Advised Funds, as these funds directed more than $250,000 immediately to first-responders helping victims of the tornadoes. Activities by these funds have raised $2.1 million, and have already granted almost $1 million in response to the needs identified by counties as they rebuild.

There are many stories about the ways in which Donor Advised Fund donors are active and strategic in response to immediate needs. But an argument can also be made for not distributing charitable funds straight away. Indeed, many Community Foundations take the long term view, supporting donors in establishing endowed Donor Advised Funds. These endowed funds generate grant dollars today and steward resources for future needs. The aspiration is to create a pool of dollars that make lasting contributions, spanning generations. Community Foundations are designed and governed with the expectation of this long term stewardship role.

What’s the alternative?
Professor Madoff mentions the relatively flat level of charitable giving and suggests that perhaps there would be more direct giving if Donor Advised Funds weren’t available. According to a recent report by Giving USA, charitable giving in the US hovered around 1.75% of GDP between 1975 and 1995 but jumped to around 2.25% of GDP between 2000 and 2010, coincident with rapid growth of Donor Advised Funds. While this may seem like a small increase, 0.5% of US GDP in 2010 amounts to $74 billion of charitable giving according to a simple back-of-the-envelope calculation. If even a small portion of this additional generosity is due to the tax incentives, flexibility, and simple rules that Donor Advised Funds offer, their potential charitable impact is clearly very valuable.

In addition to immediate giving, the other obvious alternative to Donor Advised Funds is charitable giving through private foundations. For most donors, Donor Advised Funds are more efficient than private foundations. By virtue of their low administrative costs, a higher percentage of funds go to charity rather than to administrative, legal and financial expenses. In short, even if there’s always room for improvement, it’s very hard to argue that the charitable sector would be better off without the possibility to give through Donor Advised Funds.

Need for more data and insights
Given the growing importance of Donor Advised Funds as a philanthropic vehicle and the questions raised about their role in facilitating and growing charitable giving, we believe more data is needed to paint the evolving picture of Donor Advised Funds in supporting communities.

In partnership with the Council on Foundations, the Community Foundations Leadership Team, and The James Irvine Foundation, CF Insights and FSG are launching a study on the importance and strategic value of Donor Advised Funds across diverse communities. In 2012, we will work with over 30 Community Foundations to look at how Donor Advised Funds are advancing the priorities of Community Foundations and the communities they serve. What are the emerging trends and what approaches to supporting Donor Advised Fund donors yield the strongest results? Our aspiration is that sharing knowledge and insights will yield even greater impact for communities.

Carina Wendel is an associate at FSG, and Rebecca Graves is the executive director for CF Insights. This post originally appeared on Social Impact Blog.

3 Responses to Dollars that Respond—for Today and Tomorrow

George McCully

December 6th, 2011 at 10:45 am

Excellent. Evidence beats nonsense 100% of the time. Many thanks.

Lyman Orton

December 12th, 2011 at 12:08 pm

I am surprised at the significant difference between the Distribution Rates of community foundations (14%) and Fidelity-Schwab-Vanguard (22%). I would have thought it would be the other way around.

Any idea what accounts for this difference?
It seems to me that community foundations should use the 22% number as a goal. I am a big fan of community foundations and use them because I assume they are closer to understanding local and regional needs.

Ray Madoff

June 13th, 2012 at 10:41 am

I appreciate the discussion about my op-ed on DAFs, but would like to fix a mistake in your description. I do not propose that the world would be better without DAFs. In fact, I directly state that they serve a valuable function–particularly as an efficient alternative to private foundations. However, I think that the if payout is important (which the writer seems to agree with me that it is), then the tax rules should have some payout requirement. I suggest a payout period of 7 years. My other suggestion is that private foundations should not be allowed to circumvent their payout requirements through the use of DAFs

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