After all of the Sturm und Drang around the enactment of the Pension Protection Act of 2006, which mandated a Treasury study of supporting organizations and donor-advised funds, the release of the actual report this week has been something of a non-event, receiving remarkably little commentary and discussion. The PPA generated the first real statutory definition of donor-advised funds (even though they have been in existence for more than 70 years) and modified the definition of supporting organizations, with the legislative intent of attempting to deal with some of the more egregious abuses of these charitable instruments as revealed in Senate Finance Committee hearings held with Charles Grassley (R-IA), who chaired the committee at that time.
Grassley’s hearings had uncovered some slimy stuff, especially with the murky phenomenon of supporting organizations, and the legislation dealt with some of the issues. Among the PPA changes were new reporting requirements for DAFs and SOs, excess benefit standards for both, and payout requirements for some variations of Type III Supporting Organizations (the category in which most of the SO abuses appeared to reside). The PPA also directed Treasury to report back on a number of issues, of particular interest to us questions about whether there should be a distribution or “payout” requirement on donor-advised funds and whether a donor’s influence or control over a donor “advised” fund in a way made the DAF more like a private foundation, with restrictions on how much of a donation could be claimed how quickly by a donor, compared to the immediate and full value that would be claimed for a donation to a public charity (as DAFs currently are). The report just issued by Treasury this past week is the official response to that legislative mandate.
Trust us: Questions of DAFs and SOs are tough sledding. During the run-up to the PPA, there were few people who could even explain a supporting organization, much less the differences between the Type I, II, and III supporting organizations, or how much control or direction a donor really exercised over a donor advised fund managed by a community foundation or a commercial DAF manager. They won’t make a made-for-TV mini-series out of this study, but there are interesting findings for the wonkier among us and questions that still need to be resolved.
Why Treasury relied on 2006 data for a study published five years later is kind of perplexing. But as of 2006, Treasury found 2,398 public charities—501(c)(3) organizations—sponsoring or managing 160,270 individual donor advised funds worth a combined $31.1 billion. Of the 2,398, only 23 were national commercial donor advised funds (such as those run by mutual fund companies like Fidelity and Vanguard); 19 were other national DAFs; 568 were educational institutions; 607 were community foundations; 206 were hospitals and other health institutions; 368 were affiliated with religious organizations; and 607 were others (such as United Ways or other specific charities). The DAFs of the mammoth commercial firms were worth $9.797 billion compared to $13.455 billion for community foundations, while religious DAFs were worth $4.715 billion.
While calculating payout for DAFs is a bit complex, the overall numbers show DAFs paying out at a much higher rate than private foundations. Overall, Treasury reports an average DAF payout for 2006 of 9.3 percent for all DAFs, an average payout of 14.2 percent for national commercial DAF managers, and an astounding mean payout of 28.7 percent for other national DAFs (note, however, the median payout of non-commercial national DAFs was only 10.5 percent, suggesting that some of those national DAFs turn over the bulk of their funding every year). Compare that to the minimum required and for the most part maximum usual private foundation payout of 5 percent. Community foundation DAF payout averaged 9.3 percent, exactly where the national total came out. The slow spenders were not the commercial funds, but educational institutions with an average payout of 3.3 percent and a median of zero.
Treasury appears satisfied with the aggregate payouts by DAF managing entities, though acknowledges as we have in the NPQ Newswire that the high aggregate payouts “may mask low payout rates (or even no payout) from a subset of individual DAFs.” Treasury also seems complacent with the issue of donor control, acknowledging that DAF managers might feel pressure from donors about the use of the money that they have irrevocably donated to the DAFS, but suggesting that that is not much different to any other donee organization “where a small number of actors is involved…[and] pressure may be exacerbated.” [That conclusion by Treasury seems to be quite a reach; we can see Treasury buying into the high average payout of DAF managers, though the educational institutions warrant additional investigation, but the notion that donor advice through a DAF is little different than donor pressure on a nonprofit grantee is hard to buy].
That said, the original promoter of stronger oversight over DAFs and SOs, Senator Grassley, is none too happy with the Treasury result, calling it “superficial”, “disappointing,” and “unresponsive”, slamming its reliance on 2006 data when more recent filings should have been available, and in fact failing to “advance the ball in closing abusive loopholes…[and] giv(ing) abusive organizations cause for celebration.” Just to give it a little current events flair, Grassley cites the conversion of the George Kaiser Family Foundation converted from a private foundation to a supporting organization some ten years ago, which the Senator says gave it more money to then “invest in the failed Solyndra energy company than it otherwise would have.” That seems like a bit of a stretch, but Grassley is nothing but dogged when he finds an issue of accountability that he thinks needs to be pushed.
The high payout of aggregate DAFs in general is to be lauded compared to the much slower private foundation payout rates, but Treasury could have taken the next step of asking harder questions about the very low average and medians for DAFs managed by educational institutions, the bulk of them ($1.2 billion in 12,302 individual DAFs) managed by colleges and universities. Whether one agrees or disagrees with Grassley or Treasury, there’s no question that a Treasury report on DAFs and SOs produced at the end of 2011 relying on data that are six years old is kind of pathetic.