Before I report on the legislation that has been proposed to regulate donor-advised funds (DAFs) in California, I want to remind readers that this kind of state legislation not only can go viral but can also presage federal lawmaking on the given issues. Therefore, even though this bill addresses the DAF industry only in California, it has the potential to create a wedge in policymaking on a more national basis.
A video of the August 29th Candid forum upon which this article is based can be viewed below. That said, given the increasingly heated national discourse about donor-advised funds, the California legislation co-sponsored by CalNonprofits, NextGen California, and philanthropist Kat Taylor, herself a DAF holder, is perhaps surprisingly modest next to the far more extensive concerns and proposals being offered by national critics.
In its current form, AB-1712 focuses only on DAF transparency and would “require the Attorney General (AG) to adopt rules and regulations that require DAF Sponsors to disclose information about the individual funds or accounts they maintain to help the AG ascertain whether those funds are being properly administered.” In this case, “properly administered” includes that the DAF sponsor has “a publicly available policy that governs DAFs that are inactive, dormant, or do not make distributions during a specified period of time that does not exceed 36 months.”
As NPQ first reported in March of this year, Assembly Bill 1712 was introduced by Buffy Wicks of California’s 15th Assembly District, which encompasses the cities of Berkeley, Emeryville, Richmond, and parts of the City of Oakland in the East Bay. As seen above, Candid, the intermediary resulting from the recent merger of GuideStar and Foundation Center, hosted a debate about AB-1712 last week in San Francisco with CalNonprofits CEO Jan Masaoka, who favors the legislation, and Daniel Baldwin of the Community Foundation for Monterey County and Nageeb Sumar, Vice President of Philanthropic Strategies at Fidelity Charitable, neither of whom support it as currently proposed.
Here, we stop for a little more context-setting. Philanthropy in general has long been resistant to changes in its regulation, and the resistance often is what Scott Harshbarger at one point called “ragging the puck”—that is, keeping the puck in play until the legislative clock runs down. In the case of DAF sponsors, this generally seems to take the form of responding to every challenge on transparency and payout with a statement about how essentially good they are (an argument more often used by community foundations) and how sad they are for being “under attack,” or, alternately, how fast they are growing/how much they are managing and granting in philanthropic funds—never mind that it is precisely this point that begs the need for greater scrutiny.
At this stage, AB-1712 is what’s called a “two-year bill”; it is still open to amendment and will have to move through the Assembly by early 2020 or die. The bill’s sponsors are in active conversation with stakeholders, including community foundation executives, though the degree of that cooperation was contested during the debate. Baldwin claimed the bill’s original language “demonized DAFs” and that he was unaware of recent language changes, while Masaoka insisted the sponsors had been in dialogue with community foundations along the way.
Jockeying for the Frame
It was immediately apparent that the debaters were jockeying for more than a winning position on whether AB-1712 is worthy legislation; instead, they were trying to frame an overall take on DAFs themselves. The discussion was often less about the specifics of the legislation and more about the desired positioning of the two leading DAF sponsor types: community foundations on the one hand, and national entities like Fidelity Charitable, which are independent charities created by and affiliated with for-profit investment firms, on the other. Baldwin and Sumar were each working hard to distinguish the worthiness of their respective organizational types. Baldwin, who in addition to being CEO of a community foundation is active in public policy work for the League of California Community Foundations, framed community foundations as local experts connecting donors to real community needs. When challenged by Masaoka about the donor-centrism of his positioning on DAFs, he claimed that his community foundation was above all else about “promoting grantmaking.” Sumar, on the other hand, underscored the scale and innovation of the Fidelity Charitable model, noting that he had previously worked at the Bill and Melinda Gates Foundation, which is now smaller than Fidelity. Several times he said that Fidelity aims to give an “Amazon-like experience” to donors’ philanthropy; they have, he said, a new app that allows people to do transactions on their phones, and they took in $70 million in cryptocurrency gifts to DAFs last year.
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Which Data Do We Need?
Baldwin and Sumar showered us with data, citing it near constantly in their arguments.
- From Sumar on the “geography of giving”: 42 percent of their DAF grants stay in the city of their origin, and 50 percent of their DAF grants stay in their state of origin.
- From Baldwin’s poll of 31 members of the League of California Community Foundations: Together, they hold 7,200 DAFs, 5,500 of which are not endowed, meaning the full funds are available for grantmaking. They hold roughly $9 billion in these funds and granted $2 billion for the last year reported.
The irony is that Masaoka’s argument for AB-1712 is that none of this self-reported data is the data we would need to determine whether and what kind of regulation of this multi-billion-dollar industry is appropriate to protect the taxpayer from bad actors.
Of most significance, the data they offer is not reported fund by fund, but rather in aggregate, allowing for impressive percentages in grants made, for instance, but obfuscating the dormant or questionably invested cases in these large portfolios.
Best Practice vs. Regulation
In the end, this debate was a very plain one. It’s a debate over whether an industry of this size with this much untaxed money in play should set its own standards or be regulated. In arguing for internal standard-setting,
Baldwin and Sumar made all the cases one would expect. They both suggested that reporting by fund would be an administrative burden to them as sponsors and a turnoff to DAF donors who enjoy the flexibility and relative anonymity of this vehicle. Baldwin pointed to the National Standards for US Community Foundations, through which he and his colleague organizations get certified. It’s important to note that the Council on Foundations describes these standards thusly: “The National Standards for US Community Foundations® is an accreditation program created by community foundations for community foundations. They are peer-driven, voluntary, and self-regulatory.” And Sumar noted that Fidelity Charitable does in fact have a five-percent DAFs payout policy, which is a voluntary policy choice on its part.
But of course, as Masaoka countered, regulation is not for the good actors; it is for the current or potential bad ones: “Best practices should go hand-in-hand with regulation; they aren’t a substitute for it.” And attention to DAFs, it seems, will only increase as their holdings grow. Masaoka said a copycat bill to AB-1712 is in the works in Minnesota, and the National Association of State Charity Officials (NASCO) has expressed concern as well.
“It behooves the nonprofit sector,” Masaoka argued, “to stay in the lead and not [just] let this happen to us.”