Photo by Daria Shevtsova from Pexels

July 25, 2019; Vox

A year ago, Nonprofit Quarterly focused its summer edition on the need for greater scrutiny and regulation of donor-advised funds (DAFs). A year later, this concern has found support from an unexpected corner—a former hedge-fund investor and his wife who take their philanthropy very seriously.

Billionaire John Arnold, in a series of 11 tweets, added his voice to those who think the DAF sector needs to change the way it does business if it is to fulfill its philanthropic purpose.

Donor-advised funds have grown rapidly. They provide donors with many of the benefits of a charitable foundation without much of the overhead burden. They allow a donor, as NPQ described, to “get all the tax benefits of a transfer to a public charity [yet] retain functional control over the distribution (and sometimes investment) of the donated funds.” For critics, the way DAF donors and the organizations who manage them exercise this control is problematic.

In July, Arnold spelled out his concerns about DAFs and foundation misuse in a tweet-stream.

DAFs, like foundations, can focus too much on the future; donors bypass immediate human needs as they look ahead and worry about influence in years to come.

There is often a long gap between when donors receive a tax deduction and when that money is employed for its charitable purpose. I think this hoarding of resources is inefficient and counter to the spirit of the rules…donor-advised funds have amassed huge sums ($110 billion) in recent years. DAFs get most of the benefits of private foundations but are not subject to any annual minimum distribution (though sometimes sponsors require an occasional token distribution).

It is probably worth knowing that the sponsors of donor-advised funds, which can include anything from the Fidelity Charitables of this world to small community foundations, tend to spend out at a far higher rate than the five percent required for foundations. As Dr. Patrick Rooney wrote in his article, “Have Donor-Advised Funds and Other Philanthropic Innovations Changed the Flow of Giving in the United States”:

The payout rates of DAFs have been defined in a range of manners (see Giving USA 2017, “Special Section on DAFs” delineating four options that have been suggested by others), but research shows that they all substantially exceed those of private foundations.13 To make the closest thing to an “apples-to-apples” comparison, using the same protocol that foundations use in calculating their payout rates (grant dollars divided by charitable assets at the end of the prior year multiplied by 100 to get a percentage), the National Philanthropic Trust estimates that the payout rate for DAFs was 20.7 percent in 2015 and has been above 20 percent for several years. Moreover, the payout rates for DAFs don’t include their operating costs in their payout rates, which private foundations are allowed to include in their 5 percent minimum payout rate. This is often between 0.5 percent and 1.0 percent of the asset value, constituting a nontrivial portion of the foundation payout rate.

The individual funds within the collective whole, however, are not tracked in a transparent way, so some individual funds may still avoid spending requirements. Readers will see in today’s feature that Fidelity Charitable has, in fact, spent out at a much higher rate this year than last. We also note here that the minimum payout requirement has long been an issue among foundations, and some believe foundations occasionally use donor-advised funds to avoid those requirements—essentially playing a shell game with charitable money.

Arnold’s philanthropic philosophy centers the impact of giving and seeks to find new ways to solve today’s problems. Accumulating funds and looking far ahead defeats this purpose and limits its social role: “One role of philanthropy is to be willing to fund riskier ventures than government and private sector are willing to try, but the longer a foundation operates after donors’ death, the more bureaucratic and risk-adverse it tends to get.”

In a recent interview with Vox’s Theodore Schleifer, Arnold explained why the accumulation of resources in DAFs and in charitable foundations is problematic. From his perspective, philanthropists should focus on problems right before them, not ones that might emerge decades in the future.

This generation has a moral imperative to solve this generation’s problems and that putting this money away to be spent at some indeterminate point in the future…it’s just inefficient. And I think it’s just not in the spirit of what giving is supposed to be. What I’ve seen firsthand is many people who have intent to give away very significant resources, but they delay the actual giving. So, they build up the resources either just as a private net wealth or through some type of vehicle like a DAF. And the intent is always in the future.

Organizations with large pools of funds to distribute gravitate to organizations with the administrative capability to manage the size of their giving and away from where the funds may do the most good.

The three types who generally do accept these big checks are college fund institutions, universities, and hospitals, all that frequently have a capital campaigns to build new facilities. And so the money ends up going to those sectors that, I would argue, tend to be well-funded already, instead of going towards the operating expenses of smaller organizations that are doing social services.

Lastly, as currently constructed, DAF rules and practices make longevity the goal, to which Arnold strongly objects.

Dead people’s influence should decrease as time passes. And there’s lots of examples where that influence has increased over time…I think it would be more efficient if those big legacy foundations, that they brought forward their giving and let the next generation of givers be more influential in the next generation.

His own philanthropic efforts, targeted to end their work five years after his death, provide the model.

It’s important to hear John Arnold’s voice added to those calling for change. Most criticism has come from academics and equity advocates, not from the philanthropic community. His preferred solution is to require DAFs and foundations to distribute seven percent of their assets annually and for their boards to voluntarily lead a cultural change to mirror his philanthropic philosophy. While these do not go as far as the changes Ray Madoff and Dean Zerbe called for last year, Arnold may bring a new impetus to take these concerns seriously.—Martin Levine