Will Donor-Advised Funds Meet Their “Rainy Day” Promise?

 One oft-cited rationale for donor-advised funds (DAFs) is that they serve as charitable savings accounts that can be drawn upon if the economy goes south—the proverbial “saving for a rainy day.” In this coronavirus-induced downpour of a downturn, NPQ thought it would go out and see if granting from DAFs actually works that way.

As NPQ has widely covered, DAFs have grown substantially in philanthropic importance over the last 15 years. In 2007, before the Great Recession, the National Philanthropic Trust (NPT) reports that assets in donor-advised funds totaled $31.97 billion nationally (or $39.8 billion in inflation-adjusted dollars). By 2018, that number had increased 200 percent after adjusting for inflation to $121.42 billion.

NPT is a national charity with more than $8 billion in assets according to its latest annual report. NPT tracks annual DAF payout figures as far back as 2007. The organization’s Donor-Advised Fund Report groups DAFs into three categories: national charities, community foundations, and single-issue charities. National charities include both independent national fund holders like NPT, as well as charitable organizations affiliated with financial institutions, such as Vanguard and Fidelity. As of the end of 2018, the majority of DAF assets, $72.35 billion, resided with these national charities. By contrast, assets held at community foundations totaled $33.87 billion, with the remaining $15.19 billion at single-issue charities, which, as the name suggests, focus on specific sub-sectors (e.g., Jewish funds).

At NPQ, we have written extensively about how private foundations can and should respond at this time of unprecedented public health and economic distress. Less discussed to date has been how DAF holders are responding in the pandemic. DAFs, as NPQ readers know well, can be controversial; many people would like to see them subject to greater regulation. NPQ surely will return to these issues, but here our goal is simply to begin to identify how DAFs are responding in the crisis. To this end, NPQ conducted interviews with leaders at NPT and Vanguard and at community foundations in Utah, Silicon Valley, Seattle, and Boston.

The importance of DAFs to the identities of community foundations cannot be overstated. When community foundations were first established, the idea was that donors would contribute to a pooled fund from which a central set of grants were made. This central function began to shift in the 1980s, as more donors decided they wished to take a more hands-on approach. Thus, newer community foundations often appear to be primarily a collection of locally focused donor-advised funds while older entities tend to have larger “discretionary” funds overseen by professional staffs.

The Boston Foundation, one of the nation’s oldest (and hence with more unrestricted funds) informed us that of an estimated $1.2 billion in assets, 60 percent are in DAFs. At the far newer Silicon Valley Community Foundation (SVCF), with an estimated $9 billion in assets, fully 86 percent of its assets are in DAFs; with Utah’s much newer foundation, 98 percent of its assets are in DAFs. This makes those organizations collections of donor accounts that are guided at very different levels from one community foundation to another.

Some community foundations, in other words, have robust systems of donor advisement and others have much less, but their identities as locally grounded, focused, and informed funders are lived out in communities around the country with a lot of variation. The national charities, on the other hand, tended to eschew providing giving advice to donors for the most part. And finally, the single-issue charities have been called out recently for, from time to time, blocking grants made by donors to organizations the sponsor does not approve of politically.

Our findings, both financial and qualitative, we caution, are preliminary and our sampling was hardly scientific. We also know that behavior patterns may change as the pandemic and resulting economic shutdown unfold. That said, we found some intriguing developments in four areas: levels of giving, types of giving, deepening donor relationships, and cooperation across DAF-holding organizations. It will be valuable to follow the industry to see whether—and to what extent—these developments might mark lasting changes in practice in the field.

DAF Giving Jumps in March and April

One might think to look at DAF giving during the Great Recession to anticipate how DAF holders would respond during COVID-19, although the scale of our current crisis is orders of magnitude greater. Just for a bit of perspective, in the Great Recession 8.8 million people lost their jobs over roughly two years. We have already had over 26 million join the ranks of the unemployed in a mere five weeks with COVID-19.

As a matter of fact, NPT’s Donor-Advised Fund Report data shows that payouts of DAFs did increase during the Great Recession—but perhaps less than the “rainy day” metaphor might suggest. According to NPT, during the Great Recession the value of DAF accounts declined too—but the drop was limited. From a level of $31.97 billion in 2007, DAF assets fell to $29.31 billion by 2009. As for direct payout rates, these are as follows:

Donor-Advised Funds, Payout Rates, Great Recession

What will happen with DAF mobilization in this unprecedented time?

Kate Guedj, Senior Vice President and Chief Philanthropy Officer at the Boston Foundation, said in our interview last week that this is “where DAFs prove their worth.” She put it this way: “It is the highest and best use. There’s the money…and there it goes. More money is going out than coming in. That is exactly what happens. It is a rainy day. It is raining. And now is the time to give it away.” Alex Eaton, CEO of the Community Foundation of Utah, founded in 2008, agreed, saying, “As a 12-year-old organization, this moment is a kind of proof of concept for the role of community foundations.”

Eileen Heisman, NPT’s president, said that though it took a week or more after the pandemic shutdown began for people to start making grants, “The flood gates opened with such force that we had to redeploy staff.” This is a measure, Heisman noted, that the firm generally only takes during the busy winter holidays. Jenna Mulhall-Brereton, NPT’s Chief Philanthropic Services Officer, said the number of gifts made between March 1^st and 20^th of this year was up by 39 percent over the whole month of March last year and the dollar amount of gifts had risen by an estimated 120 percent.

Fidelity’s president, Pam Norley, reported in an April 8^th press release that donors had drawn down DAF accounts by “more than $100 million in response to COVID-19.” Norley added that March 2020 DAF disbursements exceeded March 2019 donations by 36 percent and called on Fidelity DAF account holds to double donations to $200 million by Tuesday, May 5^th.

At Vanguard, the number of grants increased by 42 percent in March 2020, according to Vanguard president Jane Greenfield, with an estimated $56 million in grants going to coronavirus-related issues as of mid-March.

Eaton from the Utah foundation tells us that in a typical year, the collective payout rate of DAF account holders is about 20 percent. That is in the standard realm of DAF payout rates, and it contrasts to the usual payout rate of five percent from private foundations. “It will absolutely be higher this year,” she says, adding that she “would not be surprised by near 30 percent this year.”

The Boston Foundation had March disbursements totaling over $23 million, up from $4.5 million in March 2019. For the first half of April, DAF disbursements ran above April 2020 numbers, but less dramatically—with disbursements totaling $6.48 million for the first half of the month, compared with $3.9 million for the comparable period the previous April. Like Eaton, Guedj anticipated a higher-than-average payout from DAFs this year. In a typical year, Guedj says average payout is between 15 and 17 percent. “I will imagine it will get higher. It is human nature to give and make a contribution” in these circumstances, Guedj adds.

All told, DAF giving is up among all of the organizations we interviewed. The leaders all expect their annual payout rates to be higher than 2019’s, though again, these are preliminary perspectives just six weeks into the crisis. Trends will need to be watched as the year, and the profoundly wounded economy, proceed.

Nonprofit Stabilization and a Host of COVID-Specific Investments

This increased giving by DAF holders is being deployed quickly through both individual grants and pooled funds. Many donors recognize the hardship of their favored nonprofits in this economy. At NPT, Heisman says, “a good part of the funds have been going out to charities that donors have given to in the past, in recognition of their current load and struggles.”

The Silicon Valley Community Foundation (SVCF) set up three pooled funds to which DAF holders could contribute: 1) a regional emergency fund to support individuals and families throughout the 10-county Bay Area; 2) a nonprofit emergency fund to help stabilize organizations, and 3) a small business relief fund, in which the foundation is partnering with Opportunity Fund, a San Jose-based community development financial institution (CDFI). Of note, Heisman of NPT also said that they have seen a groundswell of giving to CDFIs. The nation’s network of 1,142 CDFIs was also tapped in the latest round of the Paycheck Protection Program, because of their vital role in directing capital toward low-income communities and communities of color.

According to Alex Tenorio, executive vice president of Development and Donor Engagement at SVCF, in March total COVID-19 disbursements totaled $90 million, of which $31 million went to the three pooled funds and $59 million to other nonprofits, including “safety net organizations, food pantries, homelessness mitigation, and critical support for individual families” and grants for research into antibody tests and vaccines. The March disbursement amount, adds Tenorio, is up about 30 percent from March 2019.

The Boston Foundation also has a host of pooled funds, with a focus on both nonprofit stabilization and support for direct service organizations. Donors, as Guedj observes, can sometimes have “amazingly creative ways of targeting money.” One example she mentions involved helping local community hospitals and senior citizens procure personal protective equipment (PPE), financing the creation of a supply chain that has helped area hospitals acquire hundreds of thousands of units of needed medical equipment.

Tony Mestres, CEO of the Seattle Foundation, focused on engaging corporate support from headquartered businesses, including Starbucks, Amazon, and Alaska Airlines as well as United Way of King County, the largest United Way in the country. Since just March 1^st, 60 partners and some 5,000 donors, both individuals and businesses, have contributed over $20 million to a fund focused on those “hit first and worst by the economic impact.” They have been able to distribute $10 million to more than 100 community-based organizations in such a short timeframe by leveraging a Community Advisory Group initiated by county government to guide grantmaking, using a no-application process, and borrowing program officer capacity from other local grantmakers.

At Vanguard, Greenfield notes that many DAF account holders’ COVID grants are for immediate needs such as food, PPE, and other medical needs. Others are being given to college and university students whose studies have been interrupted. At Utah, Eaton mentions that support for medical research around the pandemic makes up about 15 percent of DAF grant dollars so far.

Deepening Donor Engagement

A number of the interviewees talked about a marked difference through the pandemic in how they are working and how DAF holders are responding. Heisman at NPT describes it this way:

We had no framework for this phenomenon, and we are all looking at a whole new environment where there are likely to be multiple advances and retreats. But the human spirit is enormous and against this backdrop you find so many people trying to connect in new ways.

SVCF president Nicole Taylor has made a personal call for each DAF account holder to commit an extra 1–5 percent of their account holdings to meet the need for a COVID emergency response. Tenorio emphasizes that “this isn’t something we’ve done before,” but adds that “asking them to step up and support crisis response is something we think is really needed.” Tenorio notes that Taylor’s video, which could be the first of multiple calls during the course of the crisis, was followed up by additional zoom meetings and conference calls with DAF account holders.

Tenorio says donors have appreciated the outreach. “I would say there has been a great appetite in many of the conversations I have had to complement what they have already been doing with some real strategic guidance.” Eaton in Utah said her foundation is holding informational calls twice a month for donors. “Our donors are much more engaged than usual. We are definitely going to come out of this with stronger relationship with our donors.” And Mestres of Seattle calls his foundation’s effort “the most intense and most productive work that we have done in our history in such a condensed time frame.”

A New Level of Cooperation

Greenfield adds that one step Vanguard is taking is actively linking donors to their local community foundations for local giving, since this is an area where community foundations have expertise. Vanguard has even advised some DAF holders that they should pay into community-foundation-hosted, pooled COVID-related funds.

Greenfield acknowledges that this collaboration with community foundations is a bit of a shift, as community foundations and national charitable funds have often seen themselves as rivals. However, from Greenfield’s vantage point, “any historic differences look less important now,” in the current context. Heisman says NPT has also been actively recommending that donors check in with their local community foundations.

If there has been more cooperation from national charities to community foundations, it could be that some of the cooperation has been reciprocated, as people from all perspectives recognize the enormity of the crisis. As Mestres from Seattle observes, “The nature of our huge economic impact fund drove the investment from DAFs which we need to do more of. And we can partner with for-profit holders, too. The focus, he emphasizes, should be “less on custody of the funds and more on effective deployment of funds.”

Questions Going Forward

As we have stressed, these are still early days in the crisis. So far, it seems clear that giving from DAFs is likely to rise in 2020—and given the severity of the crisis, one would expect to see a larger bump than in the Great Recession. But how much larger remains an open question.

In the private foundation world, many—including NPQ—have called for a doubling of payout. In the DAF world, there is no doubt that DAF leaders have taken unprecedented steps to encourage donors to step up and donate. But to double giving in the DAF world would mean moving from 20–25 percent payout of assets to 40–50 percent. It does not necessarily look as if DAFs are likely to reach that level.

The figure that seems to get thrown around is 30 percent of assets. Now, an increase from 20 percent to 30 percent would be about $12 billion in added grants—a substantial sum. But is it commensurate with the scale of the crisis or with the scale of public benefit that DAF account holders have received over the years in tax deductions?

There is also a question of the economics of DAFs for national charities and community foundations. The dynamics are similar to private foundations: If you double payout, you increase your immediate impact, but there is an organizational cost. In the Los Angeles Times, Crystal Hayling, who directs the Libra Foundation, a foundation that has committed to doubling its payout, notes, “Your endowment will definitely take a hit and it may take you a while to build back up, but if our purpose is to respond to communities, then I think we have to put that front and center at times like these.”

Critics often charge that it is in the best interests of the sponsors of donor-advised funds to retain the assets that they hold, and that this creates a reverse incentive to encouraging giving. With DAFs, the fees earned are often an important part of the business model of community foundations. For instance, the Boston Foundation says that 27 percent of its operating budget comes from DAF fees—and they are less dependent on DAFs than either SVCF or the Community Foundation of Utah, for instance. Both Guedj and Tenorio acknowledge the challenge but add that they expect reserve funds to protect operations if their foundations are successful at rapidly increasing the DAF payout rate.

Many other questions also arise. One concerns the reality that though philanthropy can be a catalyst, it cannot substitute for governments, which have far more resources. According to a running tally maintained by Candid, global donor commitments to date remain shy of $10 billion. By contrast, the US federal government alone has spent nearly $3 trillion.

Guedj says the best response philanthropy can make is to support advocacy. “We have two channels,” she adds. “One is through our own civic leadership work we have provided advocacy on behalf of Greater Boston. Secondly, we are encouraging our own grantees and donors to engage in advocacy.”

To date, however, advocacy has been far less visible in COVID responses than immediate support.

Another challenge is staying power. Tenorio concedes that “donor fatigue” is “a real thing.” But what’s unique about this moment is that, “Everyone is living this crisis. Some can weather it. A whole lot of folks can’t. It’s certainly been no trouble to communicate the severity of the crisis. I’m not worried. People get it and understand the need to not just give once, but give often. Because it is the right thing to do.”