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Put Your Money Where Your Mission Is

by Guest Blogger

Guest blogger Alan Cantor is principal of Alan Cantor Consulting LLC, and draws on over thirty years of experience, including serving as Executive Director and, later, Board Chair of The Mayhew Program; Vice President at the New Hampshire Charitable Foundation; and Vice President for Philanthropy at the NH Community Loan Fund.  Alan will be speaking at MANP’s Executive Leadership Forum in Waterville on April 16. Don’t miss a thought-provoking conversation with nonprofit and philanthropic leaders. Register here.

money

 

Americans contribute generously to charity: individuals donated $240 billion in 2013, according to Giving USA™. But increasingly, the money is going to the wrong places.

I’m not referring here to mission. Some people feel strongly that a gift to a food pantry is more valuable than a gift to an opera house. Others might advocate for family shelters over animal shelters, or pre-schools over universities, or vice versa. I don’t want to get into that discussion now. No. For the purposes of this argument, let’s assume that all 501(c)(3) public charities are good and worthy.

The less useful gifts I’m referencing are those that don’t actually fund direct services. Instead, these gifts are going into charitable warehouses for future use: endowments, private foundations, and donor-advised funds.

Endowments

Let’s look first at endowments. I can already hear the grumbling. “Endowments? What’s wrong with endowments?! Every nonprofit wants to build its endowment!” Questioning the value of endowments is like insulting motherhood and apple pie.

Trust me: If I have the choice of running an organization with an endowment or one without, I’d take the endowment every time. An endowment is a very nice thing to have. But the never-ending chase to build endowment means that nonprofits are steering donors into setting up new permanently endowed funds, when other kinds of gifts could be vastly more useful. There’s a real opportunity cost.

It’s clear that what nonprofits need is money to operate, but it’s increasingly hard to raise those funds. The nonprofit sector has never been under more stress. Demand for services is rising. Government funding at all levels is dropping. Reporting requirements – and the time that goes into filing those reports – are growing onerous. Corporate funding as a percentage of pre-tax profits is half of what it was three decades ago. More and more foundations don’t accept unsolicited applications, making it harder for small nonprofits to access grants.

But what are nonprofits asking their largest donors to contribute? More often than not, gifts for endowment, which will then spin off about 4% a year for use by the organization. A donation of $100,000, say, is significant here in Northern New England. But to get a gift that large and then only to be able to use $4,000 a year? It’s not at all transformational. It feels good to have an endowment, certainly, but how much good does an endowment actually do?

Meanwhile endowments, once established, have a tendency to assume exaggerated importance within organizations. Asset size and investment returns are a lot easier to measure and compare than program outcomes, and people obsess about those endowment numbers. A large endowment has somehow become a proxy for excellence – but often, it actually functions as a substitute. Money that could go toward mission is plunked into an investment account, and boards tend to release only a small percent for current mission, for fear of undermining the endowment’s growth.

Private Foundations

The second category of warehousing is the private foundation. Foundations play a critically important role in supporting the nonprofit world. But why is the default presumption that foundations should be perpetual? And, even if we can rationalize that a particular foundation should exist forever, what’s so magical about the 5% payout? Yes, that’s the minimum percentage that Congress decreed in 1969 should be distributed to charity. But why not distribute 6%? Or 7%? (I’m happy to report that in Maine a lot of foundations are ahead of me on this issue: the aggregate spending rate is 7.1%)

And why not spend the money down completely within ten or twenty years? I would argue that, though this would mean that the foundation wouldn’t last forever, the quicker distribution of funds would have a greater lasting impact because it would be invested in people and causes in a way that could correct major societal and environmental problems. Some of the most effective philanthropists have had tremendous impact by aggressively spending down their foundations’ assets. But the vast majority of foundations are set up to go on forever, and critical immediate needs are overlooked as a result.

Donor-Advised Funds

Finally, there is the new kid on the block: the donor-advised fund. Historically donor-advised funds were housed at community foundations, where donors could get knowledgeable advice on connecting to important community projects. But in 1991 the I.R.S. bestowed 501(c)(3) public charity status on the first commercial gift fund, Fidelity Charitable, and nearly a quarter century later the situation has grown completely out of control.

Now every major financial services firm has its own donor-advised fund vehicle, each with public charity status, and the companies market them extensively – and effectively. Three of the top ten fundraising “nonprofits” in the most recent Philanthropy 400 list of the country’s most successful fundraising organizations are commercial donor-advised funds (Fidelity, Schwab, and Vanguard). Donations to donor-advised funds grew over 250% from 2009 to 2013, rising to over 7.1% of all giving from individuals. That’s an enormous slice of the philanthropic pie – nearly double the amount raised by all environmental, conservation, and animal rights groups combined. And there’s every indication that 2014 was an even bigger year for donor-advised funds.

A few things to realize about the boom in donor-advised funds:

  • For the last 40 years, overall charitable giving, according to Giving USA™, has hovered around 2% of disposable personal income. When times are good, we give more in terms of actual dollars, but as a nation we contribute 2%, more or less, of what we earn. So if more is going into donor-advised funds (and it certainly is), less is going to charities directly.
  • There is no federal requirement that individual advised funds distribute grants in any given year… or ever. I find it stunning that someone can get a full charitable tax deduction for a “gift” into a special DAF brokerage account, and then not be under any obligation, ever, to actually distribute those funds to charity. That’s why there’s now momentum for a proposal first suggested by Boston College Law Professor Ray Madoff to give donors a seven-year window in which to distribute money they put into their DAFs. Then-Chair of the House Ways and Means Committee Dave Camp went one step further in 2014, proposing a five-year spend-down for donations to DAFs. The notion is: If you get a charitable deduction for setting up a donor-advised fund, there should be an expectation that the money goes to an actual charity within a few years.
  • Many, many people are making a lot of money from the commercial donor-advised funds, and that remuneration is not always clear to the donors. We need to recognize that when clients contribute to commercial gift funds, their financial advisors typically continue to receive a management fee. And the longer the funds sit there, the more the financial advisors make. There’s a financial incentive for the brokers and the sponsoring organizations to keep the money from actually going out to organizations that need help. And, with $54 billion invested in donor-advised fund assets at the end of 2013, DAFs represent an enormous cash cow to Wall Street.

There is no single simple solution to the growth of the charitable warehouses, though there are many strategies, changes in law, and evolving cultural expectations that could lead to a healthier, more effective, and more efficient funding ecosystem. But the first step is to realize that the stockpiling of charitable dollars is a very real problem. And we need to talk about it.

Have reactions to share? Whether you agree with these points or want to represent an alternative perspective, be part of the conversation at our Spring Executive Leadership Forum on April 16th in Waterville.  Register here.

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