COVID-19 exposes need for increased scrutiny of ‘donor-advised funds’ in philanthropy

California is suffering. Unemployment is rapidly approaching Great Depression levels, and Californians who were once struggling have nothing.

In response, relief funds have sprung up in communities all over California. While these funds do important work, if you look at the big picture you can see a key financing tool for this relief, donor-advised funds (DAFs), are activating a relatively small amount of assets in response to this national crisis.

A DAF is a tool established by charities that allows donors to make contributions to it, receiving an immediate tax deduction on their donation with no requirement that charitable giving actually occurs from the fund, ever. DAFs are at the heart of the debate about what philanthropy provides to society at the expense of government tax proceeds, and relative to the $120 billion sitting in Big Philanthropy’s piggy banks.

Sponsors argue that DAFs strengthen philanthropy and benefit society in an indisputable fashion. However, with millions of Californians on the verge of financial ruin and service-providing nonprofits fighting to stay open, where is the to-scale outpouring of social benefit promised by their sponsors?

The answer is simple: These funds are not releasing dollars at a level that responds to the true scale of this crisis because they are largely unaccountable. Big Philanthropy is becoming another Wall Street, perpetually keeping a majority of funding under management for financial gain.

Recently, the nation’s largest DAF, Fidelity Charitable, touted $236 million in contributions to COVID-19 relief efforts. What the press release doesn’t say is that Fidelity Charitable had about $31 billion in total assets in 2019. In short, they patted themselves on the back for activating less than one percent of their total assets for COVID-19 relief efforts.

To be blunt, that is a joke at the expense of taxpayers, and it’s not a funny one.

Recently, a story highlighted the Silicon Valley Community Foundation’s CEO asking donors to give up to 5 percent of their individual DAF funds to COVID-19 response. This is commendable. However, this exposes a glaring pitfall.

Community foundations and commercial sponsors doggedly point to their aggregate annual distribution as being at least 20 percent of their total assets. They use this percentage to vehemently fight modest regulations to their industry. But if donors are distributing over 20 percent of their funds to charity each year, why do CEOs need to plead with donors to grant up to a mere additional 5 percent of funds toward a profound national crisis?

Is it possible that opaque reporting requirements inflate giving while many funds lay dormant? You bet.

Additionally, fund donors who donated volatile assets at the market peak got a maximized tax break on those assets and now, after the market downturn, those devalued assets leave less for charities. This structure is inherently unfair. Shouldn’t charitable donors get a tax break on the value of their contribution that actually goes to a charity, not upon stashing it away for later use?

This is not a drill. Millions of Californians are suffering and will continue in perpetual struggle for years to come. Nonprofits can provide essential services to those in need, but many – similar to before the pandemic – cannot access the funds locked away by DAF middlemen.

Instead of keeping tens of billions under wraps for financial gain, those activated funds could underwrite the ability of our most effective nonprofits to come to society’s aid in its time of greatest need. If not now, when? That’s a question one leading California legislator, Assemblymember Buffy Wicks, D-Oakland, has been trying to answer with Assembly Bill 2936, which would prioritize the real charitable outcomes of DAFs.

This story was originally published May 14, 2020 at 11:07 AM.