The pandemic and a ‘rainy day fund’ for American charity

Among the more heartening parts of the American response to the COVID-19 pandemic has been the emergence of and financial support for effective charitable work. One of the best examples has been New York’s Invisible Hands, a group started by three twentysomethings that has mobilized thousands of volunteers to deliver groceries to the poor and homebound. It quickly found financial support from a charitable foundation, New York’s Robin Hood, and gained access to tax-exempt status to solicit individual contributions. (The group owes more to Adam Smith’s “Theory of Moral Sentiments” than to “The Wealth of Nations.”)

The lessons from such a story, and others across the country, include the fact that necessary charitable funds were available in the first place. Foundations and private charitable accounts such as donor-advised funds (DAFs) serve as storehouses of charitable wealth — available to respond to crises.

The fact that such funds are now flowing, just as we should hope, makes it all the more curious, and unfortunate, to see an effort afoot to undermine the fastest-growing custom of charitable giving in the U.S. — and to make it less likely that charitable funds are available at a time of crisis, which, by its nature, cannot be anticipated.

Led by hedge fund billionaire John Arnold of Arnold Ventures and Boston College law school faculty member Ray Madoff, the Accelerate Charitable Giving plan urges Congress to require that funds deposited in individual, tax-exempt charitable accounts known as donor-advised funds be subject to a time limit for full distribution, or lose the charitable tax deduction for their contributions. The idea overlooks the fact that not only are such accounts already disbursing a large percentage of their assets but, crucially, they have a record of increasing their grant-making during crises. They are, in effect, America’s charitable “rainy day fund” — and should be protected.

Some history is important here. Donor-advised funds, as a way of setting aside and distributing charitable dollars, have gained popularity over the past 15 years. These individual accounts, like IRAs, allow Americans to set aside tax-exempt money to disburse over time, even as the funds grow in value before donors decide how they should be used. Some critics express concern that the possibility of slowly disbursing these funds, as well as the ease they offer in converting non-cash assets into a tax-deductible charitable contribution, make DAFs something of a tax loophole — despite the fact that such contributions can be used only for charitable giving, now or later.

DAF growth has been sharp and their impact significant. According to the National Philanthropic Trust, the number of such individual charitable accounts grew from 241,000 in 2014 to 728,000 in 2018. Giving from DAFs was just $7.6 billion in 2007; it more than tripled to $23 billion by 2018, even as overall charitable giving increased by only about a fifth. The potential is there for much more; financial assets set aside in these accounts have grown from $70 billion to $121 billion. Under tax law, these funds cannot revert to the donor — they are reserved for charitable giving. They constitute a charitable endowment for America. 

The push to insist that donors agree to pass through all their contributions within a set time period — 15 years — should be thought of as a solution to a problem that doesn’t actually exist.

Donors who put funds in individual charitable accounts typically tend to disburse them quickly. A University of Pennsylvania study found that around 85 percent of funds deposited into such accounts flows out the same year.

Significantly — and this is what I mean by characterizing them as a “rainy day fund” — that rate goes up during hard times. The same study found that, in response to the Great Recession of 2008, more funds went out from DAF accounts than went into them. The flow-rate went up to 103 percent. Funds that were set aside in reserve for emergencies were put into action.

We will not know if the same is holding true for the COVID-19 pandemic, but there are indications that it will. Fidelity Charitable, a DAF-sponsoring organization that has become the largest charitable entity in the U.S., reports that a survey of its account-holders indicates 79 percent plan to maintain or increase their giving in 2020 — including 25 percent who plan to increase it. It is, of course, too soon to tell whether that will mean more actual disbursement of funds.

The proposed time limit would put all this at risk. 

There is no doubt that 15 years is a long time — and it may be that those considering establishing a donor-advised fund will not be put off by such a time limit. But the additional complication could well inhibit charitable giving in states where DAF accounts appear most popular. According to the National Philanthropic Trust, these include California, Ohio, Indiana, Ohio, New York, Texas, Michigan and Florida. The numbers are impressive: California alone has more than 88 organizations that “sponsor” (manage) donor-advised accounts; Florida has 44 and Texas, 40. In 31 states, there are at least 15, and often many more.

Management fees for such accounts inevitably would go up, as “sponsoring organizations” faced the red-tape headache of tracking which funds had been deposited at what time — and whether they had been disbursed within the required time limit. Higher management fees would mean less money available for charities. One thinks here of the Dodd-Frank banking regulations whose compliance costs forced many community banks to close their doors — so, too, would time limit compliance-tracking burden the hundreds of local community foundations that serve as umbrellas for thousands of DAFs, whose donors have entrusted money to local foundations to direct to those most in need. Even large national DAF-sponsoring organizations such as Fidelity, Vanguard, Schwab Charitable and the National Philanthropic Trust would be forced to raise their fees, decreasing funds available for charitable giving. 

The proposal to set a time limit on account giving would harm donors across the country. Donors with reserve charitable funds during hard times do not limit their giving to their own states. Fidelity Charitable reports that 25 percent of its donors plan to increase their giving in 2020 because of the COVID-19 pandemic.

Backers of proposed DAF rule changes evidently have not considered the potential effect on donor behavior. History shows that behavior to be a positive for America and not in need of change.

Howard Husock is the executive senior fellow at The Philanthropy Roundtable and the author of “Who Killed Civil Society?”