A proposal designed to persuade Congress to make foundations and donor-advised funds direct more cash to charities is likely to be met with strong opposition.

The policy push by philanthropist John Arnold and Boston College law professor Ray Madoff is in its early stages. But already it has taken flak from both defenders of the status quo and others who think it doesn’t go far enough.

As it now stands the proposal would enact two categories of donor-advised funds, one that would offer better tax benefits to people who distribute money within 15 years of creating their DAFs versus those who keep the money in longer.

It also would encourage foundations to a distribute a bigger share of their assets with a tax sweetener. Currently, foundations must direct at least 5 percent of their endowments to charitable activities each year. The plan would waive a 2 percent excise tax on their investment gains in years that they distributed at least 7 percent. Foundations that promise to close their doors within 25 years of opening would also be exempt from the tax each year.

The Arnold-Madoff proposal would also end the practice of letting gifts to donor-advised funds count as part of a foundation’s payout, and it would disallow family foundations from counting the travel and salary expenses of family members as charitable payments.

Elise Westhoff, president of the Philanthropy Roundtable, called the proposal a threat to philanthropic freedom that crimps foundation leaders from taking advantage of donor-advised funds in ways that advance a grant maker’s charitable mission.

She said that giving through donor-advised funds offers a way for philanthropists and grant makers to stay more anonymous than they otherwise can through traditional foundations. She said that is especially helpful when foundations want to support causes that generate controversy or that go to nonprofits working in areas prone to violence. Westhoff also said the use of the funds can help a foundation train family members for future leadership and allow a grant maker to make a grant that doesn’t align directly with its stated mission.

While the Philanthropy Roundtable thinks the Arnold-Madoff proposal goes too far, others think it has not done enough to address problems in philanthropic giving.

Alan Davis, president of the Leonard and Sophie Davis Fund, calls current foundation giving “stoop change,” coins found on a stoop that aren’t worth bending down to pick up. He says that Congress should require foundations to give far more every year and that tax incentives alone are not enough to prompt more giving.

“It’s too bad that two very well-meaning people could come up with such an awful proposal,” says Davis, who has spearheaded the Crisis Charitable Commitment, a voluntary pledge by donors and foundations to give more to charity.

Foundation Assets Regain Strength

The plan comes as foundations control about $1.1 trillion in assets, back up to the same level they were before the pandemic hit, according to FoundationMark, a research organization that tracks foundation investments.

With many nonprofits facing financial troubles, it makes sense that there would be calls for foundations to give more, says Lloyd Hitoshi Mayer, a law professor at the University of Notre Dame.

“There is growing sentiment that warehousing wealth by charities is problematic, whether it is a private foundation, a donor-advised fund, or an operating charity like a university,” says Mayer, who used to lobby Congress on behalf of Independent Sector, a membership organization of nonprofits. “But I’m not sure it is strong enough to get legislation through Congress.”

‘Tide Is Turning’

In 2014, then House Ways and Means Committee Chairman Rep. Dave Camp included a donor-advised fund payout requirement in a piece of broader tax legislation. The item went nowhere.

Since then, a weaker provision that would simply allow the state to track money going in and out of donor-advised fund accounts was bottled up in the California General Assembly after sparking a full-throated lobbying battle that pitted charities against commercial donor-advised funds and community foundations that operate donor-advised funds.

The Madoff-Arnold plan is likely to spur even bigger clashes, since it includes private-foundation payout requirements in addition to donor-advised funds.

Two of the organizations that lobby heavily on philanthropy issues declined to comment. Independent Sector, an organization that represents foundations and nonprofits, and the Council on Foundations, which represents community foundations and private foundations as well as other grant makers, declined interview requests.

Ellen Dorsey, president of the Wallace Global Fund, is confident Congress will take a close look at forcing foundations to distribute more of their assets. Wallace, along with a group called Patriotic Millionaires and the Institute for Policy Studies, is pushing Congress to institute a three-year doubling of foundation payout from 5 percent to 10 percent in addition to instituting a payout mandate for donor-advised funds in response to Covid-19.

“The tide is turning and people are waking up to the practices of philanthropy that have long operated in shadows, outside of public knowledge and free of accountability,” Dorsey wrote in an emailed statement. “We expect the trade associations will fight to retain the status quo that has served many of them so well, but there is a larger, growing constituency for more fundamental reforms — both within organized philanthropy, within the nonprofit sector, and in the general public.”

Family Members’ Role

Philanthropy Roundtable’s Westhoff said the group does not have a position on eliminating the foundation excise tax for grant makers that hit a 7 percent payout mark or agree to shut down after a set time.

But disallowing family members’ expenses and salaries unfairly singles out members of a family foundation that might have necessary expertise in a subject the foundation works on, Westhoff wrote in an email to the Chronicle.

She also took issue with the proposed prohibition on counting grants to donor-advised funds as part of a foundation’s charitable distribution.

“A sweeping prohibition on counting distributions to DAFs toward the payout requirement ignores the many important ways private foundations utilize DAFs,” she wrote.

For instance, last month when the Libra Foundation gathered grant makers together to create the $36 million Democracy Frontlines Fund, it used a donor-advised fund to house the pooled contributions. The foundation, which doesn’t have a position on the current proposals, found that doing so made it easier to administer.

A Chronicle study found that from 2014 through 2016, foundations put about $737 million into some of the country’s largest donor-advised fund firms. Critics argue that there is no certainty that any of that money will be directed to operating nonprofits.

Concern About Perpetuity

Mari Kuraishi, president of the Jessie Ball DuPont Foundation, said her foundation sometimes makes donations to the Community Foundation of Northeast Florida because the grant maker’s original benefactor had fairly restrictive rules for the charities that can receive support. Provisions in the foundation’s originating documents did, however, allow grants to support local needs, and giving to a donor-advised fund managed by the community foundation is a way to do that, Kuraishi said.

Kuraishi and other leaders of foundations designed to exist in perpetuity worry that the idea of adding tax incentives to encourage faster spending could ultimately lead to requirements to distribute a greater percentage of assets every year.

They say adding requirements could shorten a grant maker’s life and ultimately dissuade donors from giving. Some donors want to give fast and shut down, she said, and others want their philanthropy to make a difference for generations.

“That’s a deeply personal choice,” she said. “It’s important to give donors assurance that what they desire to see will happen. Because if they don’t have that confidence, then they won’t do it.”

Davis, the leader of the Crisis Charitable Commitment, said he could support a provision that allowed foundations with assets of “up to $50 million or $100 million” to give 5 to 7 percent a year, noting that they might have a harder time staying afloat than a billion-dollar grant maker.

But foundations with billions of dollars in the bank are holding on to an “obscene” amount of money in a time of great need, Davis said.

“When foundations are hoarding wealth, as these foundations are, 7 percent is too low,” he said.

Victoria Grasso, president of the Cooper Foundation in Lincoln, Neb., says she understands why calls to increase the mandatory minimum spending rate for foundations are growing. The pandemic, the struggling economy, and the increased calls for racial justice across the country combine to make the present seem like the perfect time to sharply increase the share of assets foundations give.

Doing so, however, could take a key donor away from many Nebraska nonprofits that depend on her foundation, Grasso said. The Cooper Foundation was founded 85 years ago with about $23,000. It now has assets of about $25 million and has made grants totaling about $26 million over its life span.

Requiring a higher payout could force Grasso to cut staff and, in doing so, cut key connections to Nebraska nonprofits.

“We’re not saving money for a rainy day,” she said. “We’re saving money for tomorrow and every day in the future. Our commitment is to be here with the community.”