Some people simply can’t take yes for an answer.
How else to explain the rejection by some leaders of the community-foundation world to the thoughtful set of changes contained in a new Senate proposal designed to speed up how fast charitable funds go to nonprofits? It’s hard to fathom why they would oppose a move that would serve them well.
For years, the Council on Foundations, along with the Community Foundations Public Awareness Campaign, the lobbying arm of community foundations, have embraced a business model in which they fight any form of change to the regulation of donor-advised funds, no matter how mild. The council and the Community Foundations Public Awareness Campaign kept up their reflexive naysaying by rejecting the recently introduced, bipartisan proposal sponsored by Sen. Angus King, an independent of Maine who caucuses with the Democrats, and Sen. Charles Grassley, Republican of Iowa.
If passed, the King-Grassley measure, known as the Accelerating Charitable Efforts Act, would encourage more rapid distributions from DAFs by creating two types of donor-advised funds. The first type, which would continue to provide donors with an immediate charitable deduction when they donate to their donor-advised funds, would need to distribute all of its assets within 15 years. The second type of DAF could exist for as long as 50 years, but donors would delay some of the tax benefits until they made grants from their DAFs to working charities. These measures would require a bit more work for DAF sponsors, but the return would be remarkable and enormously beneficial for society: billions of additional charitable dollars flowing to organizations meeting important needs.
And here’s the punchline: Community foundations, for the most part, would not be affected at all. That’s because the authors of the bill, recognizing the historic role of donor-advised funds in community-foundation funding, created a community-foundation carve-out. No payout rules are imposed on community-foundation DAF accounts provided the account is $1 million or less. Accounts over $1 million only need to distribute 5 percent a year, and distributions to the sponsoring community foundations (including annual fees imposed on the DAF account) would satisfy the payout requirements. In addition, to eliminate competition among community foundations, a donor can set up tax-exempt accounts in multiple community foundations.
So from the point of view of community foundations, what’s not to like?
The King-Grassley measure actually provides them with a competitive advantage over commercial gift funds like Fidelity and Schwab, as community foundations could offer their donors maximum tax benefits and minimal restrictions along the lines of current practice. But more to the point, the senators’ measure would turn back the clock 30 years, allowing community foundations to focus on what they do best: build on their deep knowledge of the community to connect donors to critically important causes.
A Crucial 1991 Decision
You see, before 1991, when the IRS (to its everlasting shame) approved the establishment of the Fidelity Charitable Gift Fund, DAFs were not a driving obsession for community foundations — or for anyone. Community foundations focused on connecting their donors to vital causes in the community. For some donors, donor-advised funds were the preferred vehicle, and community foundations and DAF donors had actual conversations (that’s where the concept of “donor-advised” comes from — this was a discussion, not an edict from the donors) for the use of those funds.
But after 1991 and the takeover by Wall Street of donor-advised funds, DAFs became a commodity, and community foundations — not all but many — undertook a race to the bottom. Community foundations tried to compete with Fidelity and its ilk on rate, return, and the speed by which they responded to donor requests, rather than focusing on their knowledge of the community and their insights into charitable priorities. For some foundations, such as the Silicon Valley Community Foundation, the drive for growth at any cost overwhelmed other values, leading to a toxic culture and a change in leadership. In other community foundations, the drive to compete with the commercial gift funds for DAF assets was less overt but ever present.
The King-Grassley measure would allow community foundations to return to their roots. Many donors would come to community foundations in part because there would be fewer restrictions than at commercial donor-advised-fund sponsors. And community foundations could concentrate on what they historically have done best: helping donors connect to the most important and worthy causes in the community. These rules also facilitate community foundations building their assets — which can serve as true rainy-day funds for the community.
Why Community Funds Matter
I confess that this is personal to me. I spent several years in the 1990s working for a community foundation, as those organizations began to cope with what was becoming overwhelming competition from the commercial gift funds. And going a few years further back, I was the executive director of a small-human service organization that suffered a devastating fire. The next day I received a call from our community foundation expressing sincere sympathy and promising support. A few weeks later a $50,000 check arrived — very real money back then, and a huge boost for our efforts. I had no idea how much of that grant came from donor-advised funds, and frankly I did not care. (In fact, at the time I didn’t even know what a DAF was.) All I knew is that the community foundation rallied support for our cause — and our organization survived and thrived thanks to that intervention. The community foundation played a critical role that no other entity could possibly have assumed.
The King-Grassley measure also includes some long-overdue legal changes, such as prohibiting using the salaries or travel expenses of donor family members to help a private foundation meet its federal requirement to give away at least 5 percent of assets every year. The measure further puts limitations on private foundations’ ability to meet the 5 percent test through grants to donor-advised funds, an increasingly common workaround by foundations seeking to avoid grant making, transparency, or both. The abuses inherent in these practices are clear, and the Senate plan provides a decisive and immediate fix. Why on earth would community foundations choose to be on the wrong side of these issues?
More to the point, how have community foundations failed to grasp this perfect opportunity to differentiate themselves from Fidelity, Schwab, Vanguard, and the other commercial gift funds? My sense is that the lobbyists leading the Community Foundations Public Awareness Campaign got ahead of its membership in taking a stand against the King-Grassley measure, and I would hope that the majority of community-foundation leaders come to appreciate a good deal when they see it. The Senate proposal would curb the most outrageous abuses of donor-advised funds, while providing much-needed incentives to spur the distribution of billions of dollars to working charities from DAFs and private foundations. And, in the process, the Senate measure would allow community foundations to reinvent themselves, as themselves — that is, as community-centered forces for good.