Giving Compass' Take:
- Dan Petegorsky explains how data around donor-advised funds obfuscates the reality around the giving vehicle.
- DAFs can be used for genuine philanthropic efforts. How can you make the most of this vehicle?
- Read about a DAF-based challenge for donors to unlock capital.
What is Giving Compass?
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Note: this is an updated and expanded version of an article that first appeared in Inside Philanthropy in March, 2021. Recent reports and responses from National Philanthropic Trust and other DAF sponsors have only underscored just how poorly they’re responding to critiques that we and others have raised.
One of the more disingenuous arguments that supporters of donor-advised funds (DAFs) make is that DAFs help to “democratize philanthropy” by serving as vehicles for smaller donors, not just the wealthy. As evidence, they note that the size of the average DAF has been trending downwards—from $279,479 in 2017 to $182,842 in the latest report from National Philanthropic Trust (NPT).
Leaving aside the bizarre notion that someone with over $180,000 to give away in charitable donations is in any way a small donor, the figures are misleading. And they highlight the lack of transparency in the aggregate figures the industry reports provide (or, indeed, in the IRS form 990s on which they are largely based). As critics frequently point out, whether describing account sizes or payout rates, the sweeping averages that industry leaders cite fail to provide a clear picture of how these giving mechanisms truly function.
Regarding the question of donor size, it’s like the inverse of the “Bill Gates walks into a bar” adage.
An updated version of that old saw might go, Elon Musk walks into a bar and all the patrons suddenly become billionaires (on average). The case of the DAF reports is the opposite: By crowding the bar with masses of small donors, they want us to believe Musk isn’t nearly as wealthy as he actually is, “because averages.”
If you brought 750,000 people into Elon’s place and averaged their wealth, Musk’s worth would drop to a mere fraction of his $147 billion. (Of course, Musk has recently succeeded in bringing down his net worth all by himself.)
Similarly, in its recent annual donor-advised fund reports, NPT has been adding in literally hundreds of thousands of workplace giving accounts that are administered as donor-advised funds by American Online Giving Foundation (AOGF). Throw these into the mix and, poof, the size of your average DAF account shrinks dramatically:
These small accounts are great vehicles for spurring and managing automatic payroll deduction contributions and employer-matching donations through workplace giving programs. And they are an entirely different animal than the mini-foundations that most other DAFs have become and that have raised such strong concerns for reformers.
Participating employees do not stash hundreds of thousands or millions of dollars into charitable accounts to maximize their tax deductions, and virtually all of the money that comes into the accounts goes out to working charities in the same year.
In its most recent publicly available filing (fiscal year ending March 31, 2021), AOGF reported that its 766,186 funds received $1.5 billion in contributions and granted $1.6 billion to charities, or 105% of those contributions. At the end of its prior fiscal year, AOGF reported the total assets in its DAF accounts as only $21,661,006. Using the payout rate formula preferred by NPT and other DAF sponsors (current year grants divided by prior end-of-year assets), AOGF’s rate would be 7,171%.
Using a more rational formula suggested by Ray Madoff of Boston College Law School and James Andreoni of the University of California at San Diego, the rate would be a far more intelligible 96%. As Madoff and Andreoni point out, the commonly used payout formula is another source of problematic data on DAF activity.
But for our purposes, the point is that AOGF is clearly operating differently than most other DAFs: it’s not warehousing wealth in any way, shape, or form. Workers donate money from their paychecks to their preferred charities. By contrast, the rest of the DAF world’s average payout rate would be a mere 16%.
In other words, 84% of available assets remain in the DAFs rather than being distributed to working charities. You can see how averaging these types of funds together presents a skewed picture of donors and their giving habits.
Read the full article about DAFs by Dan Petegorsky at Inequality.