Debate amid pandemic: Should foundations have to give more?

The viral pandemic wiped out jobs and businesses and left many U.S. families unable to afford food

Philanthropy Increasing Donations (Copyright 2020 The Associated Press. All rights reserved.)

The viral pandemic wiped out jobs and businesses and left many U.S. families unable to afford food. It also caused a crisis for charities: Too much need, too little funding.

And now it's sparking debate over a divisive question: Should philanthropic groups donate more money to charities? Should they be forced to?

Ask someone like Chuck Collins, and you’ll get a resounding yes.

Collins, a director of the Institute for Policy Studies, a progressive think tank, thinks the government should compel foundations and donor-advised funds to step up their contributions. Philanthropic groups enjoy tax-favored status, the thinking goes, and many of them have watched their assets multiply from stock market gains and other investments.

“We're in the middle of an emergency,” Collins said. “The pandemic is a serious thing that we need to do something about right now.”

Collins and others are pushing a proposal for Congress to require foundations and donor-advised funds to contribute at least 10% of their investment assets each year for three years.

If passed, it would be the first significant change in laws governing nonprofit funding since the Tax Reform Act of 1969. That law set a rule by which foundations must donate at least 5% of their assets annually to maintain their tax-exempt status. Donor-advised funds, which are akin to charitable investment accounts, aren’t now required to make any donations in any one year.

The payoff, advocates say, would be an additional $200 billion for charities that serve families suffering hardships from the pandemic. The proposal has the backing of some leading philanthropists, including Scott Wallace of the Wallace Global Fund and Abigail Disney.

“We had no way to envision the level of inequality and concentrated wealth we have now in 1969,” Collins said. “We can do something about that.”

Still, it remains far from clear that his proposal can gain enough political support to make it through Congress. Even within the philanthropy community, some leading figures favor far more modest steps to increase donations. Others prefer to keep the status quo.

Philanthropist John Arnold, co-founder of Arnold Ventures, for one, is skeptical of any government mandate to compel foundations to increase their payouts. Arnold argues that the same goal can be achieved in other ways — by, for example, reducing loopholes that let foundations count donations in dubious ways or allow them to consider compensation paid to family members as part of their annual payouts. He also questions the idea of making any government-mandated contribution requirements only temporary.

“It’s a little tricky for groups to double their payout for a limited number of years and then revert back,” Arnold said. “I also think it’s hard for a lot of groups to handle sudden surges of money, then a pullback. It’s hard to run an organization like that.”

Arnold proposes a more modest solution — the Initiative to Accelerate Charitable Giving. Under this plan, assets in a donor-advised fund would have to be donated within 15 years. Arnold would also add a sweetener: Foundations that donate more than 7% of their assets in any year wouldn’t have to pay the excise tax, usually amounting to under 2%, that they normally face.

His plan — developed with Ray Madoff, director of Boston College Law School’s Forum on Philanthropy and the Public Good — has the support of some of America’s biggest foundations, including the Ford Foundation, the William and Flora Hewlett Foundation and the W.K. Kellogg Foundation.

But even the Arnold plan faces resistance from some nonprofits that oppose any government effort to induce foundations to increase their payouts. Among them is the Philanthropy Roundtable, a conservative-leaning network that opposes government involvement in private charitable donations.

“We actually don’t think it will accelerate giving at all,” Elise Westhoff, the Roundtable’s president and CEO, said of Arnold’s proposal. “It’s really a solution in search of a problem.”

In the midst of last year's devastating pandemic recession, charitable giving rose modestly for the year. The gain was boosted in part by a record-setting year from donor-advised funds, including Fidelity Charitable, whose contributions jumped 24% to $9.1 billion.

Likewise, the Ford Foundation increased its giving last year, in part by issuing $1 billion in social bonds, which are intended to raise money to address social causes, such as economic inequality.

“Charitable giving has been a silver lining through this crisis and, frankly, through throughout history,” Westhoff said. “One of the reasons that is the case is because it’s always been voluntary.”

Though precise numbers are hard to produce, donor-advised funds are believed to pay out an average of 20% a year. Jake Cook, a managing director for BDO, said he thinks a risk in having the government impose payout requirements on the funds is that some donors might actually reduce their giving.

“When you put a minimum in place," Cook said, “then you potentially have a target number that people start working towards, even if they were giving more.”

Westhoff says that scenario concerns her. When it appeared that the Initiative to Accelerate Charitable Giving was gaining momentum in Congress, the Philanthropy Roundtable led a coalition of 64 “free-market and conservative organizations” that urged Congress to reject any new restrictions on charitable giving — even on a temporary basis, as Collins and other advocates favor.

Conservatives have also expressed concern about Xavier Becerra, President Joe Biden’s nominee to lead the Department of Health and Human Services. In 2008, Becerra referred to tax-deductible charitable donations as a “$32 billion earmark” that would be scrutinized if nonprofits didn't improve their record of donating to minority communities.

All this dissension makes it less likely Congress will act on the issue, warns Steve Taylor, United Way Worldwide’s senior vice president and counsel for public policy.

“Members of Congress have nothing to gain by passing legislation in any sector, including the nonprofit sector, that the sector is divided on,” Taylor said. “If you have a small group saying, ‘This is what we need,’ and then you have a bunch of charities and donors saying, ‘No, we don’t need that’ — that ends the conversation right there.”

Even though United Way would presumably benefit from increased donations from foundations and donor-advised funds, Taylor said he worries that these proposals will distract Congress from delivering more direct aid for nonprofits. Such aid might include increased tax incentives for donations to charities and more support for nonprofits in the next version of the government's Paycheck Protection Program.

“The bad actors are going to find a way around this,” Taylor said, “and the good actors are then going to be left with a bureaucratic burden that isn’t really going to make any difference.”

Teri Behrens, executive director of the Johnson Center for Philanthropy at Grand Valley State University, says it’s too early to tell whether or how Congress might act. Nevertheless, she says her research suggests that any federal effort to spur donations carries risk.

Even if Congress were to require foundations and donor-advised funds to pay out at least 10% of their investment assets annually for three years, Behrens said it could take 20 years to replenish the money that would be spent in those three years.

“We are taking money away from future needs by doing this," she said.

On the other hand, Behrens said numerous nonprofits are shuttering now, and her research suggests that the trend will outlive the pandemic.

Collins, who is holding out hope for his plan to require increased payouts, argues that the tax system's favorable treatment of foundations and donor-advised funds may provide the strongest rationale.

“If taxpayers weren’t subsidizing their existence," he said, "they might have a point about their sovereignty. But you and I are chipping in a substantial amount of money: Seventy-five cents of every dollar that a billionaire gives to charity is lost tax revenue, so that’s why there’s a public interest.”

___

The Associated Press receives support from the Lilly Endowment for coverage of philanthropy and nonprofits. The AP is solely responsible for all content.