Donor-advised funds (DAFs) provide needed resources to local communities, especially during critical times such as the current pandemic. However, these popular giving vehicles face heavy criticism that they do not payout to nonprofits fast enough and Congress may slap them with new federal payout requirements. Durable public policy is driven by sound, data-supported evidence. This study is a good start to building that body of evidence on the use and impact DAFs have in communities around the country.
New research on DAFs housed in community foundations helps to inform policy discussions and runs counter to the underlying criticisms of DAFs. Instead, the research provides evidence that some DAFs are sending the dollars out as quickly as they come in while others are accumulating assets to meet community needs during major crises now and in the future.
Recently, the Council of Michigan Foundations (CMF), in partnership with the Dorothy A. Johnson Center for Philanthropy at Grand Valley State University, released its third installment of a research series on foundation payout rates and investments. This report “Analysis of Donor Advised Funds from a Community Foundation Perspective” explored payout rates among DAFs at community foundations nationwide and specifically in Michigan.
For this report, researchers analyzed data from more than 2,600 individual DAFs from the years 2017-2020. They represent a significant proportion (about 85%) of all DAFs held at Michigan community foundations by number and asset value. Here are some broad trends from their research.
More Michigan DAFs made a grant than received an inbound donation
The research illustrates the significant role DAFs play overall in community foundation assets and distributions. Most community foundations in the U.S. – about 90% – sponsor at least one DAF. In the aggregate, distributions from community foundation DAFs grew faster than contributions to them. In fact, in any given year of the study, more Michigan DAFs made a grant (60%) than received an inbound donation (40%). Further, DAF balances represent about half of the endowments held by all community foundations. The importance of these endowments should not be understated. Particularly in rural areas, community foundation endowments serve those in greatest need in a sustainable, strategic way.
A significant proportion of Michigan community foundation DAFs are making grants regularly
The study found that most of the DAFs (86%) made a grant in at least one of the four years of the study. These are truly giving vehicles. Even those without a grant in one of these years serve important charitable purposes. For example, these may be endowed DAFs, established for long-term giving goals. According to the study, “across the four study years less than 10% of all Michigan DAFs were quiet (inactive) in every year,” and this very small share of the DAFs examined, so-called “quiet” DAFs, “hold less than 5% of total DAF assets in the state.” This makes sense considering DAFs that were active in every year studied received nearly all of the contributions (96%). It is important to note, however, that those DAFs classified as “quiet” by the report (no grants out or contributions into DAF in one year) are still valuable charitable giving accounts. Any funds donors have put into those accounts are irrevocably dedicated to charitable giving and are appreciating over time for an ultimately larger benefit to charities. Considering about half of Michigan’s DAFs are endowed DAFs, established with the intent of long-term use, changes to the law that would disallow long-term giving goals would likely impede these vehicles.
Michigan DAF holders ramped up giving to nonprofits in 2020
Michigan DAF donors increased their giving from a median distribution of $8,500 in 2019 to $9,750 in 2020. The increase made a significant difference across the studied DAFs that existed in both years, with an additional $13.6 million in distributions out of DAFs in 2020 vs 2019 at the same time that contributions into DAFs declined. This suggests that while household budgets grew tighter, those with charitable giving accounts were still able to help their communities in a time of crisis. As for those “quiet” DAFs we mentioned earlier, nearly one in five grant dollars in 2020 came from DAFs that did not make distributions the prior year. Far from evidence of stockpiling, this demonstrates the important role of DAFs as charitable rainy-day funds.
Private Foundations Rarely Use DAFs
Of the Michigan DAFs examined, only 2% were created by private foundations. Unsurprisingly, the private foundations’ share of total DAF balances, contributions and distributions was also extremely small, representing less than 10% of all studied DAFs. While we cannot generalize the study results to all DAFs in the U.S., it indicates that there is a flaw in the proposals to over-regulate these giving vehicles. Where is the evidence of widespread private foundation reliance on DAF gifts to meet their payout requirement? The recent bill introduced by Senators Angus King (I-ME) and Charles Grassley (R-IA), S. 1981, would restrict the ability of private foundations to count their DAF gifts toward their required payout rate. Not only does this ignore the many valid reasons a private foundation may give through a DAF, such as privacy concerns, but this study suggests it is a solution in search of a problem.
Clearly, assets in community foundation DAFs are not just being amassed but are being distributed to charities as best meets the needs of the community and giving goals of the donor. This may be one state’s experience, but one that highlights why policymakers should not be hasty to pass sweeping one-size-fits-all federal payout requirements.
For more on this topic, join the Council on Michigan Foundations event on July 22, 2021. Register here.