PACS news/May 28, 2020
By Paul Brest and Erinn Andrews, Effective Philanthropy Learning Initiative, Stanford PACS
Thank you to the 1,127 participants of our DAF webinar on May 14! We greatly appreciated the quality as well as quantity (almost 250) of your questions, and will respond to some of them here that we couldn’t answer during the live event.
As background, the webinar was based on the work of Stanford students, guided by Stanford Law Professors Joseph Bankman and Paul Brest, and visiting scholar Daniel Hemel over the course of a nine week seminar. Our goal was to explore the current issues of concern to the various stakeholders—particularly the nonprofit organizations that receive DAF grants. We read relevant literature, met with representatives of various constituencies, interviewed a number of donors, and heard from DAF grant recipients via a survey sent to the nonprofit members of CalNonprofits. We heard from a larger number and wider range of nonprofits than from any other constituency. But we should emphasize that we did not aim to produce a comprehensive survey of this large and diverse field so there are certainly limitations to our work and we leave many questions still unanswered. Those interested in field-wide data might begin with the National Philanthropic Trust’s 2019 DAF Report.
During the live event, we referred to interviewing a number of under-40-year old donors. The Effective Philanthropy Learning Initiative at Stanford PACS was concurrently interviewing millennial donors and we were able to piggyback on that research to ask questions relevant to the policy lab topic. We realize that under 40-year olds are not representative of all donors, so we additionally looked at information about older donors’ reasons for contributing to DAFs.
Gifts of appreciated securities and complex assets. One feature of DAFs that makes them attractive to many donors is their ability to receive and sell appreciated securities and complex assets and distribute them to multiple charities, including community-based organizations that don’t have this capacity. (Complex assets account for about 5 percent of contributions to DAFs.)
Investing DAF assets. Most of the assets contributed to DAFs are invested in the conventional ways designed to achieve good risk-adjusted financial returns. The assets grow tax-free, but they belong to the DAF sponsor and can only be used for charitable purposes. Subject to the investments described below, they are as likely to grow as the corpus of any endowment.
Environmental, Social, and Governance (ESG) funds. Many sponsors offer ESG funds of publicly-traded stocks. Although they are unlikely to affect companies’ behavior, their alignment with some donor’s values may encourage those donors to contribute to DAFs. However, donors should scrutinize the fees for ESG funds, which are typically higher than for other investments. (Here’s an explanation of the difference between values-aligned investments and investments that have impact.)
Impact Investments. An increasing number of DAF sponsors also offer opportunities for impact investments—typically, private equity investments or loans that yield below-market returns in order to achieve social goals. These mimic program-related investments (PRIs) done by foundations, and can be thought of as quasi-PRIs. Although they have the potential for real social impact, they are difficult to do well, and a donor should conduct due diligence before recommending such investments. In contrast to private foundations’ PRIs, DAF impact investments do not count as charitable distributions; they are merely investments.
“Rate of return” on philanthropic grants. When people talk about the rate of return on philanthropic grants, they are referring to the net social value that a grantee organization can produce with additional funds. For example, funds for early childhood education have the potential to pay off during the beneficiaries’ lifetimes and for their progeny as well. Unlike financial returns, which have a common metric, the metrics for social value are highly subjective and depend on the particular causes to which grants are made. For the most part, it’s better to treat the concept as a metaphor rather than a metric. One important point, though, made by Michael Klausner in this article, is that there is no reason to treat future lives as any less important that present ones.
Timing and payout. There are various reasons why a donor may delay recommending grants from a DAF. In the webinar we mentioned donor effectiveness (the donor is deciding what causes to focus on or engaging in due diligence), cause effectiveness (some causes call for long-term rather than immediate funding), building a legacy, and inertia. There is some evidence that DAFs may have a smoothing effect—that is a higher payout—during economic downturns when individuals and foundations are giving less than usual; we should see more evidence about this soon. Also related to grantmaking, it appears that the large majority of DAF grants are unrestricted—a noteworthy difference from grants from private foundations.
We noted that the average payout of DAFs is estimated to be about 20 percent per year. The economist James Andreoni concludes that if one were to think of contributions to DAFs as inventory, contributions made in year 1 tend to be paid out by year 4. These estimates include dormant funds. Preliminary research on DAF-to-DAF transfers suggests that they account for about one percent of DAF grants. (We don’t have numbers regarding the different question of transfers from foundations to DAFs. Although there are often legitimate reasons for such transfers, such as some DAF sponsors’ special expertise, it is definitely not legitimate as a means of circumventing the 5 percent required annual distribution.)
Though not legally required, national DAFs, community foundations, and many special purpose DAFs nudge the donors of dormant funds to recommend grants, and many will make grants themselves rather than allow funds to remain dormant for extended periods. Unless the donor specifies a successor, the sponsor assumes responsibility for grantmaking after the donor’s death.
Of course, averages don’t tell you about individual funds, and we have little doubt that there is a huge variation in payout rates. It would be very useful if DAF sponsors provided de-identified information about individual DAFs.
On a related issue of transparency of donors to grant recipients—so the recipients are able to ensure that donors are reputable and to steward grants and develop relationships—we learned that such transparency is the norm for many DAFs and often the default unless a donor affirmatively chooses anonymity.
DAF sponsors’ vs. donors’ incentives. On the one hand, DAF sponsors have an incentive to have more money under management because of the fees they receive. On the other hand, donors have an incentive to make grants sooner rather than later to minimize the fees and ensure that their donations go to charities. Rather than try to reason from these abstract premises, we think it’s more valuable to look at actual practices—for example, the sponsors’ practices of nudging donors to recommend grants and the sorts of advice that they offer donors. Granted that we spoke to a small selection of DAF sponsors, we did not see perverse incentives at work.
Sponsors’ advice. Again, based on a small selection of DAF sponsors, the advice that sponsors give their donors depends on large part on the type of sponsor. Community foundations and special purpose sponsors provide invaluable advice about local nonprofits and organizations within their ambit, respectively. The large national DAFs offer customized advice to their larger donors. We are uncertain about how much any of this advice is asked for.
We will be publishing a longer form paper compiling the work of the student groups which we will post once available. For those of you unable to join us for the live event, you can find the presentation recording and slides here. Thank you again for your interest in this topic!