Diverging Fortunes: Philanthropy, the 1% and the Shrinking Middle Class

In the next few weeks, The Chronicle of Philanthropy will put out “The Philanthropy 400,” their annual ranking of the largest charities in the U.S. For at least the last two years, The Chronicle of Philanthropy has predicted that Fidelity Charitable, one of a handful of large commercial donor-advised fund vehicles, will pass United Way on the Chronicle’s list as the largest US charity, and 2016 may be the year that actually happens.

You might shrug and wonder, why should it matter? What’s the difference between the number one spot and number 5, or 10, or 15, among the hundreds of thousands of U.S. charities?

This is not to argue that size doesn’t matter, but that the underlying trends driving this change are more important, and they don’t bode well for community-focused philanthropy. What does a deeper look tell us about where philanthropy is heading in the U.S?

United Way — Adapting to a Changing World

United Way builds opportunities for low-income working families to lead successful lives by focusing on the three key building blocks of a good life: education, income and health. United Ways across the U.S. — and increasingly abroad, in Latin America, Asia, Europe and Africa — work with local communities to identify how best to address local health, financial stability and education goals; bring together leaders from all sectors — business, residents, nonprofits and public officials — to look for broad scale solutions; and then both provide programs and services directly and fund partner nonprofits to work toward shared goals.

United Way raised a total of $5.18 billion in the most recent (2014–15) year. Of that total, $3.89 billion (75%) was raised in the U.S. and $1.29 billion was raised internationally. Approximately ¾ of these funds are invested in United Way’s impact work, and ¼ are designated to other charities by donors (donor designation is much more prevalent on the West Coast).

United Ways are not endowed organizations, which brings both advantages and disadvantages. United Ways put their funds to work within 12–18 months of raising them, so the time-value of money means contributions to United Ways can have greater impact than if they were held and spent from an endowment. Endowed foundations fund their missions by spending a small fraction of their total assets, typically, between 3% and 5%, from year to year. This means an endowed foundation would need $80 billion in assets to make a similar scale of philanthropic investment as the $4 billion or so the United Way drives in the U.S. every year. Here in California, it would take an endowment of $4 billion to support the investment our local United Ways make every year. Without endowments, though, the year-to-year prospects of United Ways are much more uncertain, and they certainly are more vulnerable to economic fluctuations.

In many ways, United Way is “Philanthropy for the Middle Class.” In the US, United Way has approximately 8.5 million donors, and the average gift is around $350 a year. United Way reaches most of those 8.5 million donors through workplace giving, in campaigns where people gather with their colleagues in a group effort to give back.

But United Way reaches fewer and fewer of those donors each year.

In the 1950s, 60s and 70s, the heyday of large employers, United Way’s workplace giving approach was the perfect revenue model. Things are very different today, though. Every year, our largest and most valuable companies employ fewer people, thanks to increasing productivity and improvements in technology. Google has a higher market capitalization today than (adjusted) today as AT&T had in 1964 when it was the most valuable company in the U.S., yet where AT&T had over 750,000 employees then, Google today only has about 55,000 employees.[1][2]

The compact between businesses, individuals and communities has changed drastically, and United Ways face significant challenges in adapting and thriving. United Way still receives support from millions of moderate-budget donors, made possible by historically strong relationships with business and major corporations, but the reliance on corporate campaigns has meant weaker direct ties to individual workers. United Way has been fortunate to maintain moderate growth in revenue by raising more money from a smaller number of donors. Workplace giving may not disappear entirely, but it is imperative that United Ways transition to direct engagement of millions of individual donors outside the workplace.

We think a key to doing that is engaging and mobilizing people to volunteer and advocate, not just to give money. Millennials and younger folks especially want to be actively involved in deciding what gets done and in making it happen. But that is a very different model than the new “charities” racing to the top of the rankings.

Dark Stars: Donor-Advised Fund Entities Sponsored by Financial Services Firms

These days, it seems donor-advised funds (DAF) sponsored by financial services firms have a perfect revenue model — they hold and manage funds for millions of upper-income people, so they know who to approach about creating a donor-advised fund, and they often know a great deal about their interests through robust internal data. They are enjoying explosive growth, outpacing other entities emphasizing donor-advised funds. While contributions to community foundations have grown from $2.9 billion in 2000 to $5.8 billion in 2014, commercial donor-advised funds such as Vanguard, Fidelity, Schwab, Goldman Sachs grew from $1.5 billion to $11.8 billion during the same time period (an increase of over 800%!).

Donor-advised fund services are clearly a good revenue model for the financial services firms that sponsor them, but are they good for charities and the communities they serve?

Big Benefits for Well-Heeled Donors

Before going further, it will be helpful to distinguish between donor-advised funds as a particular type of account for holding funds earmarked for charitable purposes, and entities sponsored by financial services firms to provide access to donor-advised funds as a tool for their clients, which for convenience we will call “commercial donor-advised funds” or “commercial DAFs”. Donor-advised funds were pioneered by community foundations and large nonprofits like universities and hospitals, and also are used by other nonprofit public charities, like some United Ways.

Donor-advised funds offer valuable benefits to donors. Donor-advised funds allow donors to deduct 100% of the value of a contribution at the time it is made, but delay actual disbursement of the funds for qualifying uses until a later date. They also allow donors to take a larger deduction than they could if they were to instead set up a private foundation, which is the primary other way they could hold assets for future charitable use. Compared to private foundations, donor-advised funds allow donors to donate property that has appreciated in value over time — stock, art, commercial or residential real property or assets like boats or machinery — and receive credit for their current full value, rather than only their original investment in that property (their “basis” in tax terms), and they also allow donors to deduct 100% of that value, rather than only 30% if they were to put the assets in a private foundation.

Critics have raised serious concerns about donor-advised funds, and in particular the large funds run by financial services firms, like Fidelity Charitable, Vanguard Charitable and the others mentioned previously. A primary concern is that it is difficult to see where funds in DAFs go, and even whether they are spent at all. Charities are frustrated that such a large pool of funds is invisible to them, they are unable to identify and seek funding from them. There are no clearinghouses, such as Foundation Center or Guidestar providing access to DAF interests, giving history, and financial condition. Critics argue DAFs stockpile funds for long periods, allowing donors to get a tax deduction up front and then spend years, potentially decades, before putting the stockpiled funds to charitable use (and earning fees for fund sponsors all the while); that they get around rules that require a minimum amount be spent every year on charitable purposes, that they enable donors to get outsized tax benefits or use their tax-exempt funds for spending that benefits the donor; that they divert funds that otherwise would be spent in low-income communities. Taking all these concerns together, some philanthropic analysts conclude the net effect is that commercial donor-advised funds are undermining America’s charitable sector, as Ray Madoff and Lewis Cullman wrote in the New York Review of Books in July.

In the end, donor-advised funds are just a still fairly new financial vehicle for charitable dollars, and it should be possible to address concerns about them through policy changes.

Benefits Unclear for Communities and Causes

But whatever their merits, the large commercial DAFs are not a strategic approach to philanthropy. Commercial donor-advised funds provide a valuable service, but in my view, they are not really charities with a mission, advancing a point of view about strategic goals, so much as they are financial firms providing services to their investment clients. Community foundations, United Ways and other nonprofit foundations that also use donor-advised funds typically have a point of view, a set of charitable and philanthropic goals they prioritize, even if they also serve the needs of donor-advisors.

When challenged, defenders of commercial donor-advised funds point to the sanctity of donor intent. There is no denying that under both our free market values and our legal principles, donor intent is paramount.

But certainly donor intent can’t be the only consideration — as a society, or as an enterprise like Vanguard, or a community foundation or a United Way, we need to hold ourselves accountable for what we produce, for what the aggregation of donors’ intentions accomplishes. While commercial donor advised funds are recognized as public charities under the tax code, the true test of whether they are “charities” that belong at the top of the Chronicle’s Top 400 is what charitable impact they have on causes and communities across the country, is whether they are in fact more than just an aggregation of wealth exempted from tax. If Fidelity Charitable does become #1 on the Top 400, that may lead to more uncomfortable scrutiny of their impact.

Some commercial DAFs offer donors the option to manage the investment of funds in their donor-advised fund themselves, giving them a way to feel they are putting the funds to best use. Given Wall Street’s penchant for quantitative analysis (see, e.g. Blackrock), it’s conceivable that one day commercial DAFs also could charitable performance compared to other donor-advised funds for their donors, too.

How will we know what impact DAFs have on community-focused philanthropy, on efforts to solve large-scale problems that require sustained focus? What should we look for? The following questions would be helpful for evaluating whether a commercial DAF, or a donor-advised fund within it, is delivering sound charitable performance:

· Time-value of money: How quickly do charitable funds get converted to action?

· Mission: Does the charity have a coherent statement of purpose, of the change it would like to create?

· Strategy: Does the charity have a plausible, logical strategy for how it will bring about change to advance its mission?

· So what?: What difference does the charity make in the fields in which it is active?

· Who benefits?: This also is hard to define, but a little easier to see than the “so what” question. Most donors give first to their circles — their congregation, their or their children’s schools. This is natural, but true charity involves more selflessness. What is the ratio of giving to the donor’s own affinity groups compared to other-direct giving? Does the fund help communities or causes that wouldn’t otherwise receive substantial support? (e.g., Harvard doesn’t need more money, though a donor might need or want to be someone who contributed to Harvard.)

One way to make the beneficial impact of DAFs more visible would be increasing coordination and partnership between the large Commercial DAFs and community-focused charities with national reach, available to Commercial DAF clients wherever they live, such as Boys and Girls Clubs, Salvation Army, YMCA, United Way and other United Way. The Commercial DAFs have resisted this so far, preferring an “agnostic” or “neutral” approach to the interests of their clients as donors. This detachment may be admirable as a fiduciary principle, but it undercuts the notion they are charitable, mission-driven organizations. More important to the commercial DAFs, however, it may also leave them vulnerable to competition from other providers for management of philanthropic funds. The Commercial DAFs, while huge and growing exponentially, are still fairly young, and getting to know their clients’ aspirations as philanthropists may grow in importance as a way to make clients happy and keep their funds under management (as well as stave off possible increase scrutiny from Congress). While most donors give first to their affinities — their congregations, their schools, their museums and cultural organizations — and typically provide less to problems of the common good, ambitious clients may be inspired by the examples of high-profile billionaires like Warren Buffett, Bill Gates, and for the younger generation, Mark Zuckerberg and Priscilla Chan. For commercial DAFs seeking to provide more support to those donor-advised fund clients, community-focused nonprofits like United Way and others may prove to be helpful partners.

[1] “In 1964, the nation’s most valuable company, AT&T, was worth $267 billion in today’s dollars and employed 758,611 people. Today’s telecommunications giant, Google, is worth $370 billion but has only about 55,000 employees — less than a tenth the size of AT&T’s workforce in its heyday.”

http://www.theatlantic.com/magazine/archive/2015/07/world-without-work/395294/

[2] http://www.theatlantic.com/business/archive/2011/04/this-is-what-the-post-employee-economy-looks-like/237589/

“Fifty years ago, the four most valuable U.S. companies employed an average of 430,000 people with an average market cap of $180 billion. This year, the four largest U.S. companies employ an average 120,000 people with an average market cap of $334 billion. The titans of 2011 have twice the value of their 1964 counterparts with a quarter of the employees.”

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