The popularity of donor-advised funds (DAFs) has skyrocketed over the past several years, causing them to receive a larger share of charitable assets and making them responsible for a larger segment of grants to charities. This rise in popularity and responsibility of DAFs has made them a focus of criticism, much of which centers on the narrative that DAFs only serve as tax avoidance vehicles for the wealthy and parking lots for charitable assets. However, upon closer inspection of the data, that just doesn’t seem to be the case.
A new study released last week from H. Daniel Heist, a PhD candidate at the University of Pennsylvania, and Danielle Vance-McMullen, assistant professor in public and nonprofit administration at the University of Memphis, examined the data of 996 DAF organizations from 2007 to 2016 to provide an empirical analysis of DAF activity. Contrary to critics’ opinions, the study found that DAF grantmaking is relatively resilient to economic downturns with increased payout rates during times of recession. It also determined that DAFs granted charities nearly 90 percent of their annual contributions, identifying a new variable metric the authors call the “flow rate.”
We took a deeper dive into the study to further explain these findings and describe how it counters common myths about DAFs. In addition to our analysis, we encourage you to download and read the entire study on your own.
Before diving into the findings, we first need to define how Heist and Vance-McMullen calculated payout rate, as their findings are lower than what many following this issue may see from organizations like the National Philanthropic Trust (NPT). For example, this study found that in 2015 the median payout rate by DAFs was 13 percent. That rate is well above the 5 percent payout rate of private foundations, but below the 20.3 percent payout rate reported by NPT. The traditional payout calculation used by organizations like NPT strictly evaluates the ratio between DAF grants and asset value. The payout rate calculation used in this study used a formula that “indirectly accounts for investment earnings and fees in the calculation of asset value, uses data from within the same reporting year, and generally yields slightly lower rates.”
With that all explained, let’s look at some of the findings.
In 2015, over $13.5 billion was granted to public charities out of DAFs. Sponsor grant totals ranged from $0 to $2.8 billion, with a mean of $15.5 million and a median of $750,000. Out of 897 observations for that year, only 5 sponsors (less than 1% of the population) reported $0 in grants.
A common critique of DAFS is that they are simply warehouses of wealth where rich people stash money in order to reap tax benefits and ultimately allow the fund to remain dormant. The findings in this study show that critique is unfounded, especially when Heist and Vance-McMullen introduce flow rate as a metric. Flow rate assesses the amount of grant money leaving DAFs in relation to the amount of money contributed to DAFs within the same year.
If donor-advised fund sponsors were likened to a reservoir, the flow rate would measure the amount of water released by the reservoir as a percentage of the amount of water coming into the reservoir. This gives us a sense of the rate at which water is flowing through a reservoir. Just as water flowing into a reservoir is not necessarily the same water that is flowing out, we are unable to distinguish whether the money being granted from donor-advised funds is the same money as that which is being contributed within a given year.
Flow rate is critical to the analysis because a DAF is an active charitable vehicle that has continually changing assets throughout its life. They are not “mini private foundations” but a wholly different type of intermediary philanthropic entity.
The median flow rate in 2015 was 87%. This means that for the median DAF sponsor, the value of the grants given out of the organization was 87% of the value of the contributions that were made into the organization in that year. It also suggests that about 13% of the value of contributions is remaining in the organization to be used in the future.
Flow rate further illustrates that assets are not being parked in DAFs only to sit idle never to be distributed to charities, as levied by many DAF critics.
When we analyze organizational-level DAF activity, we observe that DAF grantmaking is relatively robust when compared to DAF assets and contributions. The median payout rate is approximately 13%, indicating that funds for DAF grantmaking are not generated solely from interest earnings. Median flow rates of 87% suggest that donor-advised funds act as pass-through philanthropic intermediaries, not as long-term parking lots for charitable dollars.
Perhaps the most impressive characteristic of DAFs was their performance during the most difficult economic environment. The study found that both the payout rate and the flow rate remained flat from 2007-2015 with the exception of 2008-2009, at the heart of the Great Recession. Here’s what the study said about the payout rate during that time:
Table 3 depicts the generally flat trend of payout rates, which indicates that grant values grow at roughly the same rate as asset values. The exception to the flat payout rates in this period is in 2008, when the median payout rate reached 16%. Because 2008 was the beginning of an economic recession in the United States, the increase in payout rate indicates that further examination of DAF use during recessions is warranted.
And here is the similar finding about the flow rate:
The median for this statistic [flow rate] has remained fairly flat over the time period of the data, except for the year 2009, when it peaked at 103% (see Table 3). This means that in 2009 the median DAF sponsor gave away more money than it received – another indication that DAF activity is different during a recession.
As the annual Giving USA report shows, there is a correlation between economic growth and charitable giving by both individuals and private foundations. As the economy enters a recession, charitable giving from both individuals and private foundations decreases at the very time charitable services are needed the most. However, DAFs buck that trend and actually increase their grants during difficult economic times.
Giving from foundations decreased as readily as individual giving during the recession years of 2008-2009 (Reich & Wimer, 2012), when nonprofits needed the money the most. During this time, donors with money in donor-advised fund accounts were uniquely positioned to continue to support the causes they cared about. Our findings suggest that grantmaking from donor-advised funds is less affected by economic recession than other forms of charitable giving. More research will be needed to understand what charities benefit from this DAF recession giving. Furthermore, policy makers may want to carefully consider the recession resilient nature of donor-advised funds as they formulate regulation for this growing form of philanthropy.
Based on this study, many of the narratives about DAFs offered by critics don’t hold up when examined against the actual data.