Plan to Enhance Donor Payout faces lengthy odds in Congress, however some proponents say the timing is correct

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Plan to Increase Donor Payout faces long odds in Congress, but some proponents say the timing is right

A plan to revise federal regulations that will regulate how quickly funds from endowments and donor-recommended funds must be spent on charity is featured in some new conventions that will address a long list of other pressing issues, according to some nonprofit leaders great opportunities.

Still, many philanthropy experts, even those who oppose some aspects of the proposal, believe that the weight of the personalities who support it and the changing public attitudes towards the role of accumulated wealth could help the initiative to accelerate donation Charity receives support from a wide variety of lawmakers in both parties.

The plan, developed by philanthropist John Arnold and law professor Ray Madoff of Boston College, would allow donors to claim an immediate deduction for contributions to their donor-recommended fund accounts if the funds are distributed to charities within 15 years . The proposal would also prohibit private foundations from using grants to donor-advised funds to meet the state requirement to pay out 5 percent of their assets annually, and it would provide a tax incentive for foundations to increase their annual payout or all expenses reduce their wealth within 25 years.

These items would be a big sell for a Congress faced with changes in foreign policy, climate change, health care, and other post-Trump priorities. In addition to these challenges, many lawmakers lack a deep understanding of nonprofit tax law, said Lawson Bader, CEO of DonorsTrust, which sponsors donor-advised fund accounts. The involvement of Madoff and Arnold, two notable figures in philanthropy, and the fact that they hired well-placed lobbying and public relations firms to move the problem forward, could give more “momentum” to the Capitol Hill plan, Bader says .

A sense of crisis sparked by the Covid-19 pandemic has also sparked a desire for immediate change among nonprofits that fear a challenging economy could affect their fundraising next year, says Bader, who opposes the Pronounce plan.

“It’s taken seriously,” he says. “Even if you don’t understand tax law and the nuances of giving, there’s this urgency that I think might be a motivator.”

Cindy Lott, Associate Professor of Practice at Columbia University and Senior Fellow at the Urban Institute, says the rapid growth in donor-recommended funds means that at some point some kind of increased regulation and scrutiny is inevitable, though it’s unclear whether 2021 will is year it could happen.

“Whenever you have that much money in the system, at some point you will have some sort of regulation or oversight,” says Lott, who previously called
Executive Director of the National State Attorneys General Program at Columbia Law School.

Lott declined to speculate on whether the Madoff-Arnold proposal will be accepted in Congress. However, she says the long and diverse list of prominent supporters could mean “a rift in the fabric of the philanthropic universe”, paving the way for significant changes in the regulation and oversight of philanthropic institutions.

Deep divisions

The proposal has not yet passed legislation to Congress and already reveals divisions between different types of nonprofits, their advocacy organizations and academics. While nonprofits have set out a united front for the past decade to advocate the maintenance and expansion of the charitable withdrawal, the Madoff-Arnold Plan has generated a variety of responses.

The plan has a prominent list of supporters including billionaire philanthropists John and Laura Arnold, Seth and Beth Klarman, and Kat Taylor, and the heads of the Ford, Hewlett, Kellogg, Kresge and Wallace foundations.

Larry Kramer, president of the Hewlett Foundation, says the plan is preferable to stricter legislation that lawmakers might consider.

“I think this proposal could gain some momentum, especially when compared to some of the other proposals that are probably floating around out there,” he said. “It’s a really thoughtful and sensible way of doing this rather than commissioning something that might or might not work for different foundations.” (The Hewlett Foundation is a financial backer to The Chronicle.)

Scott Wallace, Chairman of the Wallace Global Fund, also supports the plan. But he’s calling on Congress to go further by passing an emergency bill to double the Foundation’s annual payout rates to 10 percent and introduce a minimum payout minimum of 10 percent for donor-advised fund accounts for three years.

Opponents say such requirements would discourage the rich from investing their money in foundations and donor-recommended fund accounts, which in turn would limit the flow of money to working charities.

Steve Taylor, vice president and public order attorney at United Way Worldwide, said the effort was an overreaction to a limited number of “bad actors”, particularly donor-advised fund sponsors established by commercial financial services firms like Fidelity Charitable for their fees Generate partners.

The plan could be a deterrent to fundraising for local United Ways and could put an undue burden on the 30 or so local United Ways that manage donor-advised funds, Taylor says.

“The idea that government regulation generates more money for charity is a little absurd to me,” he said.

Similarly, Elise Westhoff, president of the Philanthropy Roundtable, a network of conservative donors and fellows, issued a statement saying she would “choke on charitable donations when they are most needed”.

Most organizations that sponsor fund accounts recommended by donors also decline minimum withdrawal amounts. In a statement, Fidelity Charitable President Pam Norley said that while Fidelity welcomed political discussion, it was already forcing “active” donations and that its donors pay out 20 to 24 percent of their wealth every year.

Madoff claims that donor-advised fund sponsors such as Fidelity Charitable, which are affiliated with commercial financial services companies, overestimate their payout rate by about 56 percent by miscalculating their charitable distributions and counting transfers between different donor-advised fund sponsors as charitable grants .

Community Foundation concerns

Community foundations that gave birth to the idea of ​​donor-advised funds are actively pushing for the proposal to be changed, arguing that they function differently than organizations like Fidelity Charitable, Schwab Charitable and Vanguard Charitable, which generate income for the nonprofits, that they founded. Community foundations argue that their regional focus makes the funds they manage an indispensable tool for donors looking to improve their cities and towns.

Jeff Hamond, director of the Community Foundation’s Public Foundation Public Awareness Initiative, an advocacy group that supports approximately 130 community charities nationwide, said Madoff and members of her group worked in good faith to address concerns among regional grant recipients.

Hamond declined to comment on what changes could be made to the support plan. He expects a detailed plan in January.

Hamond, who previously served as economic policy director for Democratic Senator Charles Schumer, said the overall proposal could find approval in Congress. If so, community foundations can tell lawmakers a compelling story about how they responded to the needs of their communities, especially during the pandemic.

Block previous efforts

Any step to speed up giving through changes in tax law will inevitably lead to a heated debate, says Harold Hancock, who served as a tax advisor on the House Ways and Means Committee for six years until 2017.

In 2014, Republican MP Dave Camp, who was then chairman of Ways and Means, released a bill that would have imposed new rules on donor-advised funds. Contrary to current efforts, which are incentivizing a faster payout, Camp would have required donor referral account holders to distribute money in their accounts to charity within five years of the donation.

Hancock recalls hearing from charities with differing views on the matter. Ultimately, the legislation went nowhere.

“No sector is a monolith, whether it’s the auto industry, banks or utilities,” he says. “It’s rare that you do something and everyone in the industry is on board.”

The debate about non-profit regulations and tax policy tends to get even more passionate because the goal is to encourage citizen engagement and get people to share their wealth.

“There is a moral aspect that otherwise doesn’t exist for state or corporate tax,” he says. “That’s why people get so involved with this topic.”

As Camp made an effort, the biggest attempt to get donor-recommended funds to give more money to charities was not even an obligation to pay out. A bill that saw action by the committee in the California General Assembly earlier this year would only have allowed the state to track the flow of money to and from accounts.

The state’s community foundations and the sponsors of the national donor-advised funds saw the bill poorly. They said it would be a hassle and an additional hassle to keep track of funds at the individual account level.

While still on committee, the bill attracted tens of thousands of dollars in lobbying from nonprofits, community foundations, and national trade funds of the state and was eventually killed.

Kat Taylor, a philanthropist who helped lead and endorsed the California effort, says the push for California law lacked a “galvanized” coalition of nonprofits advocating for law. The new federal proposal has a number of advantages that should resonate with Congress, she says. In addition to enlisting a community foundation, the new proposal contains a great sweetener with widespread support in philanthropy: the creation of a “universal deduction” that allows all taxpayers to write off charitable donations, regardless of whether they are broken down.

Taylor says philanthropy has been criticized by critics who say foundations and individual donors hoard wealth in endowment foundations and donor-advised funds. Philanthropy should “read the writing on the wall” and support legislative changes or be prepared to suffer further damage to its reputation.

“Any of these measures would improve accountability and the impact of philanthropy,” she says. “The last thing you want to do is make charity or philanthropy lose its credibility.”

Dan Parks contributed to this article.