California’s Head of Charities: A Chat About Donor-Advised Funds

Jan Masaoka interviews Tania Ibañez:

Tania Ibañez recently retired from the California Attorney General’s office where she served as the Senior Assistant Attorney General of the Charitable Trust Division. In short, she was the top state official on nonprofits and foundations.

During her tenure, Tania’s office worked on landmark registration regulating fundraising platforms such as PayPal and GoFundMe. Her office was called upon to comment on bills addressing donor-advised fund transparency, conversion of nonprofit universities to for-profit status, how non-cash donations (such as pharmaceuticals) are valued on Form 990, and many other high-impact, urgent issues related to nonprofits, philanthropy and endowments.

Now that she’s presumably sitting under beach umbrellas sipping colorful beverages (not!), we took the opportunity to chat with her. In addition to the information, we hope you gain an appreciation for Tania’s toughness and straightforwardness. This interview includes information she presented in a webinar held by the California Association of Nonprofits (CalNonprofits), and has been lightly edited for length and clarity.

Q: Your office conducted a “mandatory” study of large donor-advised fund sponsors – to my knowledge the only such data collection ever done by a government agency. What kinds of DAF sponsors were required to return the survey?

We identified 74 sponsors of two types for the project:

• California-based DAF sponsors with over $10 million in assets
• National DAF sponsors with over $200 million in assets and registered as doing business in California

We asked for information per year for three years.

Q: What types of DAF sponsors did you find?

Of our sample, 51% were community foundations, 30% were “mission-based,” and 19% were commercial sponsors.

Q: Let me ask a little more about “mission-based,” which I think is similar to the “single purpose” term used by the National Philanthropic Trust in its research reports. I understand that many university DAF programs have requirements where, for instance, 30% of the DAF amount has to go to university programs, but the donor can send the other 70% anywhere. Yet these are still called “mission-based” and “single purpose”?

Well, yes, terminology is a problem!

Q: What surprised you the most in the survey findings?

Comparative payout rates. Community foundations had lower DAF payout rates than the commercial funds when most people expected the opposite.

Q: That is a big headline. What else?

I was disappointed that surveyed entities did not say they stepped up spending in response to COVID. When we asked, “What did you do about COVID?” we got answers like, “We let our employees work from home.” I was hoping to see more people encouraging their donors to be more generous – maybe give at least 20% per year.

Q: One area of concern is how much money going into donor-advised funds is not “new contributions” but comes from transfers from private foundations and other DAFs. What did you learn in the survey about this?

These transfers are substantial. In the third year reported, the sponsors in the sample received $1.7 billion from private foundations. And California DAF sponsors had higher percentages from private foundations (8% of receipts) than national DAF sponsors (4%).

Q: Are DAFs being used to avoid private foundations’ mandatory expenditure requirements?

It certainly looks like it. There have been several high-profile public examples such as transfers from Larry Page’s private foundation and Elon Musk’s foundation.

Q: The proposed ACE Act in Congress last year would have meant that private foundation transfers to DAFs would not count towards the 5% payout requirement unless the funds come out of the DAF by the end of the year following the contribution. What is your reaction to that idea?

Sounds good to me!

Q: You mentioned that community foundation DAFs had lower payout rates than commercial ones. Can you say more about that?

Well, first, grant ratios were all over the map. Most of the sponsors fell easily into two categories: they either gave less than 5% or gave out more than 50%. Three things we found:

• Mission-based sponsors almost entirely had grant ratios of more than 50%.
• Commercial sponsors were in the “less than 5%” and “more than 50%” categories about evenly split.
• Community foundations had a greater share of grant ratios less than 5% than greater than 50%.

Q: Where can I find the findings that you published from the survey?

https://oag.ca.gov/system/files/media/donor-advised-funds-overview.pdf

Q: At recent conferences of state attorney generals and charity officials there has been a lot of talk about the role of state officials (compared to federal) in philanthropic regulation. States can’t change the IRS Tax Code. So what can state officials do?

States need to start asking different questions. How does philanthropy and charitable deductions impact the state budget? How much taxes are not being paid due to the charitable deduction on funds not in active use? How much in charitable funds are just parked and not benefiting the residents of the state? Clarity: what is their rate of distribution?

Can AGs do more to find out if transfers to DAFs from foundations are complying with donor restrictions? For example, if a donor gives money to a foundation specifying it go to scholarships, and the foundation transfers funds to a DAF, how can the AG find out if that DAF then gave out that money in scholarships?

State officials can require responses to requests for detailed information. How can people write off donations but the donation isn’t really supporting any charity?

Part of me thinks we don’t want to discourage donations. But is there a comparable benefit to the public If you’re not actually giving it to a charity that’s on the ground?

Q: So why isn’t more being done about this?

Well, lots of people are making money from this situation and no one wants to anger the big commercial funds like Fidelity or Schwab. The people that run those institutions are also big donors to political candidates of both parties.

The AG in any state — IF he’s interested — could easily go through the regulatory process and develop a form that would ask these questions. Have to go through a public comment period. Don’t need a legislative change. A lot of AGs feel that charities are already under enough scrutiny and legislation. Think tanks and foundations like to wine and dine elected officials, invite them to their events. That’s the reality. Nobody wants to make things more difficult for charities.

Charities that get money from DAFs are often good friends with the DAF sponsors . Elon Musk and other people want to conceal who they support. At the end of the day it’s what are the tax benefits worth? How much in taxes does the individual save, and how much did the USA benefit from those tax savings?

The Pension Protection Act of 2006 (P.L. 109-280) bans donor-advised funds from making grants to designated individuals. That was low-hanging fruit. How many times does the IRS audit who a foundation gave a scholarship to?

Q What about endowed DAFs which are being increasingly promoted by DAF sponsors?

Hasn’t hit my radar screen. Right now at least nothing is stopping you from giving out more.

Q: What are your thoughts about institutions now providing both DAFs and fiscal sponsorship?

Terrible. You’re opening the can of self-dealing.That’s going to blow up one of these days.

Q: What advice do you have for us on DAF reform?

You need to see if there’s an appetite for it in the Attorney General’s office or the Franchise Tax Board.