Donor Advised Funds and Conflict of Interest for Community Foundations

Donor Advised Funds

1. What is your assessment of donor advised funds? What are the pros and cons?

Seth makes very good points about the issue donor advised funds (DAFs): the nonprofit sector on the front lines is not able to tap the charitable donations via grant money like it used to because of all the focus going to DAFs and The Pacific Coast Community Foundation (PCCF) essentially acting like a bank (Libby & Deitrick, n.d.). If that is the way the PCCF is going to operate, it should allow representation of the nonprofit sector on the board. The conflict of interest that the board originally intended to avoid is now happening regularly as the PCCF essentially exists to serve the interests of the donors who, although they are not on the board, get to say how they want their funds distributed in the community. As Seth points out, it has robbed the community of the collectivist spirit that had been instilled originally through the PCCF.

The pros of DAFs from the donor’s perspective are that they provide a tax-friendly way to make a charitable contribution without having to go through the hassle of starting a fund; instead, the money is donated to an organization like PCCF and the organization is then “advised” on how the donor wants that money to be spent. The con of this arrangement is that it leads to a lack of transparency and prevents nonprofits from building real relationships with donors (Fischer, 2020). So on the one hand, money is pumped into the community in the way donors want it to be; on the other hand, the community collective spirit is not empowered, and there is a fissure between nonprofits and the philanthropists who would traditionally get to know those organizations and the work they are doing first hand.

2. From the donor perspective and the nonprofit management perspective, describe what is gained or lost for each group under the donor advised funding model.

From the donor perspective and the nonprofit management perspective, two different things are happening. The donor gets to donate money in a way that is beneficial to him and the causes he believes in. He does not have to establish his own charitable fund to do so, but can merely use a DAF to do it. It is essentially hassle-free. The DAF is managed like an investment fund and the money distributed as the donor would like it to be. The donor is happy and the organizations receiving his money are happy. Those nonprofits that are kept out of the loop because they are not on the donor’s radar and do not get to submit a proposal for grant money are not happy about it because they do not get to submit their cause and work for review and thus their cause and work can be halted, since no funds are forthcoming.

Thus, the nonprofit management perspective is that DAFs prevent the community from getting the funding needed to advance aims like fighting homelessness or helping at-risk students. In a fair market for charitable funds, nonprofits would write up proposals and submit them to an organization like PCCF. Then PCCF would confer with the board to see which nonprofit was deserving of the money entrusted it by charitable donors. The DAFs disrupted the process and essentially allowed donors to determine how the money would be spent. The conflict of interest arises as a result, and the nonprofit manager sees this the longer it goes on. Those organizations favored by the donor get the money; those the donor does not care about are essentially blocked. Impartiality is removed (Holland, 2014).

3. What are some ways that community foundations bridge the needs of the community to the philanthropic dollars they steward?

The community foundation is there for the purpose of raising money in their communities and building “a permanent resource to create vital communities by encouraging and supporting the local non-profit infrastructure” (Sacks, 2014, p. 5). The community foundation also bridges the needs of the community and the philanthropic dollars they steward by having a board comprised of local citizens from the community representing the communities interests and needs: that board is then responsible for managing the foundation and for determining how those dollars are spent based on the needs of the community (rather than the desires of the individual donor). Thus, instead of donated dollars going to a donor’s alma mater just because that is where the donor wants the money to go, the foundation’s board will accept applications for grants from the local nonprofits and determine which deserves funding. The foundation is supposed to be non-partisan and non-political, although it can get political if it is deemed to be in the best interests of the community. The foundation is supposed to be transparent and open so that trust can be established between it and the community and the organizations working hard to help that community (Sacks, 2014).

They are supposed to teach and promote philanthropy, act as intermediary organizations, engage in community leadership, be stewards of the community for the purpose of promoting nonprofit activity, promote community development, increase the accountability and operating standards of nonprofits by obliging them to apply for grants so that the board can assess their worth and merit; focus resources in the event of a catastrophe or disaster in the community; and work for social justice. None of this can happen when a community foundation is turned into a bank by focusing all its energy and attention on managing DAFs.

4. What are the advantages and disadvantages of more government oversight or regulation of DAFs? Do you believe government should increase regulation over DAFs? Why, or why not?

Advantages of more government oversight or regulations of DAFs are that it would community foundations to their original purpose of working harmony with communities and answering their needs, instead of working in harmony with the donors’ interests and satisfying the donors’ desires. It would restore transparency and ensure that trust can be established between the foundation and the nonprofits that depend upon the foundation. After all, that is what the purpose of the foundation is and why the tax-friendly status was given it in the first place.

The disadvantages of more government oversight are that it would create more tension and problems for the community foundation, as it would find itself having to justify to the government how and why money was given to certain nonprofits, and it would fear that even any hint of conflict of interest could mean big trouble for the foundation. It is one thing to manage funds on one’s own and quite another to have to report on this to the government.

Government should not increase regulation over DAFs but instead it should simply abolish them or outlaw them altogether with respect to community foundations. If a donor wants to give money to a nonprofit there is nothing stopping him. He should do it directly instead of distorting the purpose of a community foundation by way of a DAF.

5. What are the long-term consequences of increased donor control that nonprofit leaders should consider?

The long-term consequences of increased donor control that nonprofit leaders should consider are evident in the case study presented by Libby and Deitrick (n.d.). In the long-run, DAFs diminish the relationship that should exist between the community foundation and the community; between the community foundation and the nonprofit sector in the community; between the community foundation and the issues that need to be or are deserving of being addressed in the community. It breaks the trust between the nonprofit sector and the foundation. It breaks the dialogue between the two. The nonprofit sector no longer has a place to turn to for funding. That foundation that had been set up to help the nonprofit sector is not set up as a bank for donors who want to control their funds long-term.