California Assembly Bill 1712, introduced by Assembly Member Buffy Wicks (D-Oakland) on February 22, 2019, expresses “the intent of the Legislature to enact legislation that would relate to donor advised funds for the purpose of improving transparency and accountability through annual reporting requirements, promoting best practices, and requiring minimum annual distributions.” We’ve been expecting to see state legislation regarding donor-advised funds (DAFs) with the explosive rise in the charitable vehicle’s popularity over the past decade and the lack of federal regulation. But the the precise nature of the legislation, beyond the minimum annual distribution requirement and reporting requirement, has yet to be determined by the persons and organizations behind the Bill.
The Legislature hereby finds and declares all of the following:
(a) California taxpayers claim millions of dollars in tax deductions each year for contributions made to donor advised funds (DAF).
(b) Charitable contributions to organizations that sponsor DAFs account for a rapidly growing share of charitable giving. Recent reports have found all of the following:
(1) In 2016, six of the top ten recipients of charitable contributions in the United States were DAF sponsors, including the Fidelity Charitable Gift Fund, which received more charitable contributions than any other organization.
(2) The national share of total individual charitable giving contributed to DAFs increased from 4.4 percent in 2010 to 10.2 percent in 2017.
(3) DAF sponsoring organizations held more than $110 billion in charitable assets in 2017.
(c) A DAF is a charitable giving tool that has been used for decades by community foundations and other charities. Accelerating growth in the use of DAFs and the rapid expansion of DAFs affiliated with for-profit investment management businesses raises significant questions about whether these funds are being used as originally intended.
(d) Various reports analyzing DAFs suggest that in some cases each of the following are true:
(1) Contributions to DAFs have less transparency, oversight, and accountability associated with them than other types of charitable giving.
(2) Contributions to DAFs frequently fail to produce public benefits that are equivalent to the public benefits from contributions made to nonprofits that engage directly in charitable services and activities.
(3) DAFs are often conventionally invested in industries and economic sectors that may be at odds with the DAF’s charitable purpose.
It is the intent of the Legislature to enact legislation that would relate to donor advised funds for the purpose of improving transparency and accountability through annual reporting requirements, promoting best practices, and requiring minimum annual distributions.
While the two sections of the spot bill are simply placeholders for more definitive requirements, they reflect some common but also curious assumptions.
The provision in Section 1(d)(3) regarding investments seems particularly odd as the same criticism may be raised about endowments and other investments by charitable entities not involving DAFs. My guess is that this statement is mostly directed at the DAF sponsoring organizations created by, and affiliated with, large financial institutions like Fidelity, Goldman Sachs, Vanguard, and Schwab. But would a law created to further regulate DAF investments and not other investments by charitable entities make sense?
The provision in Section 1(d)(2) regarding public benefits produced by DAFs may apply even more to private foundations (which, collectively, have a lower distribution rate than DAFs) and other grantmaking organizations. The language is also problematic as grantmaking is a charitable activity and the basis of many charitable organizations’ tax-exempt status.
Donor Advised Fund Resources
Donor-Advised Funds: What You Should Know
Donor-Advised Fund Regulations Step One: Request for Comments
Do Donor-Advised Funds Require Regulatory Attention? (Nonprofit Quarterly)