February 27, 2019
When the next recession hits, donor-advised funds are expected to help cushion the financial blow faced by nonprofits, even as other revenue sources decline, a new study finds.
The study — conducted by Dan Heist, a professor at the University of Pennsylvania, and Danielle Vance-McMullen, an assistant professor at the University of Memphis — used Internal Revenue Service data from 2007 to 2016 to analyze the grant making activity of donors who have funds at 996 donor-advised-fund sponsors.
And the data helped dispel some common misconceptions about the impact of DAFs on nonprofits.
First, it found that donors who manage DAFs tend to be more generous with their grantmaking during recessions, especially when compared to other forms of giving.
“While other forms of charitable giving generally drop during economic downturns, we find that grants from DAFs remain relatively stable in recession conditions, despite reduction in contributions and decline in assets,” the study found.
“Given these findings, donor-advised funds may be an important resource to the nonprofit economy in future recessions.”
In other words, DAFs have become a critical rainy-day fund for nonprofits who need support during tough times.
And given the growth in the value of DAF assets since the most recent recession, the study suggests DAFs might help provide additional cushion to charities when the next downturn hits.
The study also offered a new way of looking at the grant-making activity of DAFs.
Rather than focusing on the payout rate, the study created a new metric, flow rate, which compares the amount of money granted from DAFs each year to the amount of money donated to DAFs by donors.
The researchers said this calculation better reflects the true activity of DAFs, since payout rates don’t account for the significant amount of money donated into funds each year.
In 2015, the study found the median flow rate for DAFs was 87 percent, meaning that for every $1 million contributed in 2015, $870,000 was granted to charities. The remaining $130,000 was invested for future grants to nonprofits — set aside for future use.
“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,” the study found.
Read more: Grant-Making From Donor-Advised Funds Is Strong During Recessions, Study Finds (The Chronicle of Philanthropy)