On the heels of the Tax Cuts and Jobs Act of 2017, 2018 may have been the most uncertain year in recent history for many fundraisers. For many nonprofit organizations, fundraising is an essential part of their operating budgets and can directly affect their ability to fulfill their missions. The big question on every fundraiser’s mind was, “is the doubling of the standard deduction going to reduce the amount that individual donors give in charitable donations in order to file them as itemized deductions?”
Based on information from the Giving USA Annual Report on Philanthropy for the Year 2018, giving by individuals decreased 1.1% from 2017; however, this decline was counterbalanced by a 7.3% increase in giving by foundations and a 5.4% increase in giving by corporations.
The result was a year in which total estimated charitable giving rose 0.7% between 2017 and 2018 for a total of $427.71 billion in contributions. With this philanthropic landscape in mind, we discuss the factors we believe led to the 2018 numbers, suggest best practices for adapting to this new charitable giving paradigm, and offer our outlook for charitable giving over the next couple of years.
Psychology: Why Are Donors Giving?
While it would be impossible to provide psychological “buckets” into which every donor would fall, there are some noticeable trends in why donors give. Starting with individuals, The 2018 U.S. Trust® Study of High Net Worth Philanthropy found most giving strategies or decisions begin with a focus on personal values, interest in the issue area, and/or things relating to the work or reputation of the nonprofit. Specific factors such as belief in the mission of the organization, belief that the gift can make a difference, to give back to the community, and “when asked” were strong influencers toward that end. Less popular reasons in the survey included nonprofit report rankings, recommendations from friends/peers, compelling pitches or collateral, and “belief that leaving too much money to heirs is not good.”
Factors that Led, or Would Lead in the Future, to Decisions about Contributing to a Particular Cause or Organization
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We believe there are a number of underlying impetuses that drive charitable giving. The first and perhaps most obvious to us is the organization’s desire to be a good corporate citizen and drive improvements in the communities in which it operates. Individuals and other businesses tend to be more likely to consume more goods or services from a business that has a strong charitable and community profile versus a business that does not.
Another reason stems from the employees. Based on our review of research, we believe employees are more likely to work for an organization that operates with values similar to their own. Organizations with a strong charitable and community profile, all else being equal, are likely to be more attractive than organizations without such a profile.
Yet another reason we cite is responsible investment (RI) and its effect on corporate sustainability and its reporting. As movement toward RI continues to grow, more pressure is being placed on publicly traded corporations to be good corporate citizens. Implicit in this is that a good corporate citizen gives back to its community in the form of both monetary donations and time (that is, volunteering). We expect this reason to become even stronger in the coming years as RI assets increase and more and more investors and stakeholders begin to request this information from the companies in which they invest.
Based on an analysis of past Giving USA charitable giving data, these trends suggest to us that the primary motivation for both individuals and corporate donors is to have an impact on the issues nonprofits address and to support the organizations they believe are best suited to provide solutions.
Given the low score of pitches and collateral on individual decision making in the U.S. Trust survey, nonprofit organizations need to be intentional in how they think about donor relations. We suggest appealing to donors by emphasizing value alignment, the impact on a particular cause, and what it means for the community, affected area, or other boundaries of the nonprofit’s mission fulfillment. At the end of the day, most donors want to know their money and time are going to drive the promised impact.
Composition: Who Is Giving?
According to the Giving USA 2019 report, there were more than $427.7 billion in charitable giving donations in the United States in 2018. Individuals comprised the greatest portion of total giving at 68% (77%, counting bequests). Individuals as a percentage of total giving is down from 72% of individuals and 80% counting bequests in the prior year. The report also noted that corporations and foundations increased their giving year-over-year in 2018, while the total amount of bequest giving was flat and individual giving decreased 1.1% is related to household sentiment about the stock market and broader economy. We have found that, historically, a household’s perception of its wealth and the overall economy can have a significant effect on charitable giving in a given year. For corporate giving, rising corporate pretax profits and an overall increase in national GDP are cited as the reasons for a 5.4% rise in corporate total charitable contributions. Additionally, we have seen an increased desire by many corporations to donate time and resources to the communities in which they operate, helping to buoy the corporate giving numbers. While not specifically cited in the Giving USA report, we believe much of the reason for the rise in foundations stemmed from the recent run-up in equity markets increasing the investment assets of foundations, which in turn creates a larger base for distributions in dollar terms on the basis of a fixed percentage distribution rule.
Growth in Charitable Giving
|Year-over-Year Growth Rate of Charitable Giving||-1.1%||5.4%||7.3%||0.0%|
Source: Giving USA 2019 Report. Year-over-year numbers are based on 2018 absolute charitable giving numbers relative to 2017 absolute charitable giving numbers.
We believe the important takeaway from this analysis of donor composition is how organizations formulate strategies to target donor segments. Given that 77% of donations came from individuals in 2018, and these percentages are unlikely to change significantly in 2019, 2020, or even over the next decade, we suggest placing a considerable focus on this segment. While appealing to foundations and corporations can be worthwhile, if time or human resources are a constraint, it might make strategic sense to focus a greater amount of resources on the subset of donors with the highest propensity to make charitable donations.
Charitable Giving (in billions)
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Willingness: Will Donors Continue to Give?
A rule of thumb for charitable giving and fundraising used to be that 80% of donations would come from 20% of donors. Based on recent years of Giving USA studies, some experts have estimated that an even greater percentage of donations today are coming from an even smaller number of donors. While part of this can be attributed to an increase in the high number of dollars originating from high-net-worth and ultra-high-net-worth donors somewhat skewing the results, it is nevertheless worth watching, especially for organizations that might derive a significant portion of their annual operating funds or annual fundraising from a limited number of sources. In our view, diversification of donors can be as important as diversification of an investment portfolio in that having a diverse group of donors can help a nonprofit organization avoid many of the financial and budgeting consequences of a major donor losing interest, finding another cause, or otherwise deciding to no longer support the organization.
We believe there are some major tailwinds (supportive of future charitable giving levels) and some minor headwinds (antagonistic of future charitable giving levels) to consider in the coming years.
Fundraising is and will continue to be critical for nonprofit organizations. Understanding donor psychology, composition, and future willingness regarding charitable giving is essential if donor funds are to continue to flow. We recommend focusing on appealing to donors through value alignment, on measuring and reporting impact and outcomes, and planning for the coming tailwinds and headwinds to charitable giving.
|Donor Type||Charitable Giving Tailwinds||Charitable Giving Headwinds|
|Individual||A long bull run for the stock market has significantly increased household wealth over the last eight to nine years, providing many donors with a larger base from which to donate. As investors take gains and households begin to recover more fully from the recession, we expect this to translate into increased charitable giving levels.||Uncertainty around the global economy, volatility in the stock market, and an upcoming presidential election year all weigh on household sentiment, which could cause individuals to save rather than to give. Additionally, tax reform reducing individual tax rates and raising the standard deduction can increase after-tax cost of charitable giving.|
|Corporation||A renewed corporate focus on corporate social responsibility increases the likelihood corporations will continue to support and donate to charitable causes.
Further, the reduction in corporate tax rates due to the Tax Cuts and Jobs Act of 2017 is likely to increase the funds available for corporations to distribute for charitable purposes.
|While a reduction in corporate tax rates leaves more money in the bottom line for many corporations, it also increases the after-tax cost of charitable giving. We do not expect this to have a material effect on corporate giving levels, but we believe it is worth mentioning as a minor headwind to total giving.|
|Foundations||The run-up over the last decade in the global equity markets has increased the market value of many foundations, meaning that a fixed distribution percentage will result in a larger distribution as a dollar amount relative to before the run-up. We believe this could serve as a major tailwind for giving.||The stock market has experienced a bull run for an extended period of time. Should this reverse, even over the short term, we believe it could have an impact on foundations' market values and thus distributions. While a minor tailwind, it is nevertheless worth watching, especially going into an election year.|
|Bequests||With an aging population and the United States poised for a large generational transfer of wealth, we could see a major increase in bequest donations over the next decade.||The "softening" of the estate tax has the potential to remove much of the impetus to make bequests. However, we do not expect this to have a significant impact on total bequest levels.|
If you have questions or for more information, please contact your PNC Institutional Asset Management representative.
The Endowment & Foundation National Practice Group
The Endowment & Foundation National Practice Group builds on PNC Bank’s long-standing commitment to philanthropy and is focused on endowments, private and public foundations, and nonprofit organizations. We seek to help these organizations address their distinct investment, distribution and capital preservation challenges.
ACCESSIBLE VERSION OF CHARTS
|Interest in the Issue Area||57%|
|First- or Second-Hand Experience Benefiting from Organization||54%|
|Recognizable or Reputable Nonprofit||50%|
|Perceived Need of the Organization or Issue Area||49%|
|Association with Another Institution||26%|
|Nonprofit Report Rankings||18%|
|Endorsement, Recommendation, or Pressure from Friend/Social Circle||10%|
|Compelling Pitch (In-Person or Collateral)||9%|
|Donor Type||Charitable Giving||Growth Rate|