Welcome to Seeding the Future, a podcast from the Charter Cities Institute, where we explore how giving and philanthropy are changing as wealth is created in new industries, at younger ages, and by more diverse demographics. In this inaugural epode, we hear from John Arnold, American philanthropist, former Enron executive, and Founder of Arnold Ventures, about philanthropy for policy change. John hit it big trading natural gas in the 1990s and 2000s, going on to found one of the most successful energy trading hedge funds, Centaurus Energy, after leaving Enron. He now ranks as one of the world’s richest people, with a net worth well over a billion dollars, and runs Arnold Ventures (formerly the Laura and John Arnold Foundation) with his wife, an organization doing groundbreaking work in criminal justice reform. Today, John shares how education reform, system design, and public policy inform his giving and some of the challenges he has encountered in advocating for policy. We discuss political polarization, crypto wealth, and their impact on philanthropy and John shares his interesting perspective on nonprofits as third parties that can solve problems in areas that governments and the private sector can’t, plus so much more! Make sure not to miss this
Key Points From This Episode:
- How education reform, system design, and public policy have informed John’s philanthropy.
- What his strategy for impact entails when it comes to advocating for policy.
- Major changes John has witnessed in philanthropy, including a shift to ‘giving while living’.
- Bridging the gap between founders and the nonprofit world with patience and commitment.
- Why John believes nonprofits need to be more direct with donors.
- Challenges that come with advocating for policy, particularly in the criminal justice space.
- Political polarization and philanthropy; what role nonprofits can play in voting reform.
- How decentralized crypto wealth will impact the philanthropy of the future.
- Global conflict resolution efforts and why organizations have lost momentum in this area.
- Finding problems that philanthropy can solve by looking in areas that are too politically or financially risky for the government or the private sector.
- John’s thoughts on the disconnect between philanthropic intent and philanthropic action.
- The inherent flaws of donor-advised funds that the ACE Act seeks to solve.
- Why John is impressed by philanthropic efforts in the climate change space.
- Why he encourages founders, philanthropists, and nonprofits not to wait until tomorrow.
- How to address the issue of connecting nonprofits with donors and vice versa.
[00:00:09] Skye Lawrence: Welcome to Seeding the Future, a podcast from the Charter Cities Institute, where we explore how giving and philanthropy is changing as wealth is created in new industries, at younger ages, and by more diverse demographics. We’ll hear from donors about leaders, about moonshot philanthropy, about creating new institutions, reforming old ones, and much, much more.
Hi, I’m Skye. I’m your host for the show. I’m the Head of Development at the Charter Cities Institute. I’m a policy walk, an unlikely fundraiser, a Charter Cities advocate with 10 years of experience in foreign policy and international development, and hopefully, improving, a standup comic. Seeding the Future will remain right here in the Charter Cities Institute feed, so just keep subscribing to the Charter Cities Institute Podcast on your favorite platforms to never miss an episode.
[00:00:57] SL: Today, we’re talking with John Arnold, an incredibly successful energy trader. In the early 2000s, he started his own hedge fund, Centaurus Advisors. I think he’s most famous for being the youngest billionaire in the US in 2007. Then, at just 38 years old, he stunned the industry by retiring, and, in 2010, he and his wife Laura created the Laura and John Arnold Foundation, an organization that does groundbreaking work in criminal justice reform.
On that note, I think a congratulations is in order. You and Laura were named in the Philanthropy Top 50 in the Chronicle of Philanthropy in February not for the first time. I feel very lucky to be kicking off this new show with a legend both in the energy business and in philanthropy. Welcome to the show, John.
[00:01:38] JA: Thanks. It’s great to be here.
[00:01:40] SL: Let’s just kick it off. I’d love to know a couple basic things. The first being: what informs your philanthropy? I know you have a lot of cause areas that you’re interested in, but I’d love to know what’s behind that. It’s interesting that a lot of the areas you’re interested in are not necessarily directly related to your profession.
[00:01:57] JA: Probably makes sense to go back to the start of my philanthropic journey, which is probably 25 years ago, when I was first starting to make some good money. I was in a field, a professional field of trading, which doesn’t have much direct social benefit. That always irked me in the back. I tried to figure out how could I use some of the money I was making financially to improve society in a more passive way of writing checks. The question was, okay, what do I want to do? Who should I write a check to? I remember being in a supermarket, as I come up to the cash register, and they used to have all the magazines right at the cash register. There was one that had ‘Top 100 Charities in America’, so I thought that’s a good start.
I threw it into the basket, took it home, read it. It was broken into categories and I think it was naturally pulled to education, as I think a lot of younger people, especially people that are coming out of the finance industry have been, because educational outcomes are associated with so many other life outcomes that we care about. The theory is, if you can improve educational outcomes, can you improve further life outcomes? It turned out that one of the charities that was in the education field was located in Houston. That was KIPP Charter Schools. That was started in Houston. I called them up, went down, took a visit, and came back and wrote a check. That was the first time I had written a significant check.
A few days later, I get a call from the founder of KIPP, Mike Feinberg, and he’s like, “Thank you for the check. Who are you? Can you get more involved?” That started this long journey for me about education, educational reform, and why was one school getting very different outcomes from a school down the street with similar demographics? [Repeat 0:03:49] That took me on this long journey of thinking about education and why this one school was getting very different outcomes from another school down the street with similar demographics. It led me thinking about the system design and public policy associated with education, which then led to – as my wife and I started spending more time on our nascent foundation in the late 2000s – we started thinking about other issues of public policy.
It wasn’t by design that we were going to be a policy foundation, but we are interested in criminal justice and some of the sub-optimal aspects of the criminal justice system. We got interested in the public pension system and we got interested in health care. The lens that we approached all these problems with was one of public policy; how do you design a system? How do you change the incentives and the rules of the system to get better outcomes? That adding a program was unlikely to be scalable and sustainable and it was very questionable as to whether that really improved outcomes for Americans. But if you can improve, again, the rules and incentives of a system, that’s the big driver of how actors within a system operate.
[00:05:08] SL: Do you see in this space you’re in having started that a while ago, do you see more people joining that viewpoint, or less people and organizations joining that?
[00:05:19] JA: There’s definitely been an increase in philanthropic efforts on policy. I think that there’s been – whether it’s in education or in criminal justice or in other areas like climate change, people are viewing the government as the 800-pound gorilla in these spaces. There’s enormous leverage if you can get that system that government creates and operates in to operate more effectively.
[00:05:45] SL: CCI is a really interesting organization that works on innovative governance in emerging markets. I know that you found out about it through a podcast, I think those 80,000 Hours podcasts that Mark did originally. But this is an edgy idea, what got you interested in this idea other than the podcast? Maybe the podcast.
[00:06:04] JA: It’s again going back to the rules and incentives of a system. We do very little internationally. I decided early on that it would be hard for us to gain that expertise to do both domestic policy as well as international development, so I stuck with domestic policy. But there’s been a couple issues along those lines that don’t really fit the core of what we’re doing, but are just really good, interesting ideas that we think aren’t getting funded enough. CCI is one of those, because it fits along the lines of how we look at issues.
What drew me to CCI was, you have this theoretical framework of what the idea is, and then you can go test it, you can go to a community that’s asking for this and implement it and see the results, see if it’s working or not. If it is, then you can scale it, bring it to more communities, see how robust the solution is. If it’s working there, take it to even broader scale. But it’s a solution that’s trying to address a very obvious problem that’s scalable, it’s sustainable, and it’s structural. Those types of things are rare to find, and so I think they should be tested, they should be developed and that’s why we’re very happy to support CCI.
[00:07:20] SL: One of the questions I wanted to ask you is, different philanthropists have different ideas about their strategy for impact. It seems to me like there’s impact investing, there’s changing policy, there’s foundation work that grants to other nonprofits that are doing a range of things. But advocating for policy definitely seems like one of the strongest things that you’ve worked on. Does it feel like the needle has been moving in a lot of those areas?
[00:07:45] JA: It has. To go back to policy as a lever of the economy, about 60 percent is private sector, about 40 percent is government at all levels. Then, philanthropy or the nonprofit sector is about two percent. The question is, for me, with that two percent, do you use that to supplement what government’s doing by providing additional resources targeted at the same thing, the same types of issues that that government programs already focused on? Or do you use that two percent to try to improve what the 40 percent is going towards?
I think when you look at that two percent, whenever you strip out funding for the hospitals and for cultural institutions, religious organizations, for universities, it ends up being a very small fraction of one percent. What’s the best way for that money to be put to use? Is it supplement or a complement to what government’s doing?
[00:08:42] SL: As I was saying to you when we were chatting about this before, I’ve been doing a little bit of reading into the history of philanthropy. It’s really interesting that there is this kind of age-old question of who should be the purveyor of public goods? Should it be the state or should it be philanthropy?
In most societies, the largest giving has been to religious institutions that oftentimes do a lot of services. But as you’re saying, if the government is already using a lot of resources towards this, why reinvent the wheel and only give to the same things that the government is essentially putting its resources towards? Rather, how do you make sure that those resources are actually meeting the ends that we’re all hoping for better, rather than doubling the same kind of programs?
Then, over the past 10, 15 years, what have you kind of seen change particularly in this space? Are their causes that you’ve seen change a lot or get a lot more focus and ones that have gotten less focus? But what is the major change you’ve seen?
[00:09:37] JA: Philanthropy in 21st century very different from what it was the last century. I think the way that money’s made today is very different. If you think about what were the great fortunes in 20th century? It was largely industrialist type money, which was you had a founder, his company would go public, but he would hold the shares. He or she would hold shares for the very long term. Often through the will, on deathbed is when a lot of the giving would happen, oftentimes setting up the foundation very late in life, or doing it at death, and somebody else would execute on the wishes.
What you’ve seen of late is that through the both financial industries and technology industry, you’re getting people who have very significant wealth at a much younger age. Oftentimes, it’s liquid wealth. People are dealing with these issues and having to think about what they’re giving strategy is much earlier, which I think is a huge benefit. I think doing it on deathbed is the wrong way and giving while living leads to much better outcomes.
[00:10:42] SL: Carnegie talks about this in his Gospel of Wealth, either give it to the state, or you give it to your kids, or you give it away while you’re alive. So, we have more people figuring out how to give it away while they’re alive.
[00:10:53] JA: Right. Because it’s younger people who are doing it, because it’s the principal who’s more likely to be engaged in it, I think that’s one of the drivers as to why we’re seeing more interest in policy. Especially from the tech sector, they’re less interested in giving to the big three, the hospitals, the universities, the cultural institutions. They’re very interested in trying to find solutions to problems, oftentimes unconventional solutions to problems, and doing it now, rather than waiting 20, 30 or 50 years to do so.
[00:11:24] SL: It brings me to a thought I’ve had for a while. I spent a lot of time out in Silicon Valley, and there’s a lot of founders and a lot of innovative thinking out there. Then, you’re in the nonprofit world, and there’s a lot of innovative thinking in different ways but I also think there’s a gap between the understanding of how nonprofits work and how founders think about problems. I also think there’s a lot of ways that both can kind of learn from each other.
Actually, part of the podcast here, I think, I’d like to have that conversation more so that those two groups can interact more. What is your experience with that, and trying to bridge that gap between that founder mindset and the philanthropist or the nonprofit world?
[00:12:01] JA: One of the issues I’ve seen is that a lot of the younger philanthropists want to write one check, find an answer to a problem that requires a one-time funding. Almost like, “We’ll start this company to solve this problem and then we’ll move on to the next thing,” kind of the venture capitalist model. Make a decision quickly, write a big check, move on. That’s not how a lot of these issues and problems get solved.
There’s a great essay written by Larry Kramer, who’s head of the Hewlett Foundation, titled ‘Against Big Bets’. He’s talking about how most of the change that’s happened in America is there because it’s year after year of pushing on these issues. If you think about climate change, that’s not an issue where you can write one check and have confidence it’s going to get solved and move on to the next thing. It requires being in the trenches for years and years, trying to change the hearts and minds of the people, which then leads to politicians changing their actions and you start getting some of the answers that were sought for originally.
But there is this enormous demand from philanthropists for the one-shot answer and there are very few of those one-shot answers of the supply. There’s enormous demand, very little supply. Most of the nonprofit sector and philanthropy is about, are you there year after year? I was actually meeting with a program head today, someone who runs their own nonprofit, who just did $150 million capital campaign. They actually raised it fairly easily. That was one-time checks. I can raise those. It’s the operating dollars every year to run the program is what’s really hard. I think that would be my advice to those who are entering the space, especially from the tech sector who are used to shorter attention span, is that this stuff requires patience, and it requires being there year after year.
[00:14:00] SL: Are there any suggestions for folks in the nonprofit space of how to kind of bridge that? I mean, what should we be doing? Should we be having more working groups? Should we be connecting in different ways? Should the messaging be different? Or should the messaging just simply be what you said, which is, hey, what we need is more money for operating. We love the big checks, but we also need operating in this directness? What is your thought?
[00:14:23] JA: I think that’s right. I think it’s being straight up with the donor upfront. This is the problem, this is our strategy as to how we’re going to create the solution, but we’re not going to have success in a year. This is a long-term trajectory.
I remember speaking with somebody who ran a marketing campaign, a direct mail campaign, trying to raise small money from donors. His learning from that was, the typical donor will give to your organization for about four years, and then they move on, they get bored, they move on, they want to go do something else. Something else is more exciting. This organization, the cost of acquisition for a donor was very significant because they kept having to come up with 25 percent new donors, just to stay even.
[00:15:10] SL: They had to spend a bunch of money to get the donor, And then they’re only there for a couple years and then they’re gone.
[00:15:14] JA: Exactly.
[00:15:15] SL: Yeah. Interesting. Interesting. I mean, I guess this naturally leads into this thought about sort of moonshot philanthropy. How do we think about pushing the boundaries on these big issues? I think what you’re basically saying is, people have to be in it kind of for the long haul. It can’t be a one shot, and then, maybe there needs to be some better messaging from the nonprofit world towards donors, particularly if you’re talking about founders or Silicon Valley folks that are used to being more targeted and quicker in their way to impact.
[00:15:46] JA: Exactly. I think for the organization, the more you can involve the donor, the better. The more they understand that this is a long slog, that you’re trying to make small movement, year after year. There’s a really good book I read from a man that led the movement to get rid of Don’t Ask, Don’t Tell so that gays could serve openly in the military. He describes a 20-year campaign to change the policy. The initial 10 years, it was very hard to see tangible movement on it. Success was getting invited by a West Point Professor to come give a talk. Getting that invitation was success.
[00:16:27] SL: That’s tough on your donor update.
[00:16:29] JA: Yeah, exactly. If you’re sitting there and you’re explaining to the donor, it’d be very easy, both for the founder of the organization as well as for the donors, to just lose patience with it. Because you don’t see a lot of movement on the issue. I think that’s the hardest part about being involved in any type of policy, is that you’re fighting and fighting, waiting for that political window to open, waiting for that time to be right. You have to have done that legwork in advance in order to have success. But it’s tough. It’s tough to sit there year after year whenever it’s trying to find what your tangible achievements in year two, year three, year four is really hard.
[00:17:10] SL: What have been some of those moments for you in your work on criminal justice? Because I’m sure there’s been a bunch of them, because there’s been so much change in the last 10 years, but I’m sure that you didn’t necessarily see the changes you would have thought 10 years ago, and there had to be openings that you’re talking about.
[00:17:27] JA: Yeah. One of the things, you saw this. The political window really opened, I think 2017 to 2019, where the left and the right had traditionally been on opposite ends of the spectrum on this issue. They could come together for this kind of brief couple-year period. It culminated with the First Step Act, passed through Congress, strongly bipartisan legislation, that then gave the okay for conservative states to start passing a whole series of reforms of the system.
I think even today, there’s that. Political windows open so long as the reforms not on the front page of the paper. If it’s going to be on the front page of the paper, then it starts getting partisan, everybody runs to their respective corner. But if it’s things that are just quiet, that both sides can sit down and agree, makes sense and are better for society, better for the individual who’s been convicted or charged, and promotes public safety. Let’s go ahead and do those.
There was a lot of work that we did, and many others did of being ready for when that political window opened, such that you had these reforms, you had the idea generation, you had evidence base behind it, you had the theoretical framework, you had the research and evaluations ready. Then, that window opens and you charge through it.
[00:18:50] SL: That’s so interesting. You make a great point about not wanting to be in the front page. What are the ways that you found – because I’m sure there are some of them – of keeping things off the front page? I’m always surprised, when you talk with people from different sides of the political spectrum, how much they actually agree on things, but there’s just a lot of buzzwords. Then, particularly, if it’s in the spotlight, then like you said, people run to their corners. Are their strategies that sort of keeping it off the front page that have worked?
[00:19:16] JA: I haven’t figured those out yet. If you know those, please tell me because it would make our work much, much easier.
[00:19:23] SL: I am sure, especially the space that you are in because it is very politically charged.
[00:19:28] JA: It can be. Yeah, it can be. Oftentimes, what we’re doing is – in public policy, unless you’re just going to throw more money at a problem, if you’re going to try to reform the system, there’s usually winners and losers. There’s a special interest group that’s made worse off than where they were before the reform. They will fight. They will fight with all their might to keep status quo, because they’re succeeding in the current system.
Whenever you propose was one of these reforms, and it has a loser in it, it has a side whose interests are not aligned with the outcome that society wants, then it becomes very, very challenging and they’re going to try to raise it to the metaphorical front page.
[00:20:17] SL: I was listening to a podcast that Laura, your wife was doing the other day, on Deep Dive with Laura Arnold. She was interviewing Andrew Yang and Larry Diamond about polarization in America. This is one of those big, hairy questions that, how do you kind of get out it? It’s obviously so important. Is that one of the spaces, I’ve been kind of pondering, that maybe philanthropy is getting into more, should get into more, or should it stay out of it?
[00:20:45] JA: So, I think it should be in more. I think there has to be realization about what’s viable, what are the viable changes? People talk a lot about how the press has created a more polarized society. I think that’s very much true. The question is, what are you going to do about it? If there’s demand for a partisan newscast, there will be a partisan newscast that the market supplies for it. You’re not going to get around that. You can come up with a new BBC type, a newscast, but no one’s going to watch it.
[00:21:16] SL: But if nobody watches it, it doesn’t matter.
[00:21:18] JA: Right. That’s not viable. We started thinking about, what are the drivers of partisanship and a lot of people have done work on this. What are the changes that a philanthropy or a nonprofit can do? What’s technically viable? What’s politically viable? What’s the pathway to success on change? That narrows that list down greatly.
What we’ve chosen to focus on is the process of how elections work. That’s the current partisan primary system. It naturally creates a political class or politicians that are much more extreme than the average voter because you divide up. Oftentimes, when states have closed primaries, you don’t even get the senator, has a vote in choosing the final two candidates, so you have the right and the left, each choose theirs.
The more extreme a voter is on the political spectrum, the more likely they are to be active politically. The more likely they are to vote, the more likely they are to contribute money, and to be active in social media about their views. It pushes, within the primary, it pushes it farther and farther within the Republican Party and within the Democratic Party to the extremes. Then, you take those two candidates and put them in a general election, and now that we have all the gerrymandering that’s occurred, and it just becomes – oftentimes, a general election doesn’t even matter, so you end up with a candidate that’s far to the left and far to the right running against each other and that election is already predetermined.
There are some various voting reforms, like doing top four plus a rank choice vote during the general, that is a solution to how do you have a –
[00:23:06] SL: It’s a process solution. Yeah.
[00:23:08] JA: Yeah. The politicians look more like what the electorate is, then the question is, how do you get that adopted in jurisdictions? That becomes hard.
[00:23:17] SL: Especially in the jurisdiction in which there is an incentive, as you said, somebody is doing well from the way the system is and so you don’t want to change the system if you’re not going to do well by it. If you’re extreme, then you’re going to do well by the system you have. Shifting that is inherently moving the status quo, but states have done it.
[00:23:34] JA: Yeah. It’s generally been done through citizen ballot initiatives. You have to go get – it’s very expensive, but you have to go get all the signatures, get your initiative on the ballot, and kind of go around the state legislator to get these things enacted.
[00:23:49] SL: Yeah. Again, a longer slog towards things.
[00:23:51] JA: It is a slog.
[00:23:53] SL: I mean, it’s interesting. You brought this up a little bit, which is folks making money at younger ages. Historically, people having made money at a later age and giving it away later. What do you think about folks in the crypto space making money very quickly, younger, and how’s that going to affect philanthropy? Or how is it already affecting philanthropy, is more an accurate –
[00:24:16] JA: I don’t know. This space is so new, and most of the people who have been very involved in crypto still have much of their wealth in crypto, and haven’t really started distributing it with a couple exceptions. But there is this great wealth that’s been created at young ages. The question is, then what? I think that remains to be seen. What happens with these funds? Are they just reinvested in that ecosystem or in the tech ecosystem? Which is what happens often, and that’s all fine. Many people, they want to have philanthropic intent, but they’ll be philanthropic later in life. This is the time when they’re focused almost entirely on the private sector activities. Again, all fine. But we just haven’t seen crypto really have an influence on philanthropy yet.
[00:25:04] SL: Yeah, it’s interesting because back to the – we think of sort of like the Gilded Age, and not just because the TV show is out now. But the Gilded Age and giving at that period in time, it also – you had a very physical place, people had a factory, people were in a certain city, you had a lot more of a place base kind of thing. I’m sort of curious to see what happens in the crypto space where it’s much more decentralized. You have people everywhere. Is that going to change? I think, presumably, it is going to change what people are giving to and where they’re giving. But we aren’t really sure yet what that’s going to look like. It’s also around sort of transparency. I think that’s going to be probably a big question too.
[00:25:43] JA: It’s a great comment. I think people have redefined their community over the years. I think most giving happens within one’s community. You need to tie an attachment to the people you’re giving to. Philanthropy historically has generally been done – when it’s done at a geographic basis, it’s generally been done within a city. You often have – people are giving in their city. Sometimes you give within your state or region. Some people, like we, define our community as our country. But just recently, you’re seeing more and more people define it globally, and saying, maybe because of tech, and because techs knock down these walls and you don’t have these barriers. The nationalistic barriers aren’t as strong as they once were, that people are viewing it as how can my dollar go for the most good in the world rather than my small geographic community.
[00:26:44] SL: Yeah. That’s very, very interesting. I mean, of course, it brings up Ukraine and all that is happening there right now. I think in a lot of places, we’re seeing not only polarization, but more move towards sort of violent polarization. It is interesting, we’ve been talking mostly about the US. But globally, are there certain causes in that space that you think will get more support? Or that maybe should get more support in terms of – I mean, maybe I’m a little biased on this question. I used to do a lot of mediation, negotiation kind of stuff. But conflict resolution, do you think maybe we’ll see some more support in that space and international level?
[00:27:19] JA: Perhaps. I think groups that have focused on this, and I’m thinking of Rockefeller in particular, with some of their nuclear non-proliferation work that they funded for years, and then they decided to pull back. I think they just found the space hard to give in and hard to have success and trying to figure out again, as a third-party entity, this foundation, where’s their leverage within the system there?
[00:27:46] SL: Talk about a [inaudible 00:27:46] horizon too. Oh my gosh. You don’t want something to happen, so doing something to have something not happen is success.
[00:27:54] JA: Exactly. I think some of the organizations that were working in this space just started to lose momentum as other challenges started to come to the forefront. There was this thought that nuclear war was a thing of the past, and that we had more challenges that the world faces today. For instance, climate change. I think a lot of the momentum from both philanthropy as well as from organizations, from people who wanted to run these organizations started moving away from things like nuclear war. Certainly, we’re talking about that again today, so you might see that ecosystem redevelop.
You do need organizations to write a check to. If a philanthropist has interest in a certain class of problems, there does need to be an ecosystem of organizations that exist that one can write a check to. In some areas, there’s more philanthropic demand than there is supply of organizations that’s able to take that money today.
[00:28:53] SL: I was doing a little bit of reading. Recently, this question of innovation has come to my mind. I wasn’t really aware that there was such a history of innovation in the nonprofit world. I learned that 911 was set up in 1968 by a foundation. It was then adopted by the government. I also learned that PBS and Pell Grants started at foundations and then were adopted.
[00:29:16] JA: Did not know that.
[00:29:16] SL: Yeah. Which I think is the Carnegie Foundation, actually. It’s made me think a little bit back to the Silicon Valley, which is great at innovation, nonprofits and philanthropy, which people tend not to think of as being the most innovative places. What are some things that we might do, or any ideas that come to your mind that we should be funding or spaces that could be quick wins? I know that that’s hard, and a lot of these are long haul projects. But are there any quick wins that should be getting money?
[00:29:44] JA: I think you start with, again, the government and private sector solve most of the problems. You have to look at what are issues where there’s not the financial incentive or the political incentive to take on these issues? Oftentimes, it’s too financially risky or too politically risky for private sector or government to get involved in that. I think once you strip out that, you end up with a small group of problems that are particularly suited for philanthropy.
[00:30:16] SL: That’s a great diagram.
[00:30:18] JA: It’s thinking about, where do the outcomes or the incentives of the private sector, where do they really conflict with what we want for society. You can think of something like for-profit colleges that are trying to maximize profitability and might be doing so at the expense of the experience that the student is getting. Certainly, early on in that industry, when students didn’t understand the outcomes, and when there were a lot of high-pressure sales pitches that were coming in, there was a lot of abuse, I think, of the student and it still exists today. It was, that the actors in that system had a very different incentive than what was good for society, because the consumer wasn’t fully educated about the decisions he or she was making. You mostly got one shot at it.
You had a certain amount of Pell Grant money, you could transfer, but a lot of people didn’t and you lost something when you transferred. You kind of had this one shot at it. That’s where government needs to provide strong regulation. Without that, it’s okay, if government’s been captured by the special interest of for profit higher ed, then what? Who’s the next layer of oversight on that?
That’s an issue that we’ve taken up, for instance, is like trying to create more accountability in the system and stop some of the fraud and abuse that’s happening in this industry. You got to start with that framework of, where does government and private sector not have incentive to address the problem or that their incentive is misaligned with the outcomes that society desires?
[00:31:57] SL: Yeah. That’s interesting, I hadn’t really thought of that as a space for nonprofits. Not necessarily to say a watchdog, but a little bit of a third party there that’s looking around and saying, “Hey. If the incentives are misaligned, then our role, because we aren’t – we’re not getting something from the system, then we have the ability and the need and the duty to push this in a different direction.”
[00:32:18] JA: Exactly.
[00:32:18] SL: Yeah. That’s an incredibly interesting sort of sphere that I guess probably a lot of nonprofits are in, and they just don’t frame it that way, necessarily. It brings too, on this incentive question, you’ve tweeted a little bit about donor-advised funds. Would love to hear your thoughts about the ACE Act. For people that don’t know about donor-advised funds, maybe just a little bit of background about what they are and what your thoughts are.
[00:32:44] JA: Sure. Donor-advised funds are similar to a private foundation, but in many ways, they are a superior instrument. They’re better because they get better tax treatment for the donor. More of your adjusted gross income can be deducted from your taxes. If you give to a 501(c)(3) three versus a private foundation and donor-advised funds are technically a 501(c)(3). They also have fewer restrictions on them.
There is a requirement that private foundations give away or distribute at least five percent of their net asset value each year and tying the tax deduction that one receives to community benefit to make sure that the private foundations aren’t just wealth warehousing vehicles that stay invested in stock market forever.
Donor-advised funds, because they were not specifically created vehicles, they were more –people figured out that the tax code allowed this type of vehicle, which was a donor-advised fund sponsor, often a financial intermediary. Many banks or many community foundations now offer these vehicles. But there’s not the tie between the donation that one receives for donor-advised funds with the requirement that that money ever get into the community. That’s one of the big flaws that I and many others in the philanthropic space saw.
It goes back to this issue that I’ve seen of this disconnect between philanthropic intent versus philanthropic action. There’s a lot of people who are very philanthropically inclined. If you talk to them about their wishes, they say, “I want to donate significant parts of my wealth to nonprofit sector. I don’t want to give it to the government at death. I don’t want to give very substantial portions to my kids, maybe some of it.” Then, you start asking them, “Okay. What are you doing? That’s your goal. What are you actually doing towards that?” Oftentimes, what I hear is, “Very little.” There’s this disconnect.
[00:34:49] SL: There’s no roadmap that makes sense or that’s easy for people to navigate.
[00:34:53] JA: Yeah. I think the system needs a forcing mechanism. You see that with much of the charitable tax law. You have to donate by December 31st in order to get a tax deduction for that year’s taxes. A very high percentage of charitable giving is done in the month of December, because you have that forcing mechanism. You also have a forcing mechanism for private foundations which have to give away or distribute at least five percent a year. That’s required. They do that. Many do much more than that, but that’s a requirement.
With donor-advised funds, you don’t have that forcing mechanism. What often happens is you see people who funder donor-advised fund. They get a big tax break that year, which is less resources to the government. Now, the tradeoff is supposed to be and why you get that tax benefit is that, that money gets recycled and put into the community at a multiple of what your tax deduction was. But what’s been happening is that, for some donors, it’s certainly not for all but for some donors, not because they’re for bad intent, but it’s just easy to put this decision off till tomorrow. It’s hard to figure out how to give effectively in however one defines effectiveness. But because that’s hard, it’s easier just to push that decision till tomorrow, and I’m probably not going to die overnight, so that’s fine.
Tomorrow keeps being tomorrow, and then you get to end of life and you haven’t figured out where this money’s going. Then, one of two things happens. Either you end up giving it away in your will, and it’s somewhat scattershot of like, “Okay. Who can take these big chunks of money?” It often ends up being the big three; the hospitals, universities, cultural institutions, because they can take seven-figure, eight-figure, nine-figure checks. Or that responsibility gets passed on to the kids. Now, sometimes that works out fine. Oftentimes, in my experience, I’ve seen that the next generation doesn’t really want that responsibility.
Oftentimes, the parents say, I want the foundation, this money to go for these causes. Those might not be causes that the kids are passionate about. Then, you have this disconnect, and the kids, they’re not passionate about the donor-advised fund, they’re not passionate about the causes. It’s not their money, they don’t have real ownership of the money. Again, it just sits there, like all the wealth warehousing vehicle. Society never gets the benefit of that money, which was the original trade off as to why you got the tax cut.
What a group of reformers proposed, and what’s largely been taken as the framework for bipartisan legislation that’s been introduced in the House in the Senate through the ACE Act is, let’s put a time limit on when the money can be given away through a donor-advised fund. What we’re saying, and what the legislation proposes is, you have two options. If you’re starting a donor advised fund, you can put it in today, you get the tax deduction today just like you do and you have 15 years to give that money away. Or if you want longer, you can put the money in today and get the capital gains, tax benefit, but the income tax benefit is delayed until you give that money to a nonprofit.
If you give it in 20 years, you get the tax benefit in 20 years. There should be an alignment between when you get the tax deduction and when that money is going into the community. It’s been very well received from both sides of the aisle, as I say. I think it’s telling that, in 2020, which was probably the year of the most need from philanthropic institutions, 35 percent of donor-advised funds didn’t give away a single dollar. That just feels wrong. That’s not in the spirit of what these vehicles are supposed to be doing.
[00:38:42] SL: I’m really glad to hear that there is bipartisan support. Is it Chellie Pingree and Tom Reed that sponsored the bill?
[00:38:49] JA: Yep.
[00:38:50] SL: There has been a little bit of pushback. I’ve read about some folks saying that they’ll be restricting charitable giving vehicles. Is that true? Will people view this as, “Oh, it’s a restricted vehicle now?”
[00:39:02] JA: I don’t think so at all. In fact, whenever I talk to someone who’s philanthropically inclined, they all intend to give this money away in the near term or medium term.
[00:39:13] SL: It’s just like a to-do list that hasn’t quite gotten around to it. Yeah.
[00:39:17] JA: Exactly. This is just providing – that’s their intent whenever they create these vehicles, 99.5 percent of the time. Let’s just makes sure that the rules are aligned around that as well.
[00:39:31] SL: Well, it is the largest generational shift in wealth, in the Baby Boomers, we have another one or two decades of that going on, which is a huge amount of wealth then going into donor-advised funds. If there ever is a moment, it seems like the moment would be now so that that’s actually getting to where it needs to be going.
[00:39:50] JA: Exactly. There’s going to be plenty of rich people in the future to worry about the problems of the next generation, and two, three generations down the road. I think the money that’s put aside today is best spent today. People talk about, “Well, you can put it in the market and it compounds and we’ll have more money for the future.”
There are two problems with that argument. Number one is, by that logic, that money should never be distributed into the community, because the expected returns are always positive for your investments. You put the money away and it just stays forever. Second is that, the costs of the problems also compound. If you can address a problem today, it’s easier and less costly than doing it tomorrow. People don’t think about the negative ramifications of the dollar that isn’t invested in the community.
[00:40:39] SL: The cost of not solving a problem now compounds into potentially a much larger problem.
[00:40:45] JA: Yeah. Oftentimes, much faster. Climate change is a great example of this.
[00:40:49] SL: What are some of the folks in the climate space and nonprofits that you think are doing some of the best work? Because it is one of the most pressing issues that we have right now and it is definitely one of those long hauls. I say long haul, as in, a lot of people have been working on this for a long time. Not long haul from now forward. Yes, that too, but also from the past.
[00:41:09] JA: Without mentioning specific organizations, what I’ll say is, the climate space, I’ve been very, very impressed with. Both from the donor community as well as the organizations. There are a lot of very thoughtful donors who have made this their number one or number two issue, especially people coming from tech, especially people coming from the finance industry, who are saying that this is the existential risk for society of our generation and that’s where we want the majority, in some cases, all of our philanthropic resources going.
The ecosystem of nonprofits in this space is incredibly talented. Really smart people get drawn to this field. They study it in school, it become academics. But then, also, thinking very strategically about, “Okay. What’s the right policy? What should it look like? What’s the advocacy campaigns necessary to try to pass the policies? What’s the research needed?” It is a very developed ecosystem of funders and organizations to try to address what’s quite likely the most important generational problem for us.
[00:42:16] SL: Well, it is one of those spaces too where you also see a lot in the private sector working certainly in Silicon Valley and startups. You see the nonprofit sector, you see the government, and maybe that is just at this moment when you’re seeing the impact of a lot of work from the past. But you’re seeing a lot of fruition of those sorts of working together relatively well.
[00:42:35] JA: Completely agree. I think that the reason Silicon Valley is interested, the reason that developers in Houston, who used to be in oil and gas, are now in the energy transition space, is that the government created an industry for this. The government has spurred industries through subsidies, through mandates. But those policies are in response to the NGO sector.
[00:42:59] SL: Pushing the government, then the government making the right space, yeah.
[00:43:02] JA: Exactly.
[00:43:03] SL: It’s a bit of a domino effect, and we tend to forget about the first domino and only see the later dominoes.
[00:43:08] JA: Exactly. But if there wasn’t a way to make money in it, you would not see the private sector respond.
[00:43:14] SL: That would have been the last – I mean, for many years, there wasn’t as much of a private sector response. But now that’s gotten a bit easier to see than it was before.
In this, I feel like there are a ton of questions that I should ask you, that I should be asking, especially philanthropists, especially folks that if we want to make more connection between founders to understand Silicon Valley mindset, nonprofit, and philanthropists, what are the questions that are not being asked or not being understood?
[00:43:43] JA: I think, because most people have their day jobs that they made their money in, they’re oftentimes still in those fields. That’s where most of their effort is. They can articulate what their goals are philanthropically, but they can’t articulate the steps of how to get there. Whenever I talk to people, it’s, “Okay. Tell me what your goals are. What are the steps you’re taking today to address that?” If it’s just, I’ll deal with this in the future, that’s when I start – don’t wait until your deathbed to address these problems. But just to maybe encourage people, start thinking about this and doing it now rather than waiting.
[00:44:22] SL: Really there are bunch of nonprofits over here that are like, “Hey! How do we connect with donors?” There are bunch of donors that are like, “We know the things we’re interested in, but we’re not.” It’s this sort of classic matching challenge. It doesn’t really seem like that egg has been cracked. Is there a reason why? I mean, is it that there needs to be some dating platform that is created between the two or what is the way to make that better?
[00:44:48] JA: The financial sector has been dealing with this for decades. You have people with piles of money in their investment account, and you have a lot of companies that are asking for money, so how do you pair those two? You have some investors who want to do it themselves. Maybe they hire a small team, maybe they do it themselves just in their spare time and research companies. You have a lot of intermediaries though. You have mutual funds. You can give your money to – in the olden days, the professional stockbroker, who would go choose stocks for you, which has now morphed into like a mutual fund or a hedge fund. Or you can also buy an index fund and you can buy an issue specific index fund. I just want the tech sector, I just want oil and gas, I just want energy transition, whatever.
You don’t have the development of that ecosystem in the nonprofit sector as much as it needs to be. You’re starting to see this stuff build up, so you have some advisors, some of the consultants are doing this. You have some advisors. Some of the community foundations do a great job of providing the service if somebody particularly has interest in their own city. Community foundations can be a great resource to connect them. You’re also starting to see kind of the equivalent of issue specific mutual funds or index funds. There are a number of intermediaries like a charter school growth fund. If I’m interested in charter schools, I don’t know which one to give money to and I want the experts to do that, I can give my money to a charter school growth fund.
Many areas of philanthropy now have a one or more of those types of vehicles that are run by experts in the space who do the diligence of organizations. They’re still not funded the way they should be, because I think donors still want that connection directly to the organization many times. There’s something about you giving over the check and the organization telling you, “Thank you, and this is what your check’s going for.” That personal connection gets lost a little bit in that space of intermediaries, I don’t know how to solve that problem. We don’t expect that as financial investors whenever I invest in Facebook or –
[00:47:01] SL: That’s an interesting question. Yeah.
[00:47:03] JA: Yeah. You don’t have Mark Zuckerberg coming to me saying, “Hey! Thank you. I really appreciate you buying shares in my company.”
[00:47:09] SL: Well, because you’re getting something else back. You’re investing, and therefore, you’re getting money back. When you give, getting that gratitude is what you’re getting back.
[00:47:18] JA: Yep, that’s a great point.
[00:47:19] SL: I assume it’s okay to say that you give generously to CCI, and we are very, very grateful for that. Way before I joined CCI, 10 years ago, I worked at the Kennedy School on a project that was so charter city-esque, but no one was using the word. It was a project that was working on towns, and governance and making local government. The irony is that, later, now, 10 years later – and I worked with a guy named [inaudible 00:47:44], who was kind of a legend at the Kennedy School on African Policy. He was sort of espousing this idea, but there wasn’t a name for it.
Now, 10 years later, we actually have a project that was being worked on at the Kennedy School by the same guy who’s now working with CCI, under the banner of CCI. It’s kind of come full circle a little bit for me, because we just weren’t calling it that. I think, actually having a name for it and having a lot of what CCI has done is sort of put protocols, and ideas and processes in place for this kind of incentive, like you said, aligning incentives. It’s really kind of cool to see that it is getting tried out this petri dish kind of way.
[00:48:21] JA: It’s similar to the trajectory of a lot of things we work on, where you have one person who thinks of here’s a potential solution to a big problem. Let’s build the theoretical framework for it, and then work and try to build public support for the idea. Then, let’s go test it and then evaluate it. That’s what you’re doing.
[00:48:40] SL: You’re absolutely right, especially I think these ideas that are a little hard to explain, or it takes founders of nonprofits to figure out a while the process that they’re doing, that sometimes that takes a year, or two, or three. Especially if the idea is a little less direct. If you have a really direct narrative, or direct project that you’re working on, that’s one thing. I say this from CCI, but I say it’s probably from a lot of other people that work in spaces that are a little more amorphous, or take a while to work out the kinks that it does take time. Those donors that, as you mentioned at the beginning of the podcast, are there for a while is just really, really helpful. Because it takes a while for people to figure that out, especially if it’s dealing with foreign governments, and all kinds of different actors and stakeholders.
[00:49:22] JA: Exactly.
[00:49:23] SL: Well, thank you so, so very much for being on today.
[00:49:27] JA: Thanks. It’s great to be here.
[00:49:29] SL: You’ve been listening to Seeding the Future, a Charter Cities Institute podcast. To learn more, you can follow us on twitter or visit us at chartercitiesinstitute.org. Thanks for listening.
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