At the American Council on Gift Annuities (ACGA), we receive a wide variety of questions from our members on a regular basis. Some of the questions are around state regulations and many of the questions surround our suggested maximum gift annuity payout rates. We often get questions around best practices in the management of a program and we thought it might be helpful to share a couple of questions that have come in lately.
A member recently asked the question, “Should charitable gift annuity (CGA) funds be invested as a pool separate from other investments”?
As with any good question, the best answer is often “it depends”. If a charity offers gift annuities is certain states that require a separate pool, the answer is definitely yes. For example, California requires that assets backing gift annuity contracts from donors residing in California be held in a separate account to fund the annuity payments. California also requires that a certain part of the assets held in reserve be invested in specific investments. However, most states are silent on this notion of separate accounts and required reserves. To further complicate the answer to the question, it also depends on the charity’s investment appetite. The ACGA suggested maximum rates are built under the assumption that the funds are in a separate account and are invested according to the prescribed investment allocation, although charities are free to invest according to their risk tolerance. Some charities have a specific sub-account for their CGA contracts in their endowment portfolio that may have a very different investment allocation. There are other charities that choose to reinsure some or all the contracts they write, avoiding the need to invest funds. There are some organizations with relatively few contracts that run their CGA programs through their finance office as Accounts Payable, commingling the funds with operating cash that may only be invested in a money market account. There is no right answer to the question and each institution should make a decision based on the size, activity level and investment risk tolerance of their gift annuity programs.
The member then posed a follow up question- - “Should investment earnings be applied to each CGA”?
Again, it depends. For some organizations that have relatively small programs and all the gifts are unrestricted, the answer might be no. The cost of the accounting of investment earnings to each of the contracts might not be justified. For other organizations that have contracts that are designated to certain programs or to fund certain projects, the answer might be absolutely yes. The contract’s earnings need to be tracked so that the annuitant’s intention will be fulfilled when the contract expires, and the residuum is withdrawn for the intended purpose. The finance office may also prefer to apply a specific market value to each annuity contract. This allows the finance office to track the asset and corresponding liability of each gift for an in-depth analysis of the health not only of the program overall, but of each gift individually. Some institutions may have gifts that are likely to go underwater – meaning that the present value of the future stream of payments to the annuitant is greater than the market value my definition of underwater is the original funds were depleted and the payments are now being made out of the reserve pool. That institution may potentially choose to go back to the annuitant and explain that the contract may not be fulfilling the donor’s intent of making a gift to the charity and ask the annuitant to relinquish their interest in the future annuity payments.
At the ACGA, our mission is to foster the success of charitable gift annuity programs at charities nationwide through the promulgation of suggested maximum gift annuity payout rates, education, research, monitoring state regulations, advocacy, and other activities that promote good gifts for nonprofits and their donors. We welcome our member’s questions and we hope that many of you find this sharing of a member’s questions to be helpful as you think about your own programs.