Under Water

With economic markets going haywire the past few months and investors looking for a safe place to park their money, some charities are stepping up their efforts to push charitable gift annuities (CGA).

The American Bible Society (ABS), which created the first individual annuity in 1848 and today has 13,000 annuities with a value of approximately $40 million, plans a year-end push to identified constituencies through direct mail and the Web.

“Very much within our budget we’re shifting money to target very carefully where we can make a difference,” said The Rev. Simon Barnes, executive vice president, development, marketing and research at the New York City-based organization. Annuities are “now a very attractive instrument, and there are not very many people who have the financial reserves to get into or expand their annuity programs,” he said.

ABS has a unique opportunity because it could quadruple its annuities and still have enough reserves, Barnes said. “If you’re 60, 65, and looking for somewhere safe to put money and get a decent return, we’re one of the last shows left in town in that regard,” he said.

Criticism over its conservative fiscal policy and large reserves has all but disappeared in recent months, said Barnes. “We believe that a rainy day will come,” he said. “We’ve seen it before, and it happens every 50 or 60 years. We’ve been around long enough to see a few of those. Because we take a much longer view than many institutions – we’re seen almost as archconservatives,” said Barnes.

While ABS might not have enjoyed the substantial gains that other nonprofits did during the go-go days of the stock market, the organization also has not been impacted as much by the recent volatility. Barnes estimates the society’s assets are down 12 to14 percent in recent months compared to the market norm of about 25 percent.

Barnes expects a number of smaller organizations engaged in the Bible cause to eventually fold into ABS. “We’re very open to that. We have a responsibility to continue their mission,” he said. “We can’t throw out fiscal lifeboats to people but we can look at ways to strategically help the Bible cause. I will expect those kinds of conversations,” Barnes said. “There will be times that it makes sense. Economies of scale will play enormously here. As much as we’d like to do it, there will be times that we can’t. It’s a winnowing, and it’s not always a bad thing,” he said.

Easter Seals is joining in the push to market annuities. With almost 70 CGAs since it started its program only four years ago, the Chicago-based nonprofit is aiming to aggressively build upon its existing $2-million annuities pool. Just before recommended annuity rates were changed by the American Council on Gift Annuities (ACGA) in the spring, Easter Seals wrote about two-dozen annuities.

“We’re not in a conservative mode at all on annuities,” said Michael Galbraith, director of planned giving. While he has received “an incredible amount of inquiries over the last month,” probably due to the economy, not many were strong leads. The downturn in the economy also has Easter Seals looking at possibly changing its limits and not offering CGAs to “people having a higher floor,” Galbraith said, with some consternation about extending them to people in their 60s.

While it’s a good environment to market a gift annuity, there’s also concern for charities about the falling market values of their reserves since at least a portion are typically invested in equities, said Frank Minton, a senior advisor to PG Calc Inc. and past chair of the ACGA board. “It’s a little early to tell the full impact of the last few months on gift annuities,” he said. Gift annuity activity increased earlier this decade when interest rates were dropping, Minton said, but this economic situation is much more serious than that of 2001 or 2003.

If a charity’s reserve fund dropped below a level required by some states, it would be necessary to shift from its general, unrestricted money into a segregated reserve fund to a level required by the state, Minton said.

That’s exactly what The Nature Conservancy (TNC) may have to do. The conservancy has had an annuities program for decades and the past two years wrote more than 300, with values in excess of $16 million. For the first time, the organization is monitoring on a weekly basis the asset value of its annuities fund because of the market’s instability.

Depending on what the asset value will become Dec. 31, there may be a potential shortfall in meeting some state reserve requirements, said Angie Sosdian, director of gift planning at the Arlington, Va.-based nonprofit. That would force either a transfer of funds, from cash reserves, endowments, or elsewhere, she said, but given the volatility, the amount has been anywhere from less than $1 million to as much as $7 million. “It’s been up and down weekly because the market is fluctuating so much,” she said.

Sosdian said Washington state requires a 110-percent reserve, applied to the entire annuities pool, but even without that state requirement, a shortfall would be likely, though probably not as significant.

Another first for TNC: annuity rates were capped in November for a period of time because it’s “bumping up against reserve requirements,” Sosdian said.

Washington, D.C.-based Greenpeace recalculated its reserve requirements to ensure it will meet state reporting next year. “Because we’re very conservative, we’re doing OK,” said Corrine Barr, gift planning manager. Greenpeace meets all its requirements, including the three-year phase-in of New York’s new levels, “even with the markets the way they are,” she said. And like Easter Seals, Greenpeace highlighted the rate change of this past summer in its marketing materials earlier in the year.

New York adjusted reserve requirements to make them more conservative while many reserve funds have taken a hit on their equity portions, said Barlow Mann, chief operating officer at The Sharpe Group in Memphis. It’s problematic for some charities, particularly those that might have been more aggressive in their investments. But in places like California and Florida, the percentage of reserves that can be invested in equities is limited by the state.

Greenpeace received its first annuity in 2001 and now has about 80 annuities that have a value of more than $2 million. “We haven’t had a lot of annuities to date, but the ones that we have, have returned very well,” Barr said, with some residuum running more than 50 percent. Charities start out with surplus reserves, so they can absorb a fair amount of loss in market value and still have adequate reserves, Minton said. That the market value has gone down doesn’t necessarily mean reserves are inadequate now, he added, but may simply project a smaller surplus for the nonprofit.

Donors are not at risk but the residuum for nonprofits might not be what they were used to during the stock market’s better days. Gift annuities are designed, in theory, to leave a residuum of 50 percent but the reality for many years was that the residuum was running significantly higher, Mann said. Most recent estimates pegged the average residuum anywhere from 68 to 72 percent. “We’re certainly working closer to 50 percent,” he said.

Some annuities written by the American Red Cross just before March 2000 have not run dry, but they were put into effect right before a market decline, much like those written earlier this year, according to Rebecca Locke, senior director of gift planning. “You might not be left with 50 percent at the end, but there’s a chance of having a good outcome for everyone,” if you’re strategic and don’t spend any of that money, she said.

Those nonprofits that acted like the tortoise (they moved slowed, were conservative, and getting ready to win the race) are in the best shape now, said Robert F. Sharpe Jr., president and CEO of The Sharpe Group. Those that have been prudent likely will reap the rewards as they push annuities in the coming months while smaller charities that were overly invested in equities with high payout rates are left without much cushion and likely will cut back.

The vast majority of charities have higher equity valuation than what ACGA recommends but they must decide what’s best for their organization in concert with their risk manager, said Bryan Clontz, president of Jacksonville, Fla.-based Charitable Solutions, LLC. When the stock market was booming in the Ô80s and Ô90s, being heavy in equities was the right decision, but in this market, “you’re worse off by far,” he said.

Though he’s still a “true believer” in CGAs, Clontz expects annuities to have a tough time over the next five years. That’s because the worst time to write annuities was March 2000, just before several years of declines in the stock market. Couple that with the average life expectancy for annuitants of 14 years, and annuities should continue to degrade until 2014, he said.

The worst thing for annuities is early, successive losses as charities make payouts into those losses, Clontz said, because it results in “negative compounding.” If return assumptions are significantly off from the start, with guaranteed payouts during market declines, it’s much more difficult for a charity to catch up, he added.

The autopilot approach to investing that might have worked in the booming 1980s and 90s, “created some sloppiness around these particular gifts and the market is punishing that a bit,” Clontz said. “It’s causing some charities to consider or stop gift annuity programs when really the risk had been there all along; it’s a matter of how you manage that. Some charities are going from doing nothing to manage risk to getting out of it altogether,” he said. Having the balance there is particularly important for charities, Clontz said, especially those that can meet their reserve requirements now but are uncertain in the next year or two.