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From President
Ann Barden’s Desk
Susie McGlynn, Communications Chair of
NCPGC, has compiled discussions of three legislative actions that may
impact your planning for year-end and 2005. Many of our NCPGC members
have participated in various stages of this legislation, and the Council
is very grateful for their expertise, influence and commitment to the
betterment of the profession.The
Northern California Planned Giving Council should be especially proud of
the achievements of its Legislative Committee, chaired by Earl Blauner
of KQED. Earl, Heidi Strassburger, Jeff Shields, Abby Mason and Paula
Blacher have proven that you can advocate for change from within the
system. You can fight city hall.
All 600+ California charities licensed
to issue Charitable Gift Annuities and the philanthropic world at large
are better off for the tireless efforts of these five individuals.
Their work involved travel, late nights, advocacy, drafting,
mathematical analysis and bad food. It was an enormous task.
Thank you Earl, Heidi, Jeff, Abby and
Paula for your intelligent and relentless efforts.
Thank you, too, to Jill Dodd of Steefel,
Levitt, Weiss for a thorough and approachable discussion of the Nonprofit Integrity Act. As many of you know, Jill’s work appeared
recently on Planned Giving Design Center.
And a final thank you to Heidi
Strassburger for penning the
article/instructions on trustee registration. They are very clear and
concise.
Best wishes for a Happy Thanksgiving
and a wonderful and safe Holiday Season. And to all a goodnight.
SB 1088 and Its Implementation
California Improves Investment Opportunities for Charitable Gift
Annuities
By Earl Blauner (KQED, Inc.), Chair
For the Legislative Committee, Northern California Planned Giving
Council
Jeff Shields, Member (U.S. Trust Company)
Heidi Strassburger, Member (UCSF)
Abby Mason, Advisor (Kaspick & Company)
Paula Blacher, Advisor (Wells Fargo)
FLEXIBILITY AND RESPONSIBILITY
SB 1088, authored by Sen. Jack Scott (D, Pasadena) and sponsored by the
Northern California Planned Giving Council (NCPGC), was signed into law
by Governor Schwarzenegger on August 30. The bill, effective January 1,
2005, amends California Insurance Code Sec. 11521.2 to allow charities
issuing charitable gift annuities in California to invest up to 50% of
their gift annuity reserves in stocks traded on U.S. exchanges. This
increase from the old limit of 10% provides more investment flexibility
for gift annuity pools by permitting licensees to invest a greater
portion of the pool’s assets in equities.
For some institutions, this will mean
that the asset allocation for their overall gift annuity pool will more
closely resemble the portfolios for their other charitable assets,
including charitable trusts and endowments.
Carefully applied, the new law should, over the long term, result in
significant additional funds available for charitable purposes.
This legislation, however, is not
intended in any way to recommend an appropriate asset allocation. Any
asset allocation changes should be carried out only after considerable
study. Nor does the new law change any other aspect of gift annuity
regulation in California designed to protect annuitants, including the
licensing and filing requirements, and the requirement to maintain the
reserve assets in a segregated trust account.
REGULATORY BACKGROUND
California requires that a portion of the required reserves (at least
90% under prior law, 50% under SB 1088) be maintained in specified
governmental fixed income investments. The remaining portion
(previously 10%, now 50%) can be invested in securities traded on the
New York and American Stock Exchanges, regional exchanges, and NASDAQ.
The new law allows a charity with a
typical mature gift annuity program portfolio asset mix of 45%
stocks/55% bonds (including both reserves and
surplus) to consider an investment shift to something closer to 70%
stocks/30% fixed income. This latter asset allocation more closely
approximates the permitted mix for charities in other states, including
those that use a prudent investor standard for gift annuity investment.
It also more closely approximates the mix California charities typically
use, consistent with the California prudent investor standard, when
investing their other charitable assets.
IMPLEMENTATION - Not Mandatory
Every organization should give very careful thought to any change in the
investment allocation of its gift annuity pool. It is vital to remember
that while increasing equity exposure up to the 50% reserve limit is
permitted by SB 1088, it sets a ceiling, or potential maximum
allocation; it should not be considered a target. A change is not
required if it is not appropriate.
More equity allocation may be
appropriate for some gift annuity programs, particularly more mature
programs with larger annuity pools. Each organization should take into
account the nature of its own gift annuity pool, including its size,
number and age of annuitants, investment experience over time, and the
amount being withdrawn from the pool for annuity payments. Any
organization contemplating a change should first consult closely with
its investment advisor and investment committee. It is important to
remember that greater equity exposure also increases, incrementally,
portfolio volatility (the variability of returns).
Client/Investment Managers Working
Group
A number of the professional investment managers of gift annuity pools
and some of their clients are now consulting with one another about how
to implement this new law. Check with your investment manager to see if
they have participated in these discussions. (If they would like, they
may contact Paula Blacher, CFA, at Wells Fargo,
blachepb@wellsfargo.com, to
discuss these issues at greater length.) Two of the principal matters
under discussion are:
- Use of mutual funds. Consent from
the Department of Insurance is needed prior to investing any of the
required reserves in mutual funds or bank common trust funds (either
equity or bond funds). These two vehicles provide the best way for
most charities to comply with their fiduciary investment
responsibilities, unless the dollar amounts of the investments are
quite large. Commingled vehicles such as mutual funds provide the
best means for adequately diversifying portfolios and for gaining
cost-effective access to professional money managers. However, the
experience of a variety of money managers and attorneys advising
charities is that Department of Insurance authorization to use
mutual funds and common trust funds has become harder to obtain and
that approvals have been inconsistent from organization to
organization. There is also some debate as to whether or not
licensees already granted authority to use an equity mutual fund up
to 10% may increase the equity exposure up to 50% in the same fund
without further approval.
- Use of Exchange Traded Funds (ETFs).
ETFs combine the advantages of stocks with those of index funds.
Like stocks, they are publicly traded on the major stock exchanges,
and like index funds, they provide diversification and have low
expenses. A number of investment and legal professionals believe
that existing law permits ETFs to be used for investment of
California gift annuity reserves in the same way publicly traded
stocks can be used, without Department of Insurance approval1. However, we are not aware of any
California licensee that currently uses these instruments as part of
its reserve portfolio.
LEGISLATIVE HISTORY
California charities owe much thanks to SB 1088’s author and champion,
Senator Jack Scott, and his Legislative Consultant Alison Merrilees.
They thoroughly understood the complexities of charitable gift annuities
and that passage of the bill would mean more money in the long run for
California charities. They very effectively conveyed the message to
their Senate and Assembly colleagues.
This issue had worked its way to the
top of the NCPGC legislative agenda before the beginning of the
legislative session in January 2004. Our initial effort was to prepare
a financial analysis to confirm that these changes would have long-term
benefit to charities without undue additional risk to annuitants. We
accomplished that with a widely-distributed analysis that was never
challenged as to its methodology and conclusions.
We were then fortunate to link up with
Senator Scott. We were referred to him by the office of Senator Jackie
Speier (D, San Francisco/San Mateo), Chair of the Senate Insurance
Committee. Senator Scott and his staff had some familiarity with and
interest in gift annuities resulting from Senate Insurance Committee
hearings about commercial annuities held in the previous session. He
was very open to working with us and authoring the bill.
Our initial approach was to apply the
Prudent Investor Rule to gift annuity reserves. This is California’s
statutory standard for other investments.
It was also the legislative approach to
gift annuities taken in other states, including New York and New
Jersey. However, early discussions with the Department of Insurance
alerted us to their concern about the standard; they felt it was too
subjective to be effectively regulated. We honored that concern and
shifted to the 50% equity limitation that was finally enacted.
After further discussions with
Department staff, they formally opposed the bill on the basis that the
small 10% equity allocation was necessary to protect annuitants. Our
policy arguments carried before both the Senate and Assembly Insurance
Committees and the bill passed out of both houses, with only one
opposing Assembly vote.
KUDOS
Finally, we thank the many organizations state-wide who supported the
bill. Support from the Planned Giving Roundtables of Southern
California, Orange County, the Inland Empire, and San Diego enabled the
Northern California Planned Giving Council to speak on behalf of our
professional colleagues statewide. Letters of support from dozens of
prominent charities were crucial. We particularly caught the
legislators’ attention with the active involvement of the University of
California, the California State University, and the Association of
Independent California Colleges and Universities. California’s
non-profit community truly showed its tenacity and strength.
1 For example, attorney
David Wheeler Newman stated that “… [R]eserves may be invested in
exchange-traded funds without the commissioner’s consent, since ETFs
fall within the statutory category of “securities listed and traded”
on the NYSE, American Stock Exchange or NASDAQ." MS&K Charitable
Sector Letter, Vol. XII, No. 3, 2004, “California Loosens
Restrictions on Investment of Gift Annuity Reserves.” Quoted with
permission.
California Nonprofit Integrity Act of 2004
Prepared By: Jill S. Dodd, Esq., Steefel, Levitt & Weiss
One Embarcadero Center, 30th Floor, San Francisco, CA 94111
Phone: 415-788-0900 Fax: 415-788-2019
Following is a summary of the Nonprofit Integrity Act of 2004, which was
recently signed into law by the Governor of the State of California.
The Act takes effect on January 1, 2005.
Organizations Covered By The Act
Charitable corporations, charitable trusts, charitable unincorporated
associations, commercial fundraisers, and fundraising counsel.
Charitable lead trusts are covered by the Act, while charitable
remainder trusts are covered only upon the termination of the income
interest. Hospitals, educational institutions and religious
organizations are not subject to the filing, registration and reporting
provisions of the Act. Charitable Corporations, Associations and Trusts with Gross Revenues of
$2 Million or More Charitable corporations, charitable unincorporated
associations, and charitable trusts (other than hospitals, educational
institutions and religious organizations) that receive or accrue gross
revenue of $2 million or more in any fiscal year are subject to the
requirements described below. Government grants and contracts for
services with governmental entities do not count toward the $2 million
threshold, so long as the governmental entity requires an accounting of
the funds as a grant or contract condition.
Financial Statements
- Annual financial statements must be prepared using generally accepted accounting principles.
- Annual auditing of financial statements is required
to be made by an independent certified public accountant in
conformity with generally accepted auditing standards.
- In the case of a charitable corporation or a
charitable unincorporated association that is controlled by
another organization, the controlling organization may prepare
a consolidated financial statement meeting the above
requirements.
Auditing Firm
- The auditing firm may provide non-audit services to
the charitable organization, but may only do so in accordance
with standards for auditor independence set forth in the
Government Auditing Standards, issued by the U.S. Comptroller
General (the Yellow Book).
Disclosure
- The audited financial statements must be made available for inspection by the Attorney General and the public, no later than 9 months after the close of the fiscal year to which the statements relate, in the manner prescribed for the disclosure of IRS Form 990. Audit Committee (Charitable Corporations Only)
- In the case of charitable corporations, there must be an audit committee appointed by the board of directors. Audit committee members may include directors or non-directors, but cannot consist of any staff (including the president or CEO, or the treasurer or CFO). Audit committee members may not receive any compensation for service (other than stipends as directors). Further, they may not have any material financial interest in any entity doing business with the corporation.
- The audit committee has responsibility for:
recommending to the board the retention and termination of the independent auditor; conferring with the auditor to ensure that the financial affairs of the corporation are in order; reviewing and determining whether to accept the audit; assuring that any non-audit services performed by the auditing firm conform to standards for independence; and approving performance of non-audit services by the auditing firm.
- If there is a finance committee, some overlapping of membership may occur, so long as members of the finance committee constitute less than 50% of the membership of the audit committee. Moreover, the chair of the audit committee is precluded from serving on the finance committee.
Financial Statements
If a charitable corporation, unincorporated association, or trust prepares financial statements that are audited by a certified public accountant, the financial statements are subject to inspection by the Attorney General and the public, even if its annual gross revenue is below $2 million.
Registration
- Charitable corporations, unincorporated associations, and trusts must register with the Attorney General within thirty days (instead of six months under prior law) after they first acquire or accrue assets.
- All Charitable Corporations, Associations and Trusts (Regardless of
Gross Revenue) All charitable corporations, charitable unincorporated associations, and
charitable trusts, including hospitals, educational institutions and
religious organizations, must comply with the following requirements,
regardless of their revenue levels.
Officer Compensation
- Reviews are required to make sure that the compensation (including benefits) paid to the president (or CEO) and the treasurer (or CFO) is reasonable.
- Reviews are required on hiring and whenever the officer's employment is renewed or extended or the officer's compensation is modified, except for compensation modifications that extend to substantially all employees.
- Reviews are to be conducted by the board of directors or a board committee (in the case of charitable corporations or unincorporated associations) or by the trustees (in the case of charitable trusts). Contracts With Commercial Fundraisers and Fundraising Counsel
- Each contract between a charitable corporation, unincorporated association, or trust and a commercial fundraiser must be in writing and signed by an official authorized by the governing board of directors (or trustees). The contract must include: (a) the legal name and address of the charitable organization; (b) a statement of the charitable purpose for which the solicitation campaign, event, or service is being conducted; (c) a statement of the respective obligations of the commercial fundraiser and the charitable organization; (d) if the commercial fundraiser is to be paid a fixed fee, a statement of the fee to be paid to the commercial fundraiser and a good faith estimate of what percentage the fee will constitute of the total contributions received; (e) if a percentage fee is to be paid to the commercial fundraiser, a statement of the percentage of the total contributions received that will be remitted to or retained by the charitable organization, or, if the solicitation involves the sale of goods or services or the sale of admissions to a fundraising event, the percentage of the purchase price that will be remitted to the charitable organization; (f) the effective and termination dates of the contract and the date solicitation activity is to commence in California; (g) a provision that requires that each contribution in the control or custody of the commercial fundraiser shall be either delivered to the charitable organization or deposited to a bank account over which the charitable organization has sole control, in either case within five days of receipt; (h) a statement that the charitable organization exercises control and approval over the content and frequency of any solicitation; (i) if the commercial fundraiser proposes to make any payment in cash or in kind to any person or legal entity to secure any person's attendance at, or sponsorship, approval, or endorsement of, a charity fundraising event, the maximum dollar amount of those payments must be specified in the contract; and (j) a provision that the charitable organization has the right to cancel the contract without cost, penalty, or liability within ten days after the contract is signed, or cancel with thirty days notice after the initial ten-day period, or cancel for cause at any time after the initial ten-day period.
- Each contract between a charitable corporation, unincorporated association, or trust and a "fundraising counsel" must be in writing and signed by an official authorized by the governing board of directors (or trustees). The contract must include provisions similar to those described above for contracts with commercial fundraisers. A fundraising counsel is a consultant who plans campaigns but does not itself raise money. The term “fundraising counsel” does not include employees, directors or trustees of the charity, nor its attorneys, bankers and investment counselors. In addition, there is a de minimus exception for a fundraising counsel whose total annual gross compensation does not exceed $25,000.
- A charitable organization may cancel a contract with a commercial fundraiser or a fundraising counsel as described in clause (j) above. If a charitable organization cancels a contract during the initial ten- ay period, a copy of that cancellation notice must be provided to the Attorney General.
- A contract between a charitable organization and either a commercial fundraiser or fundraising counsel is
avoidable by the charity unless the commercial fundraiser or fundraising counsel is registered with the Attorney General’s Registry of Charitable Trusts prior to the commencement of the solicitation.
Charitable Solicitation
- A charitable organization may not enter into a contract with commercial fundraiser unless the latter has registered, or agreed to register prior to commencing solicitation, with the Attorney General.
- The charitable organization and the commercial fundraiser cannot misrepresent the purpose of the charitable organization or the nature or purpose or beneficiary of a solicitation.
- The charitable organization must establish and exercise control over the fundraising activities conducted for its benefit, including approval of all written contracts and agreements, and must assure that fundraising activities are conducted without coercion.
- No representation may be made to the effect that a contribution is to or for the benefit of a particular charitable organization when that is not the case.
- No representation may be made to the effect that the person on whose behalf a solicitation or charitable sales promotion is being conducted is a charitable organization or that the proceeds of the solicitation or charitable sales promotion will be used for charitable purposes when that is not the case.
- No representation may be made to the effect that any other person sponsors, endorses, or approves a charitable solicitation or charitable sales promotion when that person has not given consent in writing to the use of the person's name for such purposes.
- No representation may be made to the effect that goods or services have endorsement, sponsorship, approval, characteristics, ingredients, uses, benefits, or qualities that they do not have or that a person has endorsement, sponsorship, approval, status, or affiliation that the person does not have.
- No representation may be made to the effect that the Attorney General has approved the solicitation.
- No representation may be made to the effect that a charitable organization will receive an amount greater than the actual net proceeds reasonably estimated to be retained by the charity for its use.
- No representation may be made to the effect that any part of the contributions will be given or donated to any other charitable organization unless that organization has consented in writing to the use of its name prior to the solicitation.
Commercial Fundraisers
- Commercial fundraisers must register and file annual reports with the Attorney General.
- Commercial fundraisers may raise funds for only those charitable organizations that are registered with the Attorney General (or are exempt from the registration requirement).
- Commercial fundraisers must notify the Attorney General at least ten days in advance of a solicitation campaign for charitable purposes (except in cases of disasters or emergencies). The notice must include: (a) the name, address, and telephone number of the charitable organization; (b) the name, address, and telephone number of the commercial fundraiser; (c) the fundraising methods to be used; (d) the projected dates when performance under the contract will commence and terminate; and (e) the name, address, and telephone number of the person responsible for directing and supervising the work of the commercial fundraiser under the contract.
- If requested by a solicited person, a commercial fundraiser must disclose the percentage of the total expenses of the fundraiser to the total revenue received by the fundraiser. If the request is made in writing, the commercial fundraiser must disclose in writing within five days. Disclosure must be made immediately if verbally requested, followed in
writing within five days.
- Commercial fundraisers must maintain records relating to solicitation campaigns for 10 years after the end of each campaign. Records are subject to inspection by the Attorney General.
Fundraising Counsel
- Fundraising counsel must register and file annual reports with the Attorney General.
- Fundraising counsel must notify the Attorney General at least ten days in advance of a solicitation campaign for charitable purposes (except in cases of disasters or emergencies). The notice must include: (a) the name, address, and telephone number of the charitable organization; (b) the name, address, and telephone number of the fundraising counsel; (c) the projected dates when performance under the contract will commence and terminate; and (d) the name, address, and telephone number of the person responsible for directing and supervising the work of the fundraising counsel under the contract.
Penalties for Non-Compliance
- Failure to comply with the annual reporting and annual registration renewal requirements generally result in late fees being imposed.
- Failures to comply with the other requirements could result in civil penalties (up to $1,000 on the first offense and up to $2,500 on each subsequent offense).
- In addition to civil penalties, commercial fundraisers who fail to register, renew the registration, file the annual reports, or disclose the percentage of the total expenses to the total revenue received could be barred from fundraising in California.
Trustee Registration Deadline January 1, 2005!
In accordance with Section
2850 et. seq., of the California Probate Code, the Department of Justice
now maintains a statewide registry of conservators, guardians and
trustees (“fiduciaries”). The purpose of the registry is to provide
information on fiduciaries for use by a court in appointing, continuing
the appointment or removing a fiduciary.
All persons who wish to serve as a fiduciary must file a Declaration
with the statewide registry containing the information outlined in
Calif. Prob. Code §2850(b).
The registration requirement does not apply to any fiduciary who is a
public conservator or guardian or to any trustee who administers less
than six trusts at the same time. It also does not apply to a fiduciary
who is related by blood, marriage or adoption to the conservatee, ward
or vested trust beneficiary.
For more information, see
www.caag.state.ca.us/conservator/index.htm.
You may contact the Statewide Registry of Private Conservators,
Guardians and Trustees:
By Telephone: (916) 322-9288
By Writing:
Statewide Registry of Private Conservators, Guardians and
Trustees
California Attorney General's Office
1300 I Street
P.O. Box 903447
Sacramento, CA 94203-4470
By Fax: (9l6) 444-3651
By e-mail: CGTRegistry@doj.ca.gov
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