The Benefits of Outsourcing Your CGAs

Interview by Patrick O’Donnell

Johnne Syverson, CFP, AEP, CAP, is the executive director of the Charitable Giving Resource Center, which he helped co-found in 2004. He’s worked in philanthropy for more than 40 years, and says he became interested in planned giving in 1984, while attending a conference in Boston: “I had been an advisor for 12 years prior to that and had no knowledge that planned giving even existed before that conference!” We recently had a chance to talk with him about the benefits of outsourcing charitable gift annuities.

CGAs are on the rise. But do they carry risk for the nonprofits that issue them?

Finance departments at many nonprofits are opposed to offering Charitable Gift Annuities (CGAs) for their donors, because they do not want the charity to take on the added liability risk inherent in each CGA. A CGA is an unsecured promise by a nonprofit to pay annuity payments to the donor/annuitant for as long as they live. Most nonprofits use the suggested annuity rates put forth by the American Council on Gift Annuities (ACGA). Calculated using life expectancy formulas, these rates assume that the nonprofit’s portion of a CGA after the donor’s death will be 50% of the donor’s original deposit. As a result, the issuing charity is automatically “dipping into principal” in each annuity contract as annuity payments are made.

Given the risks, what is the worst that can happen to a charity’s CGAs?

A donor can “live too long” and exhaust the funds allocated to their CGA contract. But the invested assets can also produce poor performance due to taking too much risk during a down stock market, or allowing the charity to dip into the investment account early to subsidize another aspect of the charity that needs money now. In any of these cases the whole CGA Pool can go “upside down” and remain a liability to the issuing charity for many years.

What types of charities can issue CGAs entirely in-house?

Out of the 1.5-million-plus nonprofits in the U.S., only about 4,000 issue CGAs in-house. Those that do are usually larger universities and hospital systems that have staff and the capacity to handle the financial liability, as well as having the capability to take care of the administration of each CGA in-house. This includes making timely payments to the annuitants, reporting tax consequences by issuing a Form 1099R, and investing the CGA pool assets properly while keeping them separate from the charity’s other assets. It also entails being properly registered in each state where CGAs are being offered. Some states, such as California and New York, make this a very arduous task.

Why is outsourcing a CGA a safer option than issuing it in-house?

By outsourcing the issuance of CGAs to a third party that is a 501C3 organization, it relieves the charity of the financial and legal liability risks inherent in a CGA. It also frees up the charity’s staff to do the normal work associated with running the charity and not be distracted by the nuances of administering a CGA program in-house.

Given the benefits you outlined, why do so many charities ignore outsourcing?

There are basically two reasons:

1. They are not aware that viable outsourcing options exist.
2. They believe it is too costly to outsource, and thus an attitude of “we can do it cheaper ourselves” prevails, which is erroneous when all internal costs are accounted for. This includes internal investment expense charges, which are not readily exposed.

Is it difficult for a nonprofit to outsource their CGAs?

A professional outsourcing firm makes it extremely easy for the nonprofit development officers to do their job of stewarding donors and maintaining healthy donor relationships, because they do not have to deal with administrative issues that surround an in-house CGA program.

Are there any hidden benefits to an outsourced CGA program?

Once a nonprofit makes donors aware that they can now offer CGAs by outsourcing them, donors who have lower-returning investments that are maturing often come back again and again for more CGAs, because they enjoy the unique tax benefits available to them when they use CGAs to supplement their retirement income.