CONFERENCE COMMITTEE REP

CONFERENCE COMMITTEE REP. NO. 101-04

Honolulu, Hawaii

, 2004

RE: S.B. No. 3049

S.D. 2

H.D. 2

C.D. 1

Honorable Robert Bunda

President of the Senate

Twenty-Second State Legislature

Regular Session of 2004

State of Hawaii

Honorable Calvin K.Y. Say

Speaker, House of Representatives

Twenty-Second State Legislature

Regular Session of 2004

State of Hawaii

Sir:

Your Committee on Conference on the disagreeing vote of the Senate to the amendments proposed by the House of Representatives in S.B. No. 3049, S.D. 2, H.D. 2, entitled:

"A BILL FOR AN ACT RELATING TO CHARITABLE ANNUITIES,"

having met, and after full and free discussion, has agreed to recommend and does recommend to the respective Houses the final passage of this bill in an amended form.

The purpose of this measure is to enable more of Hawaii's charitable organizations to offer charitable gift annuities as a method of raising money for their charitable work. As the "boomer" generation enters normal retirement age, charitable gift annuities are becoming an increasingly popular way for individuals to make a gift to a favorite charity within the context of their retirement and estate planning.

A charitable gift annuity is a contract under which a charity, in return for a transfer of cash, marketable securities, or other property, agrees to pay an individual a fixed sum of money for life. A charitable gift annuity is not regulated as either an insurance contract or as a security.

Currently, Hawaii law severely restricts the use of charitable gift annuities. Organizations wishing to offer a charitable gift annuity must:

(1) Have obtained tax exempt status pursuant to section 501(c)(3) of the Internal Revenue Code;

(2) Have been in continuous operation in Hawaii for the preceding ten years;

(3) Have a net worth of $5,000,000;

(4) Maintain a separate annuity fund consisting of at least one-half the value of the annuity; and

(5) File an annual compliance statement with the Department of Commerce and Consumer Affairs (DCCA).

Due to the $5,000,000 net worth requirement, few charities in Hawaii qualify to issue charitable gift annuities.

Your Committee on Conference finds that in expanding the authority to issue charitable gift annuities to additional charitable organizations, it is necessary to be mindful of both the expectations of donors and the needs of the charitable organizations.

Under the measure, as received, the authority to offer charitable gift annuities would apply if the charitable organization:

(1) Obtained tax exempt status pursuant to section 501(c)(3) of the Internal Revenue Code (same as current law);

(2) Was in continuous operation in Hawaii for the preceding ten years (same as current law);

(3) Had assets of $200,000 in cash or cash equivalents ($5,000,000, under the current law, but not limited to cash or cash equivalents);

(4) Maintained segregated assets that are an actuarially sound reserve for the outstanding annuity agreements, plus the greater of $200,000 or ten per cent of the reserves (one-half of the gift, under the current law);

(5) Annually filed a statement of compliance with DCCA (same as the current law);

(6) Invested and managed the assets in the segregated account as would a prudent investor (new requirement);

(7) Used an annuity payment rate not greater than a recommended rate; and

(8) Stated prominently, on the first page of the charitable gift annuity, that the annuity is not subject to regulation or protected by the state guaranty fund (new requirement).

Therefore, the essential difference between the current law and this measure is in a trade-off between the "entrance requirement" and the "reserve requirement". The current law has a very high entrance requirement ($5,000,000), but a weak reserve requirement (one-half of the charitable gifts' value). While this measure substantially reduces the entrance requirement to allow more charities to qualify, it establishes a balance by increasing the reserve requirement.

The new reserve requirement, unlike the old entrance requirement, is a "scaled" requirement that operates equally effectively and efficiently for both smaller and larger organizations. The new entrance requirement is about average for the fifty states, whereas the current entrance requirement is uniquely onerous. The new reserve requirement is one of the most stringent in the nation.

Your Committee on Conference further finds that the proposed trade-off is a safe and appropriate way to allow more charities to utilize the charitable gift annuity, providing reasonable assurance that both the expectations of the donors and the needs of charities will be met.

Your Committee on Conference has amended this measure to:

(1) Require that annual compliance statements be filed with the Department of the Attorney General, rather than DCCA, consistent with changes in the supervision of charitable organizations being effected in S.B. No. 2839, S.D. 2, H.D. 2, C.D. 1;

(2) Reduce the minimum surplus reserve requirement from $200,000 to $100,000. This requirement is not to be confused with the net asset requirement of $200,000 in cash or cash equivalents, and is an amount that is above and beyond the actuarially established need, or a "cushion". Despite this reduction, when the segregated reserves exceed $1,000,000, the surplus requirement will still exceed $100,000, because the cushion must also be equal to 10% of the segregated reserves; and

(3) Delete the annuity payment rate cap, as to an extent, the same function is already provided by the stringent reserve requirement which increases as the annuity payment rate increases, thereby acting as a disincentive to offering high rates. Since the benefit to a charity decreases as the payment rate increases, the charity has little incentive to offer premium rates.

Your Committee on Conference further finds that few states have imposed statutory limits on annuity payment rates, perhaps for practical reasons. New Hampshire, which is one of them, limits the annuity payment rate to no more than the rates recommended by the American Council on Gift Annuities (ACGA) at the time of issue of each agreement, which is a reasonable cap. In fact, a recent survey found that the overwhelming majority of charitable gift annuities are written at or below these recommended rates. The ACGA rates are, effectively, the de facto standard for the industry.

However reasonable the ACGA rates, your Committee on Conference has determined not to follow New Hampshire's lead, as the legislative adoption of a cap subject to amendment by a private entity raises the issue of an unconstitutional delegation of legislative power.

Finally, your Committee on Conference has amended this measure to take effect on July 1, 2004, and by making technical amendments for purposes of clarity and style.

As affirmed by the record of votes of the managers of your Committee on Conference that is attached to this report, your Committee on Conference is in accord with the intent and purpose of S.B. No. 3049, S.D. 2, H.D. 2, as amended herein, and recommends that it pass Final Reading in the form attached hereto as S.B. No. 3049, S.D. 2, H.D. 2, C.D. 1.

Respectfully submitted on behalf of the managers:

ON THE PART OF THE HOUSE

ON THE PART OF THE SENATE

____________________________ KENNETH T. HIRAKI, Co-Chair		____________________________ RON MENOR, Co-Chair
____________________________ DWIGHT Y. TAKAMINE, Co-Chair		____________________________ BRIAN T. TANIGUCHI, Co-Chair