Charitable donation accounts are investment accounts that allow credit unions to have special investment abilities, while supporting their desire to donate to charities. Using CDAs, credit unions have the potential to fund charitable contributions through investment returns rather than operating income, while also diversifying investment risk. Think of it as another tool you can use in your asset/liability management strategy.
Philanthropy continues to be a priority of the CU movement, and we all wish we could do more. In December 2013, the National Credit Union Administration provided CUs with a unique opportunity to do just that by issuing the final CDA rule, which amended NCUA §703 and 721. CDAs allow CUs to expand their investment powers and “hold investments that are otherwise impermissible.” This power is similar to NCUA §701.19, which permits expanded investment powers to fund employee benefit obligations. But in the case of the CDA, the goal is to fund charitable contributions.
BECU is one of many credit unions successfully using CDAs.
“BECU has a long tradition of supporting education locally through the BECU Foundation and nationally through the National Credit Union Foundation,” says CUES member Kathy Elser, chief financial officer of the $12 billion CU in Seattle.
“The CDA allowed us to better align a portion of our investments to our long-term charitable goals. We made our CDA investment in August, and it has funded over $400,000 in charitable donations through investment returns. Funding charitable donations is our primary goal, but the investment also earned an additional return to the credit union of nearly $395,000. The CDA program is truly a win/win for charitable giving and BECU.”
To comply with the CDA rule, a CU’s investment must be “primarily charitable in nature and meet other regulatory conditions to ensure safety and soundness.” These conditions include:
- A minimum of 51 percent of the total return must be distributed to one or more qualified charities no less frequently than every five years.
- CDA investments must not exceed 5 percent of net worth at all times and for the duration of the investment.
- The assets of a CDA must be held in a segregated account.
- Any entity authorized to make investment decisions for a CDA, other than the credit union itself, must be either a Registered Investment Advisor or regulated by the Office of the Comptroller of Currency.
- The credit union’s board of directors must adopt written policies governing the creation, funding, and management of a CDA consistent with the rule.
- The terms and conditions controlling the CDA must be documented in a written document that outlines the following details:
- charitable donations will be to tax-exempt 501(c)3 charities;
- investment strategy and risk tolerances the CDA manager must follow;
- GAAP accounting principles will be used; and
- frequency with which charitable donations will be made (Members Trust Company recommends annually).
In the conditions listed above, the total return of an investment includes income (dividends and interest) and capital gains (price appreciation or decline). This can sometimes be a point of confusion, so let’s use an example:
Assume a $1 million investment is made into a CDA and, at the end of the period, the account is valued at $1.05 million. The total return including income and capital gains in this case is $50,000. The CU must donate at least 51 percent of the total return, or $25,500 in our example, and the excess return to the CU is the remaining 49 percent, or $24,500 in our example. If this is over a one-year period, the CU earned 2.45 percent on its investment and funded $25,500 in charitable donations through investment returns rather than operating income.
“Since our first investment in April of 2014, the CDA program has allowed CUs to donate 13 times more to charity than they would have through more traditional CD investments with the National Credit Union Foundation’s Community Investment Fund program and eight times more than they would have investing in two-year U.S. Treasury Notes, a typical capital investment for CUs,” says Tom Walker, president/CEO of Members Trust Company, which currently administers and manages $97 million in CDAs and charitable lead trusts, the predecessor to the CDA. “This is why we worked with NCUA and the National Credit Union Foundation to design a better vehicle to promote long-term charitable giving and increase the impact on our communities. We have also been working with state regulators to ensure state-chartered CUs have the same opportunities as FCUs.”
Diversification across asset classes is attractive as CUs implement ALM strategies to manage interest rate risk in today’s low interest rate environment. The most important decision for a CU to make when it comes to a CDA investment is the asset allocation or, more simply put, the mix of stocks to bonds within the portfolio. This will be unique to each CU based on its specific goals and situation. Initial and ongoing analysis of any investment is critical, and Members Trust Co. recommends addressing the following risks and control procedures:
- market risk,
- concentration risk,
- interest rate risk,
- historical performance including potential impact to financials,
- investment policy statement and
- responsibilities of the individuals or committee managing the investment.
The investment policy statement is a key document that sets the guidelines for the investment and establishes any unique investment constraints that may be appropriate. To help establish, administer, and manage CDA programs and investments, CUs have an opportunity to partner with firms like Members Trust Company, which have experience managing institutional assets and equity portfolios.
"At BECU, we believe strongly in the credit union principle of social responsibility,” says Deborah Wege, CUDE, BECU’s community giving manager. “Our CDA investment is a key planning tool for our charitable giving strategy and complements our other fundraising efforts, including our annual golf tournament. The BECU Foundation has been able to increase the number of annual scholarships by 60 percent and the dollar amount of the individual scholarship awards by 20 percent. We are excited by the tremendous impact the CDA program can have on charitable giving, not just at BECU but at credit unions across the country."
Jason Ritzenthaler, CFA, is co-chief investment officer at Members Trust Company, which provides wealth management services to CUs and their members. MTC is owned by over 40 CUs and CU-affiliated companies, and currently manages approximately $1.8 billion in assets. Reach Ritzenthaler at 813.386.8705.
MEMBERS Trust Company is a federal thrift regulated by the Office of the Comptroller of the Currency. Non-deposit Investment Products: Not NCUA or FDIC Insured, No Financial Institution Guarantee, May Lose Value. Not a Deposit of Any Financial Institution. Past performance does not guarantee future results. Data quoted herein reflects the real life experience of a credit union client. Credit Union experiences may vary. 1 Return period: 1/1/2014 – 12/31/2014.