Legislature(2001 - 2002)
03/14/2001 03:20 PM House L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 121-CHARITABLE GIFT ANNUITIES Number 0165 CHAIR MURKOWSKI announced that the committee would first hear HOUSE BILL NO. 121, "An Act relating to the issuance of qualified charitable gift annuities." CHAIR MURKOWSKI, speaking as the sponsor HB 121, explained that the bill adopts language used in 30 states regarding qualified charitable gift annuities. This legislation makes it clear that [charitable gift annuities] are not "insurance business," but are exempt from regulation by the Division of Insurance. There are certain notice requirements that have to take place in order to be a qualified charitable gift annuity organization; one is notifying the division that the organization has a qualified charitable gift annuity plan. Number 0243 CHAIR MURKOWSKI said [notification] has to be given within 90 days of issuing the first qualified gift annuity. [The legislature] is saying that even though the Division of Insurance is not doing the regulating, [the division] still needs to know who is operating a qualified gift plan in the state. CHAIR MURKOWSKI referred to an article from the newspaper about Providence Health Systems' operating a gift annuities program. This is a contractual relationship between the donor and the charitable institution; an agreement is reached in which an amount is gifted to an [institution] and the charity will give the [institution] a fixed annuity over a lifetime period. Based on age and whether payout begins now or is deferred, the amount received will vary somewhat, she explained. Number 0361 CHAIR MURKOWSKI referred to a handout that describes how charitable gift annuities work. She said Jerome Selby from Providence Alaska Foundation had contacted her and indicated that there are several entities in the state operating these plans; what "they" are seeking through this legislation is recognition of how exemptions are treated through the Division of Insurance. Number 0539 FRANK MINTON, Vice President, American Council of Gift Annuities, via teleconference, said he is a volunteer for this organization, and is president of Plan Giving Services, a consulting firm that works with charities regarding gift annuities. MR. MINTON said the American Council of Gift Annuities concerns itself with charities that issue gift annuities throughout the United States. In this role, he worked with the National Association of Insurance Commissioners in the adoption of the model exemption Act, which was subsequently circulated amongst the states. To date about 30 states have adopted some version of the Act. It enables charities to offer gift annuities with the assurance that it is approved by the state. It allows the state to protect its consumers by having only charities that have been in existence a certain number of years, and have a certain amount of unrestricted assets to issue gift annuities, and it doesn't impose burdensome requirements on the charity. Number 0635 MR. MINTON said there were a few states, before this circulation, that had adopted more heavy regulations; there are a handful of states, like Alaska, that have not yet addressed the subject of gift annuities. Several of those are also considering the model exemption Act. CHAIR MURKOWSKI referred to the consumer protection aspect of the bill. To be a qualified charitable gift annuity organization under HB 121, an organization has to have a minimum of $300,000 in unrestricted cash or cash equivalents, and must have been in continuous operation for the last three years. She asked if these are standard requirements within the industry that all charitable gift annuities [organizations] have to meet. Number 0724 MR. MINTON responded that charities have been offering gift annuities for over 100 years. Default on a charitable gift is almost unheard of, he said, and he had no firsthand knowledge of any charity that has ever failed to fulfill its obligations. The practice of nearly all charities is to keep the entire contribution in reserve, and to make the gift annuity payment; then use for charitable purposes, whatever is left (indisc.). He said charities further provide (indisc.) by keeping the contribution in reserve to back the payment. Consumers are further protected because the charity's assets back the annuities. He remarked that this is one of the reasons for requiring the charity to have the minimum amount of unrestricted assets. MR. MINTON illustrated with an example. He said if someone contributed $10,000 for a gift annuity with Providence Alaska Foundation, and for whatever reason the entire $10,000 (indisc.) from making the payment, then Providence would still be obligated to continue making those payments, backed by all of its assets. The annuitant (indisc.) the general creditor of the Providence Alaska Foundation. Number 0874 REPRESENTATIVE ROKEBERG asked why $300,000 in unrestricted cash or cash equivalents is required. MR. MINTON stated that the purpose is so there is a certain amount of unencumbered assets to assure that the charity would be able to make the payments in the event that the reserves are exhausted. MR. MINTON referred to page 1, AS 21.03.021, lines 11-12 of the bill. He noted that it says "aiding and strengthening educational institutions". He pointed out that the issuers of gift annuities are not just educational institutions, but are other types of charities as well, like hospital institutions such as Providence Alaska Foundation. He suggested changing the word "educational institutions" to "charitable organizations" so there isn't an implied restriction. Number 1028 JEROME SELBY, Providence Alaska Foundation, Providence Medical Center, said Providence supports the bill and would like to see it adopted because it would do two major things for Alaska. First, it gives a "light of day" test to charitable gift annuities so that things are above board and there is registration with the state. Second, it gives people confidence that when working with an organization, in effect, they know whether it is a legitimate organization because it has the state's seal of approval. MR. SELBY said while "we" are asking to be regulated, "we're" willing to do this because it's an appropriate level of regulation; it isn't onerous and unreasonable. Number 1164 REPRESENTATIVE ROKEBERG asked Mr. Selby if he could point the committee to [where it refers to the] regulation in the bill, because it seems to him that the bill refers to the "type size" of a warning. He asked what other steps constitute regulation. MR. SELBY said in order for an organization to offer the annuities legitimately, it has to notify the state Division of Insurance that it is in the business of offering charitable gift annuities. It has to pass the scrutiny level that an organization is a "501C3." The check by the state is very minimal, but the process of getting registered in the state has value, he remarked. Number 1245 REPRESENTATIVE ROKEBERG said: Unless there is a[n] authority to create regulation or something, or there is an existing regulatory scheme in place that the Division of Insurance does, ... other than the fact that if the division saw fit to see if their notice provisions were in conformance with the statute, there is no regulation. He asked Mr. Selby if he would change his advertising or marketing of annuities to reflect a state approval if this bill passes. Number 1285 MR. SELBY responded in a negative way. He said that is not what "we" are seeking. He explained that it would require everyone to make the disclosure statement. REPRESENTATIVE ROKEBERG asked Mr. Selby if more traditional annuities are bought after the assets are conveyed to the charitable organization. MR. SELBY referred the question to Jon Calder of Providence Alaska Foundation. JON CALDER, Providence Alaska Foundation, Providence Medical Center, via teleconference, responded that Providence manages and invests the asset after fulfilling the fiduciary responsibilities. He reiterated that the purpose [of the bill] is to ensure that [entities] are qualified to do this, and have notified the insurance commissioner when it is started. MR. CALDER mentioned that he had spoken with Robert Lowe from the insurance commission, that "they" fully agree with this and the Charitable Gift Annuities Exemption Model Act ("Model Act"), and that the "Super Model Act" has been approved by the National Association of Insurance Commissioners [NAIC]. It is one of the first things to say that a charitable gift annuity is not really commercial insurance; it's for the purpose of having a donor make a gift and then realize income from that gift. Number 1423 MR. MINTON added that there are some charities across the country that do reinsure, meaning that upon receiving a contribution for a gift annuity it takes a portion of it and buys an annuity from a licensed insurance company that will cover the obligation. Having done so, [that company] feels the freedom to spend what is left for charitable purposes. The overwhelming majority of charities like Providence self-insure, meaning they reserve the money and keep it in reserve to make the payments from that reserve. REPRESENTATIVE ROKEBERG asked Mr. Calder if he retains any actuarial consultants to establish these programs. MR. CALDER responded that Providence's charitable gift annuities go by the rules and regulations of the American Council on Gift Annuities that set the actuarial rate and also govern the formula that is used. He said when he has a gift annuity, Providence Health System goes to the bank and invests the money by making all of the fiduciary responsibilities to the donor; only after this is the money spent. Number 1547 MR. MINTON said charities do not issue variable annuities like an insurance company; these are all fixed pure-life annuities. He noted that the gift-annuity rate offered by charities is substantially lower than commercial rates; therefore, gift annuities don't really compete with commercial annuities, but are used by people who want to make a gift. In the process of making the gift, [the organization] gets a deduction, in addition to the life payments. REPRESENTATIVE ROKEBERG commented that [the annuity] could be at net present value or a calculation that one would actually have a higher rate of return, because of the tax deduction, depending on [a company's] bracket and how it works out. MR. MINTON replied that typically, if a donor gave $10,000, the charitable deduction might be in the range of $4,000, varying on the age of the annuitant and the annuity rate. But somewhere in the range of 40 or 50 percent of the amount contributed would be a charitable deduction. The donor has the satisfaction of making a gift, and is getting a payment lower than what it would get from an insurance company. But it is still getting a payment and a deduction, he explained. Number 1640 CLAUDIA BIEBER, Alaska Native Heritage Center, via teleconference, said [the center] is a developing organization, and the charitable gift annuities program is a viable part of long-term financial development sustainability for the nonprofit community in Alaska. She spoke in support of the bill. Number 1679 GLORIA GLOVER, Chief Financial Examiner, Division of Insurance, Department of Community & Economic Development, via teleconference, stated that this bill provides language allowing certain charitable organizations to issue certain kinds of annuities without regulation by the Division of Insurance. She said organizations issuing annuities that do not meet the definition of a qualified charitable gift annuity must have a certificate of authority to operate in Alaska. MS. GLOVER noted that the Division of Insurance is proposing a bill that includes the charitable gift annuity language from the model bill. She went on to describe the differences. House Bill 121 places the majority of the language in Section 3 of [Title] 21, whereas the [Division of Insurance's] bill places language in Section 89, for miscellaneous provisions. She added that HB 121 addresses the conflict of the exclusion in AS 21.03.021 for the educational institutions, while the [Division of Insurance's] bill does not. MS. GLOVER remarked that she is concerned with the proposed change to AS 21.03.021 [page 1, line 11 of the bill], changing "educational institution" to "charitable organizations". She explained that it is [the Division of Insurance's] view that the educational institution would continue to be exempt from all insurance regulations, including the charitable gift annuity provision. Therefore, the change may create a problem in enforcing the bill. Number 1786 CHAIR MURKOWSKI stated that she was not certain why expanding the bill to reference charitable organizations would cause problems. MS. GLOVER replied that the current language in AS 21.03.021 is clear that it exempts educational institutions completely from Title 21. She said she does not think the language in line 8 would add the requirement for charitable organizations to meet the new notice requirements that HB 121 includes. She thought [educational institutions] would be exempt from even HB 121. MS. GLOVER continued on pointing out other differences [between HB 121 and the Division of Insurance's bill,] soon to be introduced. One is that HB 121 includes the confidentiality provision that is not in the model. It makes confidential any information received by the division or any penalty that might come out of these provisions. CHAIR MURKOWSKI asked if Ms. Glover sees that as problematic for the division. MS. GLOVER responded that she has concerns about the confidentiality that prevents [the] penalty provision, because the other provisions appear to be public information anyway. Number 1927 MS. GLOVER stated that there has been an amendment proposed for Section 5, line 17, to make the section more clear as to what notice is required. The amendment would say that the notice must confirm compliance with AS 21.03.070 (b) and (c) by removing the word "comply" and adding the words "[confirm] compliance". Amendment 1, 22-LS0258\C.1, Bannister, 3/9/01, read: Page 4, line 17: Delete "comply" Insert "confirm compliance" REPRESENTATIVE ROKEBERG asked if Ms. Glover had said this would be without regulation and would certify the authority to operate. MS. GLOVER replied that she would agree; this only provides notice to the Division [of Insurance] about the activities occurring. She remarked that the division would not agree to this registration approach. Number 1994 REPRESENTATIVE ROKEBERG asked if the National Association of Insurance Commissioners (NAIC) or a provision under the insurance code would prohibit mentioning any kind of authority. MS. GLOVER answered that she doesn't know of any prohibition. REPRESENTATIVE ROKEBERG suggested that [the committee] amend the bill to say [that an organization] couldn't advertise that it had been certified by the State of Alaska, to not misinform investors and donors; then [for the committee] to create a regulated type of investment vehicle. CHAIR MURKOWSKI asked Mr. Minton if other states have some kind of disclosure. Number 2037 MR. MINTON answered that it is common for states to have language stating that this is not backed by any guaranteeing association. He stated the he believes [HB 121] provides for that as well. REPRESENTATIVE ROKEBERG stated that this is an unregulated certification, and he is concerned that any consumer would find comfort in the fact that this is now regulated, when in fact it isn't. CHAIR MURKOWSKI remarked that Representative Rokeberg made a good point. She added that it is not entirely clear to what extent the state's notice requirement constitutes anything beyond notice, versus a registration or certification. Number 2114 MR. MINTON read to the committee language that most states require as a disclosure. He noted that it is a statement from Colorado, but similar language would be found in all states that have adopted this model Act. He read: This annuity is not issued by an insurance company nor regulated by the Colorado Division of Insurance and is not protected by any state guarantee plan or protective associations. CHAIR MURKOWSKI said that is very similar to the disclosure [language] on page 2, lines 8-11, which reads in part: "not an insurance policy in this state, is not subject to regulation by the division, and is not protected by the Alaska Life and Health Insurance Guarantee Association". REPRESENTATIVE ROKEBERG clarified that some type of prohibition in utilizing any type of certification in the form of advertising to the public is needed. It clearly states [in the bill] that the contract would say it is not subject to regulation by the division, he pointed out. CHAIR MURKOWSKI asked Representative Rokeberg if his point would be, for instance, that Providence Alaska Foundation, on an advertisement, wouldn't be able to say, "Certified by the State of Alaska." REPRESENTATIVE ROKEBERG answered affirmatively. He asked Ms. Glover if the director or anybody in her division looked at the current practice of the sale of annuities, and whether there is concurrence with the statute now. Number 2207 MS. GLOVER responded that [the Division of Insurance] has not taken an active role in reviewing these kinds of annuities. She explained that whenever it receives questions regarding whether these can be issued in Alaska, [the Division of Insurance] has responded that those entities must be licensed as annuity insurance companies in order to operate here. REPRESENTATIVE ROKEBERG stated that if [entities] are marketing and are self-insured, then they are marketing annuities, and should be conforming with [Alaskan] statutes. MS. GLOVER responded that she does not disagree. CHAIR MURKOWSKI, referring to Amendment 1, stated that the clarifying language that's attached [notifies] the division that there's been notice to the donor. REPRESENTATIVE HALCRO made a motion to adopt Amendment 1. There being no objection, Amendment 1 was adopted. Number 2294 REPRESENTATIVE ROKEBERG made a motion to adopt conceptual Amendment 2 that would prohibit [a company from using the state certification] in marketing or advertising. REPRESENTATIVE HALCRO suggested prohibiting the use of state certification as a marketing tool for some kind of a guarantee. He added that on the other side, the organization should have the ability to say, "Yes, we are registered with the state." REPRESENTATIVE ROKEBERG said not in the advertising. REPRESENTATIVE HALCRO agreed, but said if [an organization] is going to participate in one of these programs, it will certainly want some reassurances. REPRESENTATIVE ROKEBERG remarked that these are not subject to regulation by [the Division of Insurance]. Also, there shouldn't be any kind of comfort for the investor that there is a state regulation, because there isn't any. REPRESENTATIVE HALCRO replied that he understands, but passing this legislation basically places an approval stamp stating that it is all right to do this; the average citizen is going to want some kind of reassurance that this is all right. REPRESENTATIVE ROKEBERG remarked that [the committee] shouldn't pass the bill, then. Number 2374 CHAIR MURKOWSKI asked Mr. Selby if this were passed, would [Providence Medical Center] change advertising to indicate registration with the state. MR. SELBY answered that [Providence Medical Center] wouldn't change what it was doing; it already has the disclaimer language that states that it is not regulated by the State of Alaska. He remarked that Representative Rokeberg has a legitimate concern that somehow folks might try to imply that they are backed by the State of Alaska. That's counter to the purpose of exempting these folks out in the first place, he said. CHAIR MURKOWSKI remarked that she appreciates what Representative Rokeberg is saying and thinks that it is fair to have some type of prohibition on the advertising component. This is [just] a registration process with the [Division of Insurance]. TAPE 01-32, SIDE B Number 2481 CHAIR MURKOWSKI announced that there being no objection [to conceptual Amendment 2], it was adopted. Number 2466 REPRESENTATIVE ROKEBERG made a motion to adopt conceptual Amendment 3 striking "may not be smaller" and inserting the words "shall be larger" [from Section. 3, line 13]. CHAIR MURKOWSKI asked if he just wants it to be apparent. REPRESENTATIVE ROKEBERG agreed that he just wants it to be apparent. He said it should be bold, so people make sure to read it. REPRESENTATIVE HALCRO stated that in his business there are certain requirements; for instance when using logos, it has to be a [certain] percentage [size] so the logo is visible and is standard. He suggested that it could be applied, for example, to say it has to constitute at least 5 percent of the total ad space. CHAIR MURKOWSKI remarked that this doesn't refer to an advertising context, but to the document. REPRESENTATIVE HALCRO clarified that it depends on how big the document is; it probably needs to be a decent-sized type. CHAIR MURKOWSKI asked Ms. Glover if [the Division of Insurance] has a standard for disclosure requirements. Number 2351 MS. GLOVER answered that [the Division of Insurance] does review and approve policy language; however, she is not aware of any standard requirements for notices. CHAIR MURKOWSKI said she has no problem with the language stating "shall be larger and in bold type," instead of "may not be smaller". Number 2255 REPRESENTATIVE KOTT asked Providence [Medical Center] what is currently being done. MR. CALDER responded that the notice in their documents is the same type size as the rest of the document. He said he would be happy, however, to have it larger and in bolder type. Number 2146 CHAIR MURKOWSKI announced that there being no objection to conceptual Amendment 3, it was adopted. Number 2134 REPRESENTATIVE CRAWFORD made a motion to adopt conceptual Amendment 4. He referred to AS 21.03.070, subsection (b), which reads: When entering into an agreement for a qualified charitable gift annuity, the charitable organization shall disclose to the donor in writing in the agreement that a qualified charitable gift annuity is not an insurance policy in this state, is not subject to regulation by the division, and is not protected by the Alaska Life Health Insurance Guaranty Association established under [AS 21.79.040]. REPRESENTATIVE CRAWFORD stated that [a charitable gift annuity] is not protected or under oversight by anybody, and Colorado's language states this as well. He added that this might be a good disclosure [for Alaska to use]. CHAIR MURKOWSKI said it was her understanding, when Mr. Minton read the Colorado language, that it mirrored this. CHAIR MURKOWSKI clarified that [a charitable gift annuity] may not be protected by the Alaska Life and Health Insurance Guaranty, but there is an underlying assumption [in the Colorado language] that it could be protected by something. She suggested that the committee take that language and adapt it to Alaska. She asked Mr. Minton if he would agree. MR. MINTON replied that he thinks substantively it is the same and that the existing language [in subsection (b)] could be a little more inclusive. CHAIR MURKOWSKI asked Mr. Minton if subsection (b) is the NAIC language. MR. MINTON responded that it is the paragraph from the NAIC model statute. He remarked that the state is adopting this model statute to come up with its own disclosure language. He added that he had read Colorado's language but that all of the disclosure language is substantially the same and only varies a little bit from state to state. Number 1968 MS. GLOVER stated that the [NAIC] model says: The charitable organization shall disclose to the donor in writing in that annuity agreement that a qualified charitable gift annuity is not insurance under the laws of this state and is not subject to regulation by the insurance commissioner or protected by an insurance guaranty association. CHAIR MURKOWSKI remarked that it is pretty much what is said in subsection (b). She asked Mr. Selby and Mr. Calder if they had any comment on this. MR. SELBY replied no, that he thinks it is fine. He stated that he would agree that if it stated, "regulation by the division", some folks might not understand that it's the Alaska Division of Insurance. He suggested that it would be clearer if it said "regulation by the Alaska Division of Insurance". He added that the statement "not protected by the Alaska Life Health Insurance Guaranty Association established under [AS 21.79.040]" leaves open the question of whether there is anything else that covers it, and he suggested that the committee use lateral language or say that it's not protected by any insurance guaranty, including the Alaska Life Health Insurance Guaranty Association established under AS 21.79.040. He noted that this would not change the intent of the disclosure statement. CHAIR MURKOWSKI suggested that if it were to say, on line 10, "is not protected by any insurance guaranty including the Alaska Health", it would be clear that there "isn't anything out there." REPRESENTATIVE ROKEBERG said he thinks that the bill states that it just has to meet the requirements of [subsection (b)], it doesn't have to give them verbatim. REPRESENTATIVE HALCRO asked Ms. Glover whether there is anybody that people could turn to if there were a dispute. MS. GLOVER answered that with the way this is written in the exemption, [the Division of Insurance] would not have authority to look into any kind of problems. Number 1723 CHAIR MURKOWSKI announced that there being no objection to Conceptual Amendment 4, "making more clear subsection (b) under [AS.21.03.070]," it was adopted. Number 1719 REPRESENTATIVE KOTT referred to page 3, lines 9-10, which talks about confidentiality of the information received by [the Division of Insurance]. He remarked that his only concern is if under [subsection (d) on page 2, a person] had issued his or her first annuity and as a potential annuitant wanted to find out if this was really legitimate, [the person's] only recourse would be to go to the [the Division of Insurance]. But, under this provision, [the Division of Insurance] could not provide any information. He asked if this is standard confidentiality language built into the NIAC model Act. MS. GLOVER responded that there is not a confidentiality provision in the model. He agreed that [the Division of Insurance] would not be able to provide any information regarding the notice on these types of entities. Number 1654 REPRESENTATIVE HALCRO asked Ms. Glover if there isn't enough information provided upfront before somebody gets involved. MS. GLOVER replied that she would have no problem providing the information to [the Division of Insurance]. CHAIR MURKOWSKI stated that the point behind the confidentiality provision was that what one didn't want a case in which someone gives $10,000 to one organization, and then a second organization, looking for donors, can call up the Division of Insurance and get the donor's name and number, and come knocking on that person's door for more information. CHAIR MURKOWSKI stated that she is concerned with having information subject to disclosure. She added that by having all of the information in "DRG" confidential, the consumer can't get the information about the charitable organization that has been registered or filed with the Division [of Insurance]. REPRESENTATIVE KOTT stated that he doesn't see where the charitable organization would have to provide a person's name to the division because it is not part of the requirement of the bill. REPRESENTATIVE ROKEBERG stated that he agrees and thinks that [the committee] could delete [subsection (h), page 3, lines 9- 10]. Number 1546 CHAIR MURKOWSKI asked Mr. Minton if he had any comments on the confidentiality clause. MR. MINTON responded that he thinks it is appropriate for the [Division of Insurance] to disclose to a donor that a given charity has issued its annuities. He added that he does not see this paragraph prohibiting that kind of disclosure. Number 1513 REPRESENTATIVE KOTT responded that he thinks it does [prohibit that kind of disclosure]. He made a motion to adopt conceptual Amendment 5, to delete page 3, lines 9-10 [subsection (h)]. REPRESENTATIVE ROKEBERG objected and said if the [Division of Insurance] had imposed a civil penalty for the failure to properly notice, [the division] couldn't tell anybody what little activity "they" are doing. Number 1477 REPRESENTATIVE ROKEBERG withdrew his objection. REPRESENTATIVE HALCRO added that he didn't know what kind of liability the state would have if the division had information about a particular charity that was operating questionably, and didn't provide that to consumers. Number 1440 CHAIR MURKOWSKI announced that with no further objection, conceptual Amendment 5 was adopted. Number 1431 REPRESENTATIVE KOTT made a motion to adopt a conceptual amendment by deleting "educational institutions" on page 1, lines 11-12, and substituting "charitable organizations". CHAIR MURKOWSKI remarked that when Mr. Minton had brought that up with her it seemed to make sense; however, Ms. Glover has caused her to question what the impact would be. She suggested that this be looked at when [the bill] comes before the House Judiciary Standing Committee. [Therefore, the amendment was not addressed further.] Number 1337 REPRESENTATIVE KOTT made a motion to move HB 121 as amended from committee with individual recommendations and the attached zero fiscal note. There being no objection, CSHB 121(L&C) moved from the House Labor and Commerce Standing Committee.