Unusual Arizona Group Shuts Down, Cutting Off Annuity Payments to Donors

An unorthodox Arizona charity that paid financial planners a commission to market its gift annuities has shut down, cutting off payments to an unknown number of donors who entrusted the organization with their money.

The closure of the Mid-America Foundation, in Scottsdale, Ariz., was disclosed in a terse, two-sentence letter to donors by Robert R. Dillie, the charity’s executive director. Mr. Dillie, a former insurance agent who in the past had insurance licenses denied or revoked in at least four states, told donors that Mid-America had “inadequate assets” to make further annuity payments.

The letter offered no explanation of what happened to the donors’ money, nor did it provide information about how to contact Mr. Dillie or other charity officials. The Chronicle was unable to locate Mr. Dillie for comment, and Mid-America’s telephones and Web site are out of service. The Arizona charity has no connection to a small nonprofit organization in West Des Moines, Iowa, that also goes by the name Mid-America Foundation.

The shuttering of Mid-America in Arizona has spurred concerns that government regulators could impose stricter rules on gift annuities, a popular form of planned giving that generates hundreds of millions of dollars each year for nonprofit groups.

Frank Minton, vice president of the American Council on Gift Annuities, a service organization for nonprofit groups, said that the overwhelming majority of charities that offer annuities shun the kind of unorthodox practices used by Mid-America, including aggressive advertising and the payment of commissions to financial planners who bring in annuity business. Now, Mr. Minton said, some charity officials are concerned that in the wake of Mid-America’s troubles, lawmakers and regulators could wind up imposing restrictions on all charities that offer annuities, including ones that are “quite responsible” in handling donors’ money.

Gift annuities allow people to donate cash or other assets in exchange for fixed payments. Typically, charities designated by a donor receive what is left of the initial gift upon the donor’s death. In the wake of Mid-America’s closure, not only are donors losing out on their annuity payments, but so too are charities that expected to receive money from the organization.

Lacking Supervision

While it remains unclear what led to Mid-America’s downfall, one thing is certain: In the months before it closed, the organization operated without close supervision by state and federal officials. Mid-America did not file financial reports, including the annual Form 990 informational tax return that the Internal Revenue Service requires of charities its size. While it is not clear how much money Mid-America collected in charitable gifts or how many donors may be affected, a financial statement that the charity gave to financial planners in early October said it had $42-million in assets.

What’s more, the two states where Mid-America was most active, Arizona and Florida, are not among the 10 states that require charities that offer gift annuities to prove that they have adequate reserves to pay off donors in the event of financial difficulties.

Florida Rules

In Florida, a charity offering annuities must simply show that it has operated in the state for at least five years. To meet the Florida requirement, the Mid-America Foundation said it was doing “administrative work” for the Hazel M. Gulley Memorial Foundation, a small organization based in Peru, Ind., that is registered in Florida, according to Tami Torres, communications director for the state’s Department of Insurance.

Herschel W. Gulley, executive director of the Gulley Memorial Foundation, said that among those who invested their life savings in a Mid-America annuity was his mother-in-law. Now, with a law firm’s help, he said, “My number-one goal is to find all the money and make sure every annuitant gets every penny he’s owed, and what’s left over goes to charity.” Like Florida, Arizona imposes few restrictions on charities that offer gift annuities. Arizona, where Mid-America set up operations in April 1998, merely requires them to file an annual list of their officers. This past July, after Mid-America had failed for more than a year to file such a list, the Arizona Corporation Commission revoked the right of Mid-America to offer annuities in the state.

Mid-America’s closure marks the second time in the past two years that an Arizona-based charitable group has run into serious trouble. In November 1999, the Baptist Foundation of Arizona filed for protection from creditors under Chapter 11 of the federal bankruptcy code, owing nearly $600-million to 13,000 people who had bought securities from the organization. State officials sued the Baptist group’s accounting company, Arthur Andersen, for $800-million, alleging it helped cover up a fraudulent scheme by some of the organization’s officials.

Now authorities in Arizona, as well as Florida, are trying to untangle the exact reasons for Mid-America’s troubles. They said they had received complaints about Mid-America’s closure, but, as is their custom, they declined to comment on whether investigations are under way.

With little information about Mid-America’s status available publicly, it remains unclear whether annuity holders will ever receive further payments. In his letter, Mr. Dillie told donors that Mid-America would inform them “in the event there is a change in circumstances” at the charity. What’s more, The Arizona Republic in October quoted Mr. Dillie as saying that Mid-America had filed for Chapter 11 bankruptcy protection in Delaware, where the organization is incorporated. Under Chapter 11, groups can reorganize and arrange to pay off a portion of their debts using whatever assets they have left. The Republic quoted Mr. Dillie as saying of Mid-America’s Chapter 11 status, “It’s not a bad thing. It needs to be reorganized.”

But a Chronicle computer search of federal bankruptcy-court records in Delaware and across the nation turned up no record of Mid-America having filed for bankruptcy protection.

Previous Problem

The mystery surrounding Mid-America is heightened by Mr. Dillie’s past problems with state regulators. Records show that he agreed to surrender his Wisconsin insurance license in 1990 after state officials accused him of violating several regulations. Among the allegations: that Mr. Dillie had taken in premium payments without forwarding them to the insurance companies to which they were owed. Mr. Dillie denied that allegation, but acknowledged having failed to keep policyholder records as required by state law.

Wisconsin denied an application that Mr. Dillie made in 1996 for a new insurance license on the basis that he had failed to disclose on the application form the 1990 action against him.

In 1999 Wisconsin rejected an insurance license for an entity called Mid-America Financial Group Inc., which listed the same Arizona address as the Mid-America Foundation, because the application again omitted information about the earlier administrative actions against Mr. Dillie. Wisconsin officials said the earlier state actions showed “evidence of untrustworthiness or incompetence” on Mr. Dillie’s part.

Arizona, Colorado, and Illinois also denied insurance licenses to Mr. Dillie for failing to reveal the Wisconsin administrative action against him.

Aggressive Pitches

To longtime gift-annuity experts like Mr. Minton, one of the most vexing aspects of Mid-America’s operations was its practice of paying commissions to financial advisers and insurance agents that brought in annuity businesses. Three years ago, the National Committee on Planned Giving and the American Council on Gift Annuities issued a joint statement warning financial planners, insurance agents, and charities to avoid relationships with institutions that market annuities by offering commissions.

While the statement did not cite specific groups, charity officials have said it was aimed at the National Community Foundation, in Brentwood, Tenn., a group that, like Mid-America, has offered commissions of up to 8 percent to insurance agents and others, based on the fair market value of the assets that donors used to set up charitable gift annuities. The National Community Foundation remains in operation.

A key concern behind the joint statement was that paying commissions could subject a charity’s gift-annuity fund to regulation by the federal Securities and Exchange Commission and invite more-intense state regulation.

Charities that solicit gift annuities are exempt under the Philanthropy Protection Act of 1995 from federal regulations that require companies that sell commercial annuities to maintain financial reserves, file voluminous financial reports, and comply with stiff state regulations.

Mr. Minton said that the American Council on Gift Annuities interprets the Philanthropy Protection Act as stipulating that a charity that pays commissions to solicit gift-annuity business loses its exemption and must comply with the rules that apply to commercial enterprises.

In the past, executives of Mid-America and the National Community Foundation have contended that they are in compliance with the law because their staff members are the ones who actually solicit donations, and the staff members themselves do not receive commissions.

While it is unclear whether the payment of commissions was a factor in Mid-America’s closure, such payments can affect the bottom lines of charities that offer them, Mr. Minton said.

“Obviously the commission has to come from somewhere,” he said. “It has to reduce the charity’s resources, with which it backs the annuity.”

The lure of the commission, he said, could induce a planner to steer clients to a particular group without fully investigating whether it has the financial resources to support the annuity. In addition, he said, the amount of a commission may be “all out of proportion” to the amount of work a financial planner does to set up the annuity.

“One financial planner told me he’d been offered $250,000 for setting up a single $3-million annuity, which required only a few hours of his time,” Mr. Minton said.