Putting Faith in a Trust Company

Presbyterian fund-raising charity creates for-profit subsidiary to manage assets and perform a range of financial services

Few charities have been as successful at raising and managing money for religious causes as the 199-year-old Presbyterian Church (USA) Foundation. With $1.5-billion in assets and 150 employees, it ranks as one of the largest and most innovative church-related philanthropies in the nation.

But the organization’s executives are concerned for the future. They believe charity regulations are becoming so stringent and unpredictable that the foundation’s ability to carry out its mission is threatened. While many charities share such concerns, Presbyterian officials have come up with something of a radical solution:

They are moving the bulk of the foundation’s financial-services operations out of the non-profit arena altogether and reorganizing them under the same laws that regulate commercial businesses.

On January 2, the foundation opened what appears to be the nation’s first charity-owned, federally chartered trust company, a for-profit venture that will administer charitable trusts for churches and other religious bodies, invest the assets in stocks and bonds, and keep up with recordkeeping and disclosure requirements. Two other subsidiaries — a federally regulated mutual-fund company and a state-regulated insurance company that will issue charitable gift annuities — are due to follow.

“If I could find a less onerous way to insure that the foundation will continue to serve in the future as it has in the past, I would,” says chief executive Larry D. Carr, the architect of the strategy. “We don’t think it’s possible.”

The foundation also has taken bold steps to deal with a separate challenge: sweeping changes occurring on the religious front that are causing many churchgoers to shift their loyalty — and donations — to ecumenical and non-denominational groups or to secular charities.

In an effort to serve the changing religious market, the foundation won approval from the Internal Revenue Service to offer financial services to a wide variety of religious organizations, not only those that are Presbyterian.

The foundation’s goal is not to generate profits from its services, Mr. Carr says, but to provide investment management to groups that do not have the resources to handle it on their own — and to do so more cheaply than commercial firms would.

“We feel a very strong responsibility” to the Presbyterian tradition of ecumenism, Mr. Carr says. “Our objective is not to take over the world.”

Still, he concedes that the foundation’s plan could wind up giving big for-profit companies that manage charitable assets — giants such as Fidelity and Merrill Lynch — a new source of competition.

Mr. Carr began working on the restructuring in 1994, a year after he took over as head of the foundation after spending 23 years working in the insurance industry. This month’s opening of the New Covenant Trust Company marks the first public sign of his transformation plans.

Like the trust departments of Citicorp, Chase Manhattan, and other big institutions, New Covenant will operate under the regulatory scrutiny of the U.S. Comptroller of the Currency, and it will pay taxes on profits to the I.R.S. Mr. Carr says he does not expect those taxes to be significant, since the aim of the trust company is to serve the needs of charities, not generate big earnings.

By next year the foundation plans to open two other subsidiaries:

* An investment company that will offer churches and other groups greater control over their money than is now available from the foundation.

* An insurance subsidiary that will issue charitable gift annuities in states that restrict their sales to licensed insurers — thereby allowing the foundation to seek such donations from many more people.

Mr. Carr says the main intent of the restructuring is to insulate the foundation from new restrictions on charities, such as limits on the types of trust and annuity activity allowed, and to make it easier to comply with charity laws that often vary by state and sometimes by city or town.

The expense of the restructuring and of paying taxes on the trust company’s assets is negligible compared with the expenses incurred by the charity in dealing with non-profit regulations and the gains that will be made in efficiency, Mr. Carr says. He estimates that the entire plan will save the foundation more than $500,000 annually in operating costs.

“The foundation operates nationally,” he says. “We can try to adapt on a location-by-location basis, but it’s very expensive. When you’re responsible for the amount of money we’re responsible for, you can’t afford to make many mistakes.”

Earnings on foundation assets cover 40 per cent of the mission work undertaken by the Presbyterian Church’s national office, he notes — everything from setting up soup kitchens and paying seminary scholarships to sending missionaries overseas.

While the hassles and costs of complying with regulations for non-profit groups are already bothersome, Mr. Carr says, he is more concerned about the prospect of harsher restrictions being imposed in the near future. He says such changes are nigh for a variety of reasons: the growing economic and political clout of non-profit institutions; recent high-profile fraud cases involving such groups as United Way of America, the Foundation for New Era Philanthropy, and the N.A.A.C.P.; and questionable non-profit business practices that, while perhaps legal, undermine the public trust.

Mr. Carr says he sees warning signs in the charity world of the same patterns that preceded sharp new regulation of banks, insurers, and brokerages in the 1980s. Among them: tough new standards imposed by the accounting profession, which, he notes, recently tightened rules governing how charities account for pledge dollars.

Mr. Carr says he backs tougher accountability standards for charities if they are “reasonable and responsible.” But trying to anticipate the direction of state and federal regulations while running a billion-dollar financial institution is difficult, he says. Better to operate under well-established commercial-business laws, where “we know what those rules are,” he says.

By operating under commercial laws, whose disclosure and reporting standards are generally more rigorous than those of charity laws, the foundation hopes in part to reassure donors that its financial standards are high, Mr. Carr says. He also wants to “raise the bar” of accountability for other charities.

“The thing that philanthropy has always lacked is an accountability to the public,” Mr. Carr says. “It’s never effectively said, ‘This is what we do with what you give us.’ ”

The Presbyterian foundation is widely viewed in the world of religious financial services as among the savviest and most aggressive institutions. It takes in about $60-million a year in annuities and other planned gifts, mostly from elderly church members. The foundation receives an additional $90-million in deposits annually that it manages for local congregations and other church-related institutions. In 1996, gifts and deposits rose 41 per cent, to $128-million, and last year they went up at least 9 per cent, to more than $140-million.

Even the foundation’s headquarters site, in this small farming and industrial town on the Ohio River, was chosen for financial reasons. The Presbyterian Church (USA), which was formed in 1983 by the merger of two other Presbyterian bodies, originally planned to put the foundation’s headquarters in Louisville, but church officials realized they would be liable for Kentucky taxes on the foundation’s assets. Indiana has no such tax, so they decided that being across the river from Louisville would be a better choice.

Foundation officials offer a variety of specific reasons — some highly technical — for the restructuring plan. In the case of the trust company, a major impetus was a recent federal decision, effective in December, that limits the options charities have for investing money from revocable trusts, which are gifts that a donor can cancel up until death. The Presbyterian organization recently has been doing about $10-million per year in revocable-trust business, Mr. Carr says, and by forming the commercial trust company it can escape the new federal limits.

There are separate benefits to chartering the trust company under federal law, he also says. Doing so exempts the foundation from technical rules that some states impose on trust agreements. For example, because the foundation is incorporated in Pennsylvania, donors who want to craft a planned-giving agreement must have their lawyer draw it up according to Pennsylvania law. Such rules, Mr. Carr says, can discourage some donors who live in other states from leaving money to the church.

Besides the trust company, the foundation plans to start an investment subsidiary later this year that will offer clients — whether churches, Presbyterian nursing homes, or other groups — a family of mutual funds regulated by the Securities and Exchange Commission. The foundation offers such investments now, but the new arrangement will allow clients to make deposits and withdrawals daily, in contrast to a monthly timetable required under trust laws governing the foundation’s present system.

In addition, under the Securities and Exchange Commission rules that will govern the investment company, clients will be able to earmark investments for a pastor’s retirement fund or some other purposes benefiting a sole individual. The laws that now govern the foundation limit it to managing investments earmarked for non-profit institutions.

Mr. Carr says the insurance subsidiary, planned for late this year or early 1999, will allow the foundation to offer charitable gift annuities in every state, even those that require annuity issuers to be licensed insurance carriers and those where annuity laws are so vague that charity managers can’t tell what is legal and what isn’t. Gift annuities let a donor make a tax-deductible contribution to a charity and collect regular payments from the charity until the donor’s death, at which point the charity retains the remaining principal.

Mr. Carr says the foundation has, in the past, refrained from promoting gift annuities in certain states because of regulatory limits, and he expects the new insurance subsidiary to allow it to cast a wider net for planned-giving dollars. Creativity Needed

Presbyterian officials began contemplating the reorganization plan several years ago, looking carefully at changes in mainline Christianity, the future needs of the foundation, and the regulatory climate for charities.

A 1995 report from the foundation’s board titled “Where Do We Go From Here?” noted that giving patterns within mainline Christianity were shifting in ways that called for more creative business practices.

“An evolution is going on in every Christian denomination in the way it does its work in the world,” Mr. Carr says. “Churches are doing their work through ecumenical partnerships rather than on their own. They are spinning off their retirement communities, hospitals, schools, and colleges so they no longer own and control them. And so it becomes very hard for churches to offer financial services to those things without violating their [tax-exempt] status. Yet those things remain part of the essential methods of Christian expression even though they are no longer officially part of the church.”

In order to provide financial services to groups related to — but not legally part of — the Presbyterian Church and not jeopardize its tax-exempt status, the foundation decided that it needed the approval of the I.R.S. Mr. Carr says the aim of requesting I.R.S. authority was to assure itself that it was acting legally in managing the assets of Presbyterian-related entities like colleges and retirement homes and also to test the boundaries of “what it means to be a church.”

An I.R.S. private-letter ruling, issued in October 1996 after 17 months of consideration, allows the foundation to provide trust, investment, and other financial services to a broad range of Christian organizations, including ecumenical groups in which the Presbyterian Church is a member and denominations that have some ecumenical tie to the Presbyterians. Limits on Clients

Still, after consulting with the foundation, the I.R.S. imposed limits, designed to keep the organization from becoming too much like a commercial financial-services company. For example, organizations that are not formally owned by the Presbyterian Church but are affiliated, such as a Presbyterian college or an ecumenical group to which the Presbyterian Church belongs, cannot make up more than 30 per cent of the foundation’s base of business. Stricter limits apply to services provided to other denominations.

Mr. Carr says he already has had “very, very preliminary” talks with another denomination and an ecumenical organization about providing financial services.

While changes on the religious scene have had important implications for the foundation, it is the legal climate surrounding charities that is of most concern, Mr. Carr says.

He points to a federal antitrust suit involving the issuance of charitable gift annuities as proof that charities have become an open target for aggressive legal action.

Beginning as a small state-court action in Texas in 1994, the case mushroomed into a federal class-action suit alleging that charities nationwide conspired with the American Council on Gift Annuities to set artificially low rates on payments to donors who bought charitable gift annuities. The council recommends payout rates that many charities use.

Charities have staunchly denied the charges leveled in the antitrust suit, and a coalition of non-profit groups twice persuaded Congress to pass retroactive laws aimed at derailing the suit. Many have seen that lobbying effort as a sign of the charity world’s growing cohesion and vitality, but Mr. Carr sees it as an admission of wrongdoing.

“Anytime you have to get retroactive legislation passed to get out of a lawsuit,” he says, “you’re kind of de facto admitting that you weren’t following the law.”

Terry L. Simmons, president of Charitable Accord, a national coalition of charities that has spearheaded the fight against the annuity suit, disagrees. “Charities were unquestionably operating within the law, and the press releases and legislative history from Congress on the bills make that clear,” he says.

Mr. Carr, however, blames charities themselves for creating the conditions that allowed the suit to occur. He ascribes no malicious intent to charities involved in the litigation, and he points to aggressive lawyers trying to win big-money judgments from the charitable world.

Still, he says, charities in general, in an effort to maximize the amount of money available for their missions, have failed to do enough to disclose the details of planned-giving arrangements, inviting suits from disgruntled heirs.

Mr. Carr likens the annuity case to an episode he says occurred in the for-profit insurance industry in the 1980s, when regulators accused insurers of using rating bureaus to set rates on fire and casualty insurance. The insurers argued that the practice was an efficient way to hold down costs.

“This annuity case is just a repeat in philanthropy, where big money is involved, of what happened in the for-profit insurance business, where big money is involved,” Mr. Carr says.

“It’s not about evil,” he says. “It’s about intending to be efficient.”