CDAs: The Best-Kept Secret of the Credit Union Movement

What many CEOs call the “best-kept secret” of the credit union movement, is actually a capability that has been around for years. We’re talking about the charitable donation account, also known as a CDA.

A charitable donation account is a straightforward way you—as a credit union—can give to your community while simultaneously strengthening your bottom line. Let’s talk more about why CDAs are the best-kept secret of the credit union movement below.

What is a Charitable Donation Account?

Credit unions often face the balancing act of being actively accountable to their members while also utilizing the best investment strategies for their bottom line. The solution can be a charitable donation account.

A charitable donation account (CDA), according to Title 12, Section 721.2(b)(2), “is a hybrid charitable and investment vehicle… that you may fund as a means to provide charitable contributions and donations to qualified charities.”

Between 1999 and 2012, federal credit union (FCU) donations were limited to nonprofit organizations and tax-exempt organizations, according to the Federal Register.

In 2012, however, “the Board repealed the restrictions on permissible charities and the conditions for making a donation… then added charitable contributions and donations as a category of activities preapproved by regulation as ‘incidental powers necessary and requisite to carry on a credit union’s business.’”

The result is a credit union’s ability to utilize CDAs.

The CDA is a power, authorized by both the Federal Credit Union Act and many states, that allows a credit union to invest in potentially higher-earning assets in order to help fund charitable giving to 501(c)3 organizations while maintaining or enhancing the credit union’s bottom line. In short, a true win-win for both the charity (or charities) and the credit union itself.

Charitable Donation Accounts

Why Would I Use a CDA?

Credit unions are inherently charitable institutions. Whether you are supporting the Children’s Miracle Network, a local food pantry, financial literacy services, or shelters for at-risk women and their families, credit unions already give!

In the current credit union environment of low yield, credit unions have to find a way to seize every efficiency possible—and this is one area where a CDA could help. If your credit union already gives to charity, a CDA could help your credit union provide those donations with more financial efficiency.

If your credit union is looking to expand community impact and provide funding to key charities, a CDA could help you kick-start that effort without negatively impacting your bottom line.

How Does a CDA Work?

Under federal guidelines, a federally-chartered credit union may place up to 5% of net worth into a charitable donation account. This account can be invested in assets that are normally not allowed for your credit union.

Moreover, the earnings from the CDA must be divided between one or more IRS-filed 501(c)3 entities and your credit union. This contribution can be made flexibly with the only requirement being that 51% of the earnings on a five-year look-back period are distributed to the charities you’ve selected.

States may have similar or different guidelines depending on local regulations. Working with a competent provider, well versed in local regulations can help you navigate this framework.

If the account is terminated, your credit union can keep all but the 51% of earnings required to be contributed to the 501(c)3 charities you’ve selected.

In general, yields on vehicles typically used in CDAs provide a better return than traditional credit union investments. In fact, in the current yield environment, a credit union may see a better yield than it is realizing on traditional investments even after making required charitable contributions. It’s no wonder the CDA has been called one of the “best-kept secrets” in the credit union market!

How Charitable Donation Accounts Help Support Your Mission

Why should your credit union care—and how can a charitable donation account help support your mission?

Credit unions nationwide are recognizing injustice and are at the forefront of helping fix it. Whether addressing the present-day impact of historical redlining, helping solve basic and financial literacy shortfalls, or providing access to needed skills in today’s job market, credit unions are providing the contributions to make a difference.

Additionally, CDAs are a great strategy to address excess liquidity while demonstrating strong corporate social responsibility (CSR). Choosing to invest in a CDA demonstrates to your community that your credit union is dedicated to making a positive impact on the communities you serve.

CDAs in Action

Here is an example, of a charitable donation account in action, courtesy of CU Management:*

  1. A $1 million investment is made into a CDA
  2. At the end of the period, the account is valued at $1.05 million
  3. The total return (including income and capital gains, in this case) is $50,000
  4. The credit union must donate at least 51% of the total return ($25,500 in this example)
  5. The excess return to the credit union is the remaining 49% ($24,500 in this example)
  6. In this example, over a one-year period, the credit union earned 2.45% on its investment and funded $25,500 in charitable donations through investment returns at no cost to the credit union

*This performance is not guaranteed to any credit union or bank. Not insured by the NCUA or FDIC. Always read prospectuses or memoranda before investing. Seek qualified legal, accounting, and investment advice to help evaluate investment decisions.

CDA Evaluation Process

Research shows that on average, $131 million dollars per year go underutilized because credit unions overlook CDA capabilities. This considered, we have taken our experience and developed some best practices such as compliance, credit union internal process, and governance requirements listed below.

  • Impact Review: Is the potential impact worth the added due diligence effort?
  • Scope of Potential Commitment: What is the size of the commitment, both current and long-term?
  • Evaluation of Alternatives: What are the constraints, underwriting, risk limits, accounting, etc.?
  • Internal Policy Review and Modification
  • Integration and Approval with Stakeholders: Finance, ALCO and board, human resources approval will be needed
  • Regulatory Approval
  • Final Approval and Funding Inception

Real-Life Examples and Strategies for Maximum Success

The Gates Foundation wants to eradicate polio in Africa. LA Family Housing aims to eliminate homelessness and has put 1,387 people into permanent housing, with 97% of tenants retaining their housing. The Michael J. Fox Foundation fundraises to find a cure for Parkinson’s and has raised more than $650 million for Parkinson’s research.

The first step in establishing a CDA is defining what charitable success means to your organization. Ask your credit union: What is your definition of success?

Do you want to eradicate hunger in your community? Sponsor all youth athletics in the areas you serve? Do you strive to end high school illiteracy? Or, are you focused on providing homes to the homeless population in your city or town?

Define what charitable giving looks like for your credit union, then push to be recognized as a leader in your community. Some strategies for maximum success include:

  • Employee Engagement
  • Member Engagement
  • Community Development
  • Public Relations

How can you begin optimizing your investments to have a greater impact on your credit union and your community at large? Listen to your members—what do they care about?

By using a CDA, not only can you improve your bottom line, but you can increase member and employee loyalty and engagement. By demonstrating the credit union’s commitment to charitable giving, you are fulfilling your mission to serve your members and support the members of your community.

Our team is here to discuss with you the many ways your organization can benefit from investing in charitable donation accounts.