Author’s note: The following comments elaborate on the financial statements of the Archdiocese of St. Paul and Minneapolis Chancery Corporation (“Archdiocese”) that ended June 30, 2015. Condensed financial statements are included in the November 19 issue of The Catholic Spirit. The Management Discussion and Analysis and Financial Statement are posted here.
Since I last reported to you on our annual financial statements in November 2014, our Archdiocese filed for Reorganization under the Bankruptcy Code (January 2015). The path to this difficult decision has received much publicity, but bears review.
At the time of release of our financial statements last year, the Archdiocese was facing an unknown number of claims due to the lifting of the civil statute of limitations for sexual abuse of minors until May 2016. The Archdiocese was considering all options to address this situation and archdiocesan leaders sought the best path to ensure fairness for victims of clergy sexual abuse and fairness for the faithful whose stewardship has made archdiocesan ministry possible.
Archdiocesan leaders consulted with various representative clergy and lay leadership groups and with outside professionals about the decision regarding Reorganization.
Archdiocesan leaders concluded that Reorganization was and is a way to respond to all victims by allowing the available funds to be equitably distributed to all who have made claims, not just those who have the earliest trial dates or settlements.
The process we’re in now is actually bringing together the victims, the Archdiocese, parishes and insurers to come up with a fair and just settlement for all who have been abused and made claims. Compared to other diocesan bankruptcies nationally, it’s an unprecedented comprehensive process that has all sides working toward the same goal of healing and hope for a better tomorrow.
Further, Reorganization would allow the Archdiocese a fresh start to adhere to reforms made to minimize the threat of this circumstance ever happening again and to continue its service and support of the faithful and the stewardship that makes archdiocesan ministry possible.
Before the Archdiocese filed for Reorganization in January, we had begun efforts to significantly reduce operating expenses and to be better stewards of the monies parishes contribute through assessments and other contributions received directly by the Archdiocese every year.
In addition, we knew in order to weather the Reorganization process we would need to conserve our resources because much would be consumed as we engaged legal and other professionals in preparing for Reorganization and to assist with negotiating with insurance carriers and plaintiffs counsels.
In November 2014, we made the painful and necessary decision to reduce our workforce and non-personnel expenses. These reductions resulted in almost $5 million in expense reductions, which was 20 percent of our entire annual operating expense budget. Total Operating Expenses, without Special Issues expenses, decreased from $30.5 million in 2014 to $22.9 million in 2015, a 25 percent reduction.
After much analysis and consultation, the Archdiocese also made the difficult but necessary decision to place the Chancery, Archbishop’s Residence, Hayden Center, Dayton Building and the Hazelwood property on the market for sale.
These buildings, which are located across from and behind the Cathedral of St. Paul and in Northfield, are being aggressively marketed for sale by Cushman & Wakefield/NorthMarq, and we have a signed purchase agreement for $4.5 million on the Hayden Center. The proceeds from their eventual sales will generate cash with the hope of and desire to help us move through Reorganization efficiently.
Because our buildings have not yet sold, a new facility, which we would lease, has not been selected. It is our commitment to find property in an area where the Church’s presence can be an integral part of a neighborhood revitalization and renewal effort. We anticipate that the annual expenses of leasing office space will be neutral to current costs of maintaining our existing facilities.
The reason we do all of these things is simple: To make sure the Archdiocese can continue its unique role in the Church’s mission by forming and assigning priests, ensuring those in hospitals and prisons are ministered to, providing parishes the support they need and ensuring people of all cultures and languages are evangelized and catechized.
It is important to understand that this financial report does not cover parishes, schools or other Catholic entities within the 12-county area that comprises the Archdiocese of St. Paul and Minneapolis. All of those organizations are separate legal entities and prepare their own financial accounting reports.
It has been our practice since the year ended June 30, 2013, to release our full audited financial report to be transparent and accountable to our many stakeholders among the Catholic faithful. Indeed, almost 65 percent of our support for our valuable missions comes from parish assessments, which are the result of contributions to the local Church by parishioners. It is for this reason that Archbishop Hebda, the Archdiocesan Finance Council and I continue to support full transparency and timely reporting of our financial results.
As you may recall, Fiscal Year 2014, which ended June 30, 2014, was the first year we did not receive an unqualified opinion from our certified public accounting firm. They issued a disclaimer of opinion and a going concern qualification as a result of our inability to provide an estimate of our liability related to ongoing litigation and claims of sexual abuse. At that time, we had pending claims and a significant number of notices of claims, with each claim being unique and requiring factual development to determine the liability, if any, that existed.
As a result of our continued inability to estimate our liability related to sexual abuse claims at June 30, 2015, of which 416 sexual abuse claims were filed by the Aug. 3, 2015, timely filing deadline, we are not able to have an audit of our financial statements for the year ended June 30, 2015.
In consultation with the Archdiocesan Finance Council and Corporate Board of Directors, we filed a motion with the Bankruptcy Court, and were granted approval, to allow our CPA firm to perform Agreed Upon Procedures on the Fiscal Year 2015. These procedures do not represent an audit and as a result you will not see an Independent Auditor’s Report attached to our financial statements. The Agreed Upon Procedures were developed by management in consultation with our CPA firm and will assist us in governance of the Archdiocese by requiring attestation procedures on key balance sheet accounts and internal controls. Our financial records are submitted on a monthly basis to the Bankruptcy Court and United States Trustee and are subject to their review. When we emerge from Reorganization, we intend to return to the standard practice of annual independent audits and will continue our practice to promptly release our financial statements and auditor’s report upon completion.
For the year ended June 30, 2015 (our Fiscal Year 2015), we incurred a loss from operations before Special Issues expenses of $516,542 as compared to a loss from operations before Special Issues expenses of $4,940,448 in FY 2014.
Our loss from operations in FY 2015 was $5,750,086 and compares favorably to a loss of $9,120,676 for FY 2014. Special Issues expenses were $5,233,544 and $4,180,228 in FY 2015 and FY 2014, respectively. In addition, in Fiscal Year 2014 we had a $4.7 million negative impact to our operating activities as a result of two unusual items, of which $1 million was a write-off that did not negatively impact our cash.
After adjusting for these two unusual items, our deficits, before Special Issues expenses, in FY 2015 and FY 2014 were comparable.
The Special Issues expense of $5,233,544 incurred by the Archdiocese during FY 2015 related predominately to both legal fees incurred by attorneys representing the Archdiocese in the Reorganization and the Ramsey County charges, as well as legal counsel representing the unsecured creditors committee and the parish committee. Within Reorganization, the Archdiocese is referred to as the “Debtor in Possession” and as such, it is responsible for paying all legal fees incurred both by our legal counsel and the legal counsel representing the plaintiffs or victims of sexual abuse. This is generally not the case with the defense of claims in civil law and is unique to Reorganization.
Our legal counsel and staff have spent thousands of hours going through clergy files, conducting investigations, and reviewing claims and financial records to assist us in the goal of a fair, just and expedient Reorganization. Resources were also spent on working with numerous insurance carriers that issued policies to the Archdiocese over the past seven decades dating back to the late 1940s. We are working closely with the insurance carriers to determine coverage for claims and to find equitable settlements for those who were abused.
Reviewing and investigating sexual abuse claims against the Archdiocese, which now total 416, is expensive, as are the costs of legal notifications in national, regional, state and local publications. Special Issues expenses are substantial but necessary in order to achieve the goal of obtaining the most resources for those sexually abused by clergy. We clearly recognize that we cannot sustain this level of spending for Special Issues indefinitely and that is why it is imperative that we negotiate a fair and just resolution to this Reorganization in the near term.
Total Operating Revenue in 2015 was $22,430,660 as compared to $25,525,732 in 2014. The major reason for this decline is a decrease in Investment Income and Contributions, offset by a slight increase in Parish Assessments. The decline in Investment Income is the result of the Archdiocese selling investments prior to filing for Reorganization. U.S. Bankruptcy Court rules required us to sell investments and convert them to cash or low-risk investments such as government-backed securities, and we chose to convert most of our investments to cash.
Parish Assessments, our primary source of revenue which is generated from the 187 parishes within the Archdiocese, increased by 3.4 percent to $14,246,426 in 2015 from $13,776,682 in 2014. Assessments are calculated and billed on a two-year lag which means the parish financial results for the years ended June 30, 2013, and 2012 formed the basis for the Parish Assessment revenue for the years ended June 30, 2015, and 2014, respectively. Sunday collection revenue at the parishes, the most significant driver of the assessment calculation, increased from 2012 to 2013.
Our Operating Expense, without Special Issues in 2015, totaled $22,947,202 as compared to $30,466,180 in 2014, a 25 percent decrease. After adjusting the 2014 Operating Expense for the two unusual items mentioned earlier, Operating Expenses in 2014 were $25,772,538. That almost $2.8 million or 11 percent decrease is due to the significant expense reductions in program expenses including personnel reductions implemented in November 2014.
On an annual basis, those reductions will equate to almost $5 million and highlights that we are willing to make the tough decisions to operate going forward (post-Reorganization) with some surplus that will allow us to build reserves as we anticipate that little to no liquid assets will be available after we emerge from Reorganization.
Non-Operating Activity – General Insurance Program
The General Insurance Program of the Archdiocese of St. Paul and Minneapolis provides comprehensive, uniform coverage to all of the parishes, Catholic schools and certain other Catholic entities within the Archdiocese, as well as the Chancery Corporation. The coverage provided by the General Insurance Program includes commercial general liability and workers’ compensation. The General Insurance Program is maintained for the benefit of the participants who have contributed those funds in exchange for obtaining insurance coverage.
The General Insurance Program had a deficit from operations of $972,739 in 2015 as compared to a deficit from operations of $131,124 in 2014. The decrease year over year was due to billing credits effective from Jan. 1, 2014, through June 30, 2014, and a reduction of premiums charged to participating parishes, schools and other Catholic entities from July 1, 2014, through June 30, 2015, because the reserves were larger than required by professionals engaged to determine the appropriate reserve for outstanding and incurred claims.
Non-Operating Activity – Priest Benefits
The Archdiocese coordinates a self-insured health and dental benefit fund for active priests and seminarians within the Archdiocese. The Archdiocese invoices parishes, Catholic schools and other Catholic entities based on clergy assignments and pays benefit providers directly for any claims. Priest Benefits generated a slight income in both 2015 and 2014.
Net Assets of the Archdiocese were $26,056,959 on June 30, 2015, as compared to $32,540,508 in 2014, a $6,483,549 or 20 percent decrease as a result of the Statement of Activities deficit in 2015. The increase in Cash to $15,304,260 in 2015 from $3,861,917 in 2014 is the result of converting Investments to Cash as required by the U.S. Bankruptcy Court. Of the total Cash on June 30, 2015, of $15,304,260, $8,726,282 represents Unrestricted Cash. The remaining Cash is Board Designated and Restricted. The categories of Board Designated and Restricted and their availability for operations will be determined at a future date by the U.S. Bankruptcy Court. Total Cash and Investments on June 30, 2015, were $16,367,039 compared to a balance on June 30, 2014, of $19,172,616, and decreased by $2,805,577 or 15 percent, mainly as a result of the cash outlay for Special Issues expenses.
The Litigation Reserve of $4,600,000 did not change from 2014 to 2015 as a result of management’s inability to estimate our liability related to ongoing litigation and claims of sexual abuse as each of the 416 claims are unique and require factual development to determine financial exposure.
It is important to understand that the value of the assets and liabilities on the Condensed Statements of Financial Position are not necessarily reflective of the outcome of Reorganization. With the exception of the Litigation Reserve, they are based on Generally Accepted Accounting Principles. Assets, particularly Land, Property and Equipment, are recorded at their net book value, which may not reflect their fair market value. Final determination of the value of the assets and liabilities will be at the discretion of the U.S. Bankruptcy Court.
Shortly after we filed for Reorganization in January 2015, Judge Robert Kressel ordered the parties into mediation. Although I am not able to speak about the mediation in detail, it is our hope to continue to work with insurance carriers, victims’ counsel, creditors, parishes and other Catholic entities to obtain a fair and just settlement of victim claims. At that time, the next step for us would be to file a Plan and Disclosure Statement and obtain Confirmation of a Plan from the U.S. Bankruptcy Court.
Archdiocesan leadership is taking the necessary steps to ensure that our financial situation is resolved fairly and just compensation is received for victims of clergy abuse while honoring the gifts of stewardship of past and present faithful in pursuit of the mission of the Church. This has not changed and has been our goal since this chapter of the Church’s history began a few years ago.
Our focus has been and will continue to be fairness to victims of clergy abuse and adherence to reforms. I once again would like to thank all the clergy and lay leaders, staff, volunteers, parishioners and others throughout our local Church who continue to work in these challenging times to strengthen sustainability in support of our shared mission.