Financial Officer Report FY 2016

View the Management Discussion and Analysis and Financial Statements FY 2016.

Introduction

Fiscal Year 2016 began July 1, 2015, and ended June 30, 2016. It was a year of continuing financial challenges for the Archdiocese of St. Paul and Minneapolis, and it was our first full year in Reorganization in U.S. Bankruptcy Court. But it was also a year of clarity, hope and positive developments.

As you may remember, after much consultation, the Archdiocese filed for Reorganization Jan. 16, 2015, due to the increasing number of claims of clergy sexual abuse of minors against the Archdiocese following adoption of the Minnesota Child Victim Act in 2013. After the Aug. 3, 2015, claim filing deadline, we learned that there were more than 400 claimants, a number Archbishop Bernard Hebda called “breathtaking.” Effort began in earnest at that time, and continues to the present, to engage more than a dozen insurance companies that covered the Archdiocese since the 1940s and contribute to a proposed trust that will eventually compensate those who have been harmed.

Mediation efforts involving Archbishop Hebda, Bishop Andrew Cozzens, members of our Corporate Board and Finance Council, and attorneys representing the Archdiocese, the parishes and claimants have been positive and productive. All involved agree on common goals: to ensure that all people are safe in our churches and schools, that those who have been harmed receive fair compensation, and to ensure that the Archdiocese can continue to fulfill its core missions.

Our Plan of Reorganization filed Nov. 15, 2016, contains a proposed Trust with more than $130 million, with almost $100 million from Archdiocese carriers, the single highest amount provided by insurance carriers in any diocesan bankruptcy to date. This Plan includes proposed settlement offers from more than 10 different carriers. At this point, there are only two carriers that have not agreed to a settlement with the Archdiocese. The Plan provides for the appointment of an independent Bankruptcy Courtappointed trustee to determine how much compensation each claimant receives from the Trust. We believe the settlement offers incorporated in the plan are fair and reasonable.

The Plan will be submitted to claimants and other creditors following Court approval of a disclosure statement, at which time these parties will have an opportunity to vote on the Plan. Settlements with most of the carriers are contingent on approval of the proposed Archdiocese Plan. If the Plan is not approved due to opposition by claimants’ counsel, the Archdiocese may have no choice but to file an amended Plan without the insurance settlements and other proceeds, which would leave a relatively small sum for the victims. Those remaining proceeds could be largely exhausted by professional fees incurred before and after Plan confirmation.

In early FY 2016, the Archdiocese commenced discussions with the Ramsey County Attorney’s Office directed towards resolution of pending criminal and civil charges. County Attorney John Choi said a key goal of his was to make sure that processes, protocols and practices were put into place in the Archdiocese to ensure children were safe in our churches and schools. We wholeheartedly agreed with that goal. After lengthy discussions that included Archbishop Hebda, members of the Archdiocese’s Office of Ministerial Standards and Safe Environment, and outside legal counsel, we reached what Choi called a “landmark agreement.” That agreement gives a district court judge oversight of our safe environment practices and requires reviews in court every six months through February 2020. Choi said he believed the agreement could serve as a prototype for child protection far beyond the Church.

After the civil Settlement Agreement with Ramsey County, our team continued to make changes to promote safe environments and continued to engage the Ramsey County Attorney’s Office in dialogue to resolve the criminal case against the Archdiocese. Choi announced July 20, 2016, that he was pleased with the Archdiocese’s policies, protocols and practices to protect children and dismissed the criminal charges.

The extensive legal efforts in FY 2016, described above, drove much of the Archdiocese’s spending and continue to do so into FY 2017. Legal and professional fees, referred to as “Special Issues Expense” in our Statement of Activities, totaled $7.9 million, up from $5.9 million in FY 2015, partially a result of a full year of bankruptcy expenses in FY 2016 as compared to FY 2015. It is important to note that these fees include charges from not only the Archdiocese’s legal counsel and advisors but also the fees of professionals representing parishes and abuse claimants. Significant amounts were spent opposing a motion to consolidate the assets of over 200 Catholic entities into the bankruptcy and addressing issues raised by a Plan of Reorganization proposed by counsel for abuse claimants.

While our Special Issues Expense grew in 2016, our effort to continue minimizing our Operating Expense was successful. Our Operating Expense before Special Issues Expense in 2016 was $18.6 million, down from $22.9 million in 2015. In 2014, Operating Expense before Special Issues Expense was $30.5 million. In the past three years, we have cut our expenses by approximately $12 million, a decrease of 39 percent, while still offering parishes and schools valuable services and resources to better carry out the mission of this local Church.

In 2016, we sold Archdiocesan real estate not directly involved with our mission. The Hayden Center, which is home to more than 100 Archdiocesan employees, was sold to the Minnesota Historical Society in February for $4.3 million. The Chancery and Archbishop’s Residence, located across the street from the Cathedral of St. Paul, were sold to a real estate group for $3.2 million in April. In addition, the Hazelwood property near Northfield, used as a weekend retreat, was sold in March for approximately $350,000. Those proceeds are in a separate account, designated to be used in our Plan and noted on the Statement of Financial Position as Cash – Restricted by Bankruptcy. We added approximately $875,000 more with the sale of the Dayton Building, home to our Offices of Communications and Evangelization and Catechesis, in August.

While we were selling our properties, the Court approved our lease of 777 Forest St., on St. Paul’s East Side. It was built in 1939 and was the original headquarters of 3M. All Archdiocesan employees will be moving into the space in February 2017. It will be the first time in decades that all employees will be working in the same location. We are confident it will lead to better communication, collaboration and service to the parishes, schools and faithful. Renting is expected to provide cash savings to the Archdiocese, considering the amount of needed deferred maintenance to the buildings we currently occupy.

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 70 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.

For the second straight year, because of our ongoing Reorganization, the Archdiocese, in consultation with the Archdiocesan Finance Council and Corporate Board of Directors, filed a motion with the Bankruptcy Court, and was granted approval, to allow our independent accounting firm to perform Agreed Upon Procedures on our financial statements for FY 2016. 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 the Audit and Risk Assessment Committee of the Corporate Board and our independent accounting firm, and they 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 of release promptly after completion of our financial statements and auditor’s report.

Financial Condition

For the year ended June 30, 2016 (our FY 2016), we generated a profit from Operations before Special Issues Expense of $2,165,075 as compared to a loss from Operations before Special Issues Expense of $464,014 in FY 2015. Our loss from operations in FY 2016 was $5,772,467 and compares favorably to a loss of $6,401,017 for FY 2015. Special Issues Expense was $7,937,542 and $5,937,003 in 2016 and 2015, respectively.

The Special Issues Expense of $7,937,542 incurred by the Archdiocese during 2016 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, we are 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 Bankruptcy Reorganization.

Our legal counsel has spent hundreds of hours working with numerous insurance carriers who issued policies to the Archdiocese over the past seven decades. We are working closely with the insurance carriers to determine coverage for claims and to find equitable insurance settlements for abuse claims. Special Issues Expense is substantial, but necessary in order to achieve the goal of obtaining fair compensation for sexual abuse claimants. We recognize that we cannot sustain this level of spending for Special Issues Expense indefinitely and that is why it is imperative that we negotiate a fair resolution to this Reorganization in the near term. While Special Issues Expense to date is significant, this spending has resulted in the Archdiocese’s insurance carriers contributing almost $100 million into the Plan of Reorganization and has moved the process closer to resolution.

Revenue

Click on chart and table images to view enlarged graphics.

Total Operating Revenue in 2016 was $20,780,084 as compared to $22,483,188 in 2015. The major reason for this decline is a decrease in Contributions and Fees and Program Revenues, offset by a slight increase in Parish Assessments and Other Income. Fees and Program Revenues decreased as a result of lower revenue generated from The Catholic Spirit, and Other Income increased due to a court approved settlement with a software vendor.

Parish Assessments, our primary source of revenue, are generated from the 187 parishes within the Archdiocese, increased by 4.1 percent to $14,826,794 in 2016 from $14,246,426 in 2015. Assessments are calculated and billed on a two-year lag which means the parish financial results for the years ended June 30, 2014 and 2013 formed the basis for the Parish Assessments revenue for the years ended June 30, 2016 and 2015, respectively. Assessments increased as a result of increased parish income and an increase in dollars received from capital campaigns.

Operating Expense

Our Operating Expense, without Special Issues Expense in 2016, totaled $18,615,009 as compared to $22,947,202 in 2015, an 18.9 percent decrease. The decrease is due to the significant expense reductions in Program Service expenses including personnel reductions implemented in November 2014 which the full year impact was realized in 2016. These reductions were necessary to enable the Archdiocese to continue to operate knowing that Special Issues Expense would be significant and required. Every Program and Support Service category saw a reduction in expenses from 2015 to 2016.

Non-operating Activity – Gain on Sale of Assets

As previously mentioned, the Archdiocese sold three properties in 2016. These sales resulted in cash received of approximately $7,849,000 and a book gain from the sales of $4,266,719.

Non-operating Activity – General Insurance Program

The General Insurance Program of the Archdiocese of St. Paul and Minneapolis provides comprehensive, uniform commercial general liability and workers’ compensation coverage to all of the parishes, Catholic schools and certain other Catholic entities within the Archdiocese, as well as the Chancery Corporation. 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 surplus from operations of $3,090,775 in 2016 as compared to a deficit from operations of $846,211 in 2015. The increase year-over-year was due to an increase of premiums from participating parishes, schools and other Catholic entities from July 1, 2015, through June 30, 2016, and lower than expected 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 loss in 2016 and a slight income in 2015.

Financial Position

Net Assets of the Archdiocese were $26,739,817 on June 30, 2016 as compared to $25,479,177 in 2015, a $1,260,640 or 4.9 percent increase as a result of the Statement of Activities Changes in Net Assets in 2016. The increase in Cash to $18,092,712 in 2016 from $15,304,260 in 2015 is the result of the sale of properties and the deficit from operations of $5,772,467 due to Special Issues Expense. Of the total Cash on June 30, 2016, of $18,092,712, $3,366,138 represents Unrestricted Cash and $4,148,990 is Board Designated. Cash Restricted by the Bankruptcy is $7,855,560 and Cash Restricted by Donors is $2,722,024. The availability of Cash for operations will be determined at a future date by the U.S. Bankruptcy Court.

The significant decrease in Land, Property and Equipment from $8,207,566 to $4,054,110 is due to the sale of the three properties. General Insurance Program Assets increased as a result of an increase in cash due to the increased premiums and lower than expected claims.

It is important to understand that the value of the assets and liabilities on the Condensed Statements of Financial Position are not 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.

Looking forward

The Archdiocese is hopeful that our Plan of Reorganization will be quickly approved so this local Church is able to continue to carry out its core mission of spreading the Gospel message of Jesus Christ. I continue to be thankful to all the clergy, lay leaders, staff, volunteers, parishioners and others throughout the Archdiocese for their commitment to God’s people during these challenging times of uncertainty. It is only together that we will be strong enough to chart a new course for this local Church to healing and reconciliation.