Financial Officer Report FY 2017

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, 2017. View condensed financial statements below, as well as the Management Discussion and Analysis and Financial Statements.

Introduction

Fiscal year 2017 began July 1, 2016, and ended June 30, 2017. While the Archdiocese of St. Paul and Minneapolis continues to operate under the uncertainty of the ongoing bankruptcy that began in January 2015, it continues to operate with fiscal responsibility, accountability and transparency.

Our financial priority is the fair, just and timely resolution of the more than 400 claims of sexual abuse of minors against the archdiocese. Some of the claims date back as far as the 1940s, and their impact is real and lasting for the claimants, their families and friends. Archdiocesan leaders continue to meet with some of those who were harmed and seek to understand the impact through review of the accounts of other victims/survivors.

In December 2016, the archdiocese submitted its second Amended Plan of Reorganization to the U.S. Bankruptcy Court, raising our proposed settlement from $130 million to more than $156 million. The plan is funded by more than $122 million from archdiocese insurance carriers, the single highest amount provided by archdiocese insurance carriers in any diocesan bankruptcy to date, nearly $14 million from the sale of available archdiocesan properties and assets, between $5 million and $6 million from the General Insurance Fund, and nearly $14 million from parish insurers. Those funds would be available to claimants upon the court’s approval of the plan.

The financial statements in the following pages show the archdiocese continues to incur legal and professional expenses (referred to as Special Issues Expense), but these expenses are significantly less than last year. This year, the archdiocese incurred $4.8 million of Special Issues Expense, compared to $7.9 million in FY 2016. Attorneys for the archdiocese billed $1 million less, the Official Parish Committee (which represents many of the parishes in the archdiocese) billed $1.5 million less, and the law firm that represented the archdiocese in the civil and criminal cases in Ramsey County billed nearly $600,000 less on a year-over-year basis. The only legal expense that increased in the past year was the amount billed by the attorneys for the Unsecured Creditors Committee, which was $350,000 greater than in FY 2016.

In bankruptcy, the entity that files for reorganization pays the fees of all professionals and attorneys involved. U.S. Bankruptcy Court Judge Robert Kressel has reminded all involved in the case that the longer the process continues, less money will be available to those who have been harmed. That is the guiding force behind our efforts to bring this case to a just and fair resolution as soon as possible. All professional fee requests are subject to review and approval by the bankruptcy court.

Archdiocesan leadership and staff continue to work diligently to be good stewards of the resources entrusted to our care by the faithful through parish assessments and other donations. For the fourth consecutive year, Operating Expenses Before Special Issues Expense declined. Our total Operating Expense Before Special Issues Expense for FY 2017 totaled just short of $18.5 million, down from $18.6 million. Those numbers topped $22.9 million in 2015 and $30.5 million in 2014. This represents a $12 million or 39 percent decrease since FY 2014. The flattening of expenses over the past two years demonstrates the ability of leadership to hold management accountable to controlling expenses.

After selling the Chancery and Archbishop’s Residence for $3.2 million, the Hayden Center for $4.3 million and the Hazelwood property near Northfield for $350,000 in FY 2016 for a combined total of more than $7.8 million, the Dayton Building sold this fiscal year for nearly $900,000. The proceeds from the sale of those properties total almost $8.8 million and are part of the archdiocese’s $156 million proposed settlement for victims/survivors of clergy sexual abuse.

Because of the sale of all offices near the Cathedral of St. Paul, all archdiocesan employees moved into our leased offices at 777 Forest St. in the Dayton’s Bluff neighborhood of St. Paul. We are one of the area’s largest employers and proud to be part of St. Paul’s East Side. There is a spirit of camaraderie and collaboration having all staff members working together in the same building for the first time in decades. This new working environment allows us to serve parishes better and continue the mission of the Church. The archdiocese does that by forming and assigning priests to parishes, hospitals and prisons, as well as supporting parishes in their vital mission of evangelizing and catechizing all Catholics and those who are preparing to join the Catholic Church.

While we support parishes, Catholic schools and other Catholic entities in the 12 counties that make up the archdiocese of St. Paul and Minneapolis, this annual fiscal report does not contain their financial information. That is because, under Minnesota law, they are all independent corporations with completely separate finances and are required to prepare their own financial reports.

In our commitment to accountability and transparency to the Catholic faithful and the public, the archdiocese has released its full audited financial reports annually since June 30, 2013. This is important to Archbishop Hebda, the archdiocesan Finance Council and staff because approximately 70 percent of the archdiocese’s funding comes from parish assessments, which is predominately the result of plate and envelope collections from parishioners at the parishes. People who give generously to this local Church deserve a full accounting of their resources.

For the third 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 CPA firm to perform Agreed Upon Procedures on our financial statements for the Fiscal Year 2017. 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. The Agreed Upon Procedures are significantly less expensive than an audit. 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, 2017 (our Fiscal Year 2017), we generated a profit from Operations before Special Issues Expense of nearly $2.3 million as compared to $2.2 million in FY 2016. Our loss from Operations in FY 2017 was $2.6 million and compares favorably to a loss of $5.8 million for FY 2016 which was the result of Special Issues Expense decreasing from $7.9 million in FY 2016 to $4.8 million in FY 2017.

The Special Issues Expense of $4.8 million incurred by the archdiocese during FY 2017 was significantly less than FY 2016 and was due to what can only be described as a “slow down” in the Reorganization process and the resolution of civil charges in Ramsey County in December 2015 and the dismissal of criminal charges by the Ramsey County Attorney’s Office the following summer. Because the archdiocese filed for bankruptcy in January 2015, we are responsible for paying all legal fees incurred by our legal counsel, the legal counsel representing the plaintiffs or victims of sexual abuse, and the official parish committee appointed by the bankruptcy court.

We are very aware of the mounting Special Issues Expense in our Reorganization, now $16 million since FY 2015 when we filed for bankruptcy. A significant portion of those funds have resulted in archdiocese and parish insurance carriers committing to pay more than $136 million into our $156 million Plan of Reorganization, which would be available upon court approval. That is why we continue to work as efficiently as we are able to end this process and fairly and justly compensate those who have been harmed.

Revenue

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Total Operating Revenue in FY 2017 was $20.7 million, down just more than $50,000 from FY 2016. Parish Assessments, Fees and Program Revenues, and Other Income all decreased, but strong financial markets increased our Investment Income and Contributions increased on a year-over-year basis, and made up most of the difference. The Investment Income was generated by restricted funds which are not available for general operations or contribution into the Plan of Reorganization.

Parish Assessments, our primary source of revenue, are generated from the 187 parishes within the archdiocese, decreased by 2.2 percent to $14.5 million in 2017 from $14.8 million in 2016. Assessments are calculated and billed on a two-year lag which means the parish financial results for the years ended June 30, 2014 and 2015 formed the basis for the Parish Assessments revenue for the years ended June 30, 2016 and 2017, respectively.

Operating expense

Our Operating Expense Before Special Issues Expense in 2017 totaled nearly $18.5 million as compared to $18.6 million in 2016, a 0.8 percent decrease. This continued trend of decline in expenses that began in 2014 illustrates our continuing commitment to control costs whenever possible, look for opportunities to save and operate within our financial means.

Non-operating activity — Gain on sale of assets

As previously mentioned, the archdiocese sold the Dayton Building in 2017. This sale resulted in cash received of approximately $875,000 and a book gain from the sale of $779,000.

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 property, casualty, 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 surplus from operations of $2.1 million in 2017, down from $3.1 million in 2016. The decrease year-over-year was due to an increase in claims during FY 2017 over FY 2016, which had a historically low claim year.

As noted earlier, the General Insurance Program has committed at least $5 million and no more than $6 million to the Plan of Reorganization.

Non-operating activity — Priest Benefits

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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 2017 as compared to a loss in 2016. The income was the result of increased rates charged to participants and slightly lower claims.

Financial position

Net Assets of the archdiocese were nearly $27.3 million on June 30, 2017 as compared to $26.8 million in 2016, a nearly $500,000 or 1.8 percent increase as a result of the Statement of Activities Changes in Net Assets in 2017. The increase in Cash to $20.9 million in 2017 from $18.1 million in 2016 is the result of the cash from the sale of the Dayton Building and the approximately $2.3 million of cash generated from Operations Before Special Issues Expense as this expense was not paid during FY 2017.

Of the total Cash on June 30, 2017, of $20.9 million, $9.1 million represents Unrestricted ($5.1 million) and Board Designated ($4 million). Of the Board Designated funds, approximately $2.8 million has been committed to the Plan of Reorganization. The cash Restricted by Bankruptcy represents the cash proceeds from the sale of our real estate and interest earned on those funds, and the remaining cash of $3.1 million is Restricted by Donors. The categories of Board Designated and Restricted by Donors and their availability for operations will be determined at a future date by the U.S. Bankruptcy Court.

The largest increase in Assets other than Cash was in the General Insurance Program Assets. The balance at June 30, 2017 was $14.1 million, an increase of $2.1 million from the balance of $12 million in 2016 and was due to the surplus generated in the program during 2017. $5 to 6 million of that balance is included in our Plan of Reorganization and the remaining balance is required by the regulatory authority overseeing the self-insured workers’ compensation program and reserves to pay claims. The increase of approximately $4.4 million in Accounts Payable and Accrued Liabilities, Post-Petition, is the result of accrued and unpaid Special Issues Expense during FY 2017.

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. 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 occur through the reorganization process.

Looking forward

The cloud of bankruptcy is great and is a heavy burden for many of us as we complete our day-to-day responsibilities with uncertainty towards the future. It is our hope that the court will approve our Plan of Reorganization in the near term and the local Church can continue to carry out its core mission of spreading the Gospel message of Jesus Christ. At the same time, I believe that the changes and strategies leading up to the filing of bankruptcy and the environment in which we have operated since then, have made us a stronger more unified and transparent Church. First and foremost we continually work to ensure a safe environment for children. Additionally, out of necessity, we are able to provide services with fewer resources, our managers have learned to operate within a smaller means and have become more creative and strategic, and we have built stronger relationships internally and with the parishes.

We will eventually emerge from bankruptcy, and as was well stated by our Moderator of the Curia, Father Charles Lachowitzer, in a recent article in The Catholic Spirit, “We cannot just dust off our hands in that familiar gesture of finishing a project. When civil justice has run its linear process, then the virtue of justice must continue to direct our path.”

These have been challenging and uncertain times for all Catholics, and I want to thank all the clergy, lay leaders, staff, volunteers, parishioners and others within the archdiocese for their commitment to creating a stronger, more unified Church.