DIOCESE OF ROCKVILLE CENTRE (“DRVC”)---AN ANALYSIS OF FREE CASH RESERVES AND OPERATING RESULTS AS OF, AND FOR THE YEAR ENDED, AUGUST 31, 2010

BY DICK GRAFER---NOVEMBER 4, 2011

INTRODUCTION AND BACKGROUND

With one immaterial exception the DRVC has now (finally) published all 14 of its audited financial statements for the fiscal year ended August 31, 2010 (June 30 and December 31, 2010 for certain affiliates). As in past years, I have consolidated these financial statements myself since the DRVC does not publish its own consolidated statements for reasons that are unclear. My comments below are based upon an analysis of these statements consolidated by me.

This is the eighth year I have performed this consolidation and analysis, so a little historical perspective may be helpful in understanding the results and why I do it:

  1. I began this analysis in 2003 when the DRVC first published complete audited financial statements in response to a recommendation by the U.S. Conference of Catholic Bishops that all dioceses seek greater financial transparency. Unfortunately, “transparency” does not seem to mean the same to the DRVC as it does to most people. As noted above, no consolidated financial statements and no detailed discussion and analysis thereof are provided. In addition, very little other helpful information is provided. Finally, questions raised by me and others over the past the eight years (and there have been many) have not been answered, and additional information requested has not been provided. So, the process used by me is difficult but one that I believe results in reasonably accurate findings and conclusions. An independent study group confirmed that in 2007.
  2. The reason I began performing this analysis in the first place was that it quickly became apparent that the DRVC possesses an enormous and probably excessive amount of free cash reserves. Free cash reserves (“FCR”) are cash reserves not needed for operations, capital expenditures or future plans. Having a reasonable amount of FCR to protect against surprises is prudent. Having an excessive amount of FCR is irresponsible for a charitable organization that should be using such excessive reserves for its charitable mission.
  3. Although FCR have remained fairly constant over the past eight years (excluding the effect of the 2008-2009 market crash), that doesn’t explain why they were accumulated in the first place and maintained at a level far exceeding maximum generally accepted industry standards. (Note: Even at the current market-reduced level of $130 million, FCR still exceed these maximum standards by a very large amount). Nor does it explain service cutbacks during difficult economic periods when having such excess reserves should make that unnecessary. This is simply not right for an organization that prides itself on its spiritual, charitable and humanitarian mission. To its credit, the DRVC did eliminate $7.8 million of parish insurance assessments in 2007, but that effectively acknowledged I was right about the self-insurance affiliates having excess reserves accumulated on the backs of the parishes over a long period.
  4. The DRVC has consistently disputed my conclusions using weak arguments and refuses to answer my questions or engage in any serous debate about the issues. It did publish an “Explanation of Reserves” on its website and in the Long Island Catholic three years ago, but this “Explanation” was dreadfully lacking in substance.
  5. Although the DRVC has historically had an annual operating deficit, such deficit is usually offset by investment gains in the DRVC’s substantial investment portfolio. Thus, using the operating deficit as a justification for its excess reserves or certain other actions mentioned below is unreasonable.
  6. The notable exception to investment gains offsetting operating deficits was during the 2008-2009 market crash when the investment portfolio experienced a $30 million loss. This led to an overall operating and investment loss. The DRVC responded to this market crash in what appeared to be a knee-jerk reaction, instituting service cutbacks and a program to induce early retirements (the “Voluntary Separation Program”). These actions may have been unnecessary given (1) the great amount of FCR still on hand, (2) the subsequent market recovery and (3) the fact that the size of the operating deficit declined from 2007-2009. I understand that a majority of pastors objected to these actions, which resulted in some revisions and the resignation of the first lay Diocesan COO.

SUMMARY OF 2010 RESULTS

The following table summarizes the consolidated free cash reserves for all DRVC affiliated entities for the past five years. Note that neither the financial statements published by the DRVC or the information presented below include the parishes, Catholic Health Services or Tomorrow’s Hope Foundation; however, it is unlikely that any of these entities possess significant excess reserves.

DRVC Consolidated Free Cash Reserves (in millions)

Year Amount

2005 $177.2

2006  $173.8

2007  $138.9

2008  $122.9

2009  $130.1

The significant decrease in FCR in the 2007-2009 period occurred primarily due to a decline in the value of DRVC’s investment portfolio during the market crash of 2008-2009. The increase in FCR in 2010 occurred primarily due to a partial recovery in that portfolio, a gain on the sale of certain property and a change in accounting principle.

Despite the decrease in FCR to $130.1 million in 2010 from higher amounts in earlier years, FCR remain very high and are still equal to more than 2 ½ years of unfunded operating expenses compared to a maximum recommended industry standard of only 1 year. That’s equivalent to $80 million in excess reserves. In addition, unrestricted net assets equal $246 million, which approximates 5 years of unfunded operating expenses compared to the maximum recommended by the Better Business Bureau (“BBB”) Wise Giving Alliance of only 3 years. That’s equivalent to $96 million in excess reserves. Donors are encouraged by the Alliance not to give to a charity if the charity exceeds this maximum standard, and the DRVC exceeds the maximum standard by a lot.

FCR are directly impacted by the year-to-year change in DRVC net assets. The year-to-year change in net assets consists of two components---operating performance and investment portfolio performance. The following table summarizes the change in DRVC net assets during the past four years by both of these components:

Changes in DRVC Net Assets 2007-2010 (in millions)

2010 2009 2008 2007

(in millions)

Operating (Deficit) Excluding One-time Items $(18.8) $( 5.2) $ (13.3) $(18.7)

Net Investment Gains (Losses) 17.9 (11.0) (18.8) 24.4

Increase (Decrease) in Net Assets $( .9) $(16.2) $(32.1) $ 5.7

As can be seen from this table, the DRVC was essentially break-even in 2010 after two years of decreases in net assets caused by the market crash---$16.2 million in 2009 and $32.1 million in 2008. Obviously, the 2008-2009 decrease in net assets negatively impacted FCR, which, as noted above, decreased from $173.8 million in 2007 to $130.1 million in 2010. Although 2010 was essentially a break-even year, it contained two unusual, offsetting items---a $5.8 million gain on the sale of certain property (included in “Net Investment Gains”) and insurance losses included in the “Operating Deficit”, which were probably of a one-time nature or recoverable in future years from the parishes and ministries. Typically the DRVC adjusts what it assesses the parishes and ministries for insurance losses in subsequent years to eliminate and/or recoup such losses.

RECENT DEVELOPMENTS AND DRVC ACTIONS

In view of the fact that free cash reserves remain very high and net assets have stabilized, recent belt-tightening actions taken by the DRVC (including service cutbacks and the “Voluntary Separation Program”) may not have been necessary. If the purpose was to create efficiencies in order to maintain or expand services, that’s admirable. However, if the purpose was to maintain reserves, that’s not very admirable. So, which is it? Is the DRVC achieving efficiencies in order to maintain services or in order to maintain reserves with a concomitant reduction in services? I can’t answer that question without a lot more information, which the DRVC is generally unwilling to provide. However, the DRVC doesn’t have a great track record when it comes to using its reserves to maintain or expand services in a time of need.

It should be noted that the Voluntary Separation Program may cost the parishes and DRVC $20 million or more in separation inducements before the related benefits are realized. So, unless the related positions are permanently eliminated or filled with lower paid employees, the Program could cost more than it saves, thereby eating into reserves without accomplishing anything. If positions are permanently eliminated, that will probably result in a de facto cutback in services at the wrong time.

In recent years the DRVC has increasingly shifted some of its FCR to newly-created entities such as the Mission Assistance Corporation and Ecclesia Assurance Company. That trend continued to some extent in 2010. Whether this shifting of reserves is done solely for charitable and business reasons or to make the amount of reserves held by the Administrative Offices (DRVC headquarters) less visible is unclear. In any event, these new addresses for the FCR have not changed the fact that they exist or my tracking of them.

The DRVC’s announcement that 100 of 133 parishes are losing money is a concern. Since the DRVC does not publish combined parish financial statements, it’s difficult to know what this means and whether or not some of these parishes can survive without DRVC support, which has generally been minimal in the past. These parish operating losses may be the result of a continuing decline in elementary school enrollment (which requires greater subsidies from the parishes) and/or from the decline in the value of parish reserves invested with Unitas, the DRVC pooled investment fund, which manages parish reserves and lost significant value during the 2008-2009 period. The DRVC recently announced a plan to eliminate and/or consolidate certain schools, which should ease the financial pressure on certain parishes. However, without more information, it’s impossible to determine how effective or impactful this plan will be for those parishes which are losing money.

Have you noticed a common theme in my report this year? Much more information is needed before an informed judgment can be made concerning any of the actions taken by the DRVC. Unfortunately, the DRVC chooses not to publish combined parish or Diocesan financial statements or to provide other helpful information. So it’s impossible to independently and accurately determine the financial health of the parishes on a combined basis or of the Diocese as a whole. So much for transparency!

After the sexual abuse scandal came to light in the early 2000’s, annual Catholic Ministries Appeal collections decreased dramatically from over $15 million to around $8 million. Although such collections have leveled off in the $10-11 million range since then, the lower amount suggests that a large number of Long Island Catholics remain upset about the scandal, have become aware of the size of the FCR and/or are simply unhappy with the financial stewardship of the DRVC. It should be noted that only $2.3 million of the annual Appeal goes to fund the $34 million Catholic Charities annual budget. This is a relatively small amount compared to other dioceses I have examined. How sad given the great work that Catholic Charities does!

OTHER OBSERVATIONS AND CONCLUSIONS

Despite the lack of information provided by the DRVC, I think it’s safe to make the following observations and/or reach the following conclusions based upon my analysis:

  1. Although free cash reserves have declined in recent years (primarily due to the 2008-2009 market crash), such reserves still exceed maximum generally accepted industry standards by a significant amount ($80-96 million).
  1. Operating deficits continue, but they actually declined during the 2007-2009 period and the 2010 operating deficit may be an aberration if the related insurance losses are of a one-time nature or are passed on to the parishes and ministries via higher assessments, which they usually are.
  1. Although significant investment losses were experienced in 2008 and 2009, a net investment gain of almost $8 million was achieved during the longer 2007-2010 four year period. This longer-term trend highlights a good point: Investment losses (and gains) should be viewed in a longer-term context than operating deficits. Consequently, reacting to the 2008-2009 investment losses (which could easily reverse themselves in the future and already have to some extent in 2010) with drastic, short-term actions, which is what the DRVC did, may be unwise, particularly if such actions result in a reduction in services or no real savings.
  1. Despite the apparent declining financial health of the parishes, there is no assurance the DRVC will use its excess reserves to help. Historically it hasn’t provided much financial help to the parishes except for a few loans to struggling parishes, the “Jubilee” forgiveness of parish debt in 2000 and a moratorium on insurance assessments for part of 2007. Consequently, I wonder whether the DRVC announcement about 100 parishes losing money isn’t a subtle attempt by the DRVC to justify the need for its excessive reserves.
  1. The DRVC has provided loans to the parishes to pay for the Voluntary Separation Program, but the operative word here is “loans”, not “grants”. Therefore, the parishes are expected to repay this money even though they didn’t have much of a say in implementing the Program in the first place and may find it doesn’t save them anything if they maintain services at past levels.
  1. The Markey Bill with its one year statute of limitations “window” for filing past sexual abuse claims again failed to pass in Albany, but the DRVC undoubtedly remains hesitant to use much of its excess reserves for additional services or parish support while the prospect of future passage remains. That should not be a reason to reduce services, however, which are now needed more than ever.
  1. There is no reason to believe that future proceeds from the annual Catholic Ministries Appeal will increase from their presently depressed levels. So, FCR will probably not change much in future years. However, the DRVC owns some very valuable property, including the Seminary in Huntington, which it could use to expand services or restore reserves if needed.

FINAL THOUGHTS AND QUESTIONS

In this time of great need, will the DRVC use some of its $130 million in free cash reserves ($80-96 million of which is excessive) to support struggling parishes and maintain or expand services? Will it fulfill the humanitarian portion of its mission? Or will it instead act to preserve its reserves with further belt-tightening around the parishes, ministries and services? Achieving operating efficiencies is a good thing. Recent actions taken by the DRVC, however, seem to have gone beyond that. I hope and pray that the DRVC will weigh future actions of a similar nature against the broader mission of the Church and manage its reserves accordingly.