Aug 18th 2012 | BOSTON,
NEW YORK AND SAN DIEGO | from the print edition
OF ALL the organisations that serve America’s poor, few do more
good work than the Catholic church: its schools and hospitals
provide a lifeline for millions. Yet even taking these virtues into
account, the finances of the Catholic church in America are an
unholy mess. The sins involved in its book-keeping are not as vivid
or grotesque as those on display in the various sexual-abuse cases
that have cost the American church more than $3 billion so far; but
the financial mismanagement and questionable business practices
would have seen widespread resignations at the top of any other
public institution.
The sexual-abuse scandals of the past 20 years have brought shame
to the church around the world. In America they have also brought
financial strains. By studying court documents in bankruptcy cases,
examining public records, requesting documents from local, state
and federal governments, as well as talking to priests and bishops
confidentially, The
Economist has sought to quantify the damage.
The picture that emerges is not flattering. The church’s finances
look poorly co-ordinated considering (or perhaps because of) their
complexity. The management of money is often sloppy. And some parts
of the church have indulged in ungainly financial contortions in
some cases—it is alleged—both to divert funds away from uses
intended by donors and to frustrate creditors with legitimate
claims, including its own nuns and priests. The dioceses that have
filed for bankruptcy may not be typical of the church as a whole.
But given the overall lack of openness there is no way of knowing
to what extent they are outliers.
The retirement funds for Wilmington, Delaware, were largely lost
when it settled sex-abuse claims for $77m in February 2011. Those
funds had been tossed into a pooled investment account that also
contained parish investments and funds for cemeteries and the
education of seminarians. The Eastern United States province of the
Passionists, a missionary order, has diverted retirement funds to
cover operating expenses. In a bid to stave off bankruptcy it has
sold off property, including a 14-acre piece of New York
waterfront, and made an unorthodox investment in a Broadway show,
“Leap of Faith”. It flopped.
In a public company, this type of thing would attract regulatory
scrutiny. In the church, retirement is still largely in the gift of
the bishop. Retirement plans for priests are typically set up as
diocesan trusts rather than proper pension funds with structured
benefits. They do not fall under the Employee Retirement Income
Security Act of 1974, the law that establishes standards for plan
trustees and remedies for beneficiaries, including access to
federal courts. Priests thus have no recourse to law if they are
hard done by. Nor, as a matter of course, can they take their
pensions with them if they leave for another diocese.
Richard Vega, who recently stepped down as president of the
National Federation of Priests’ Councils, estimates that 75-80% of
clergy pension schemes in America are underfunded. He says that
only a small minority of priests will have set aside enough of
their net average salary of $25,000 a year to cover themselves.
Others will be less fortunate.
The clergy and its creditors
The principle of separation between church and state in America
means that religious groups are not required to file tax returns,
list their assets or disclose basic facts about their finances.
Some dioceses do publish accounts, but these tend to provide an
incomplete picture. Though lawyers for dioceses facing bankruptcy
have fought to keep most financially sensitive documents sealed,
the process has forced the church to let in unaccustomed light.
The documents that have been disclosed reveal that some bishops in
the bankrupt dioceses presented the diocesan funds of parishes,
schools, hospitals and retirement accounts as separate when they
were really simply book-keeping entries in the same pooled
investment account. The diocese of San Diego, for instance,
reported to the bankruptcy court that it had over 500 accounts. But
these were merely entries in a “Parish, School Diocese Loan Trust
Account”, maintained in a single bank account at Union Bank of
California.
Such pooling saves on administrative costs and allows dioceses to
use a surplus in one area to cover shortfalls in another, often a
legitimate course of action. But it has presented problems when it
comes to working out which assets belong to whom in bankruptcy
proceedings.
The vast majority of parishes that commingled their funds with
those dioceses now in bankruptcy lost all their investments. In
some cases they were misled into believing that the money would be
kept separate from the main diocesan funds, and thus safe in the
event of bankruptcy. The judge in the Wilmington bankruptcy,
Christopher Sontchi, said parishes that had suffered this fate had
grounds to sue the diocese for breach of fiduciary duty. None
has—but that is hardly surprising, given that the bishop and the
chancellor of the diocese sit on the five-member board of trustees
of each parish.
Some parishes were more careful than others in ensuring their funds
were handled properly. According to a document in The
Economist’s possession, a parish priest in Wilmington wrote to
the diocese: “Find enclosed a cheque for $1,000,000 to be invested
in [the parish of] St Thomas’s name in the diocesan account. It is
my understanding that if the need arises, this is and always will
be available for parish use. If this is not the case, please return
it and I will put it under my mattress for safe keeping.” The
diocese cashed the cheque, apparently depositing it in a general
cash account. The parish lost the money when the diocese struck a
sexual-abuse settlement. By contrast St Ann’s parish, also in the
Wilmington diocese, wired its deposits directly into a segregated
investment account at Mellon Bank rather than to the diocesan cash
account at Citizen’s Bank. Its trustees also insisted on drafting a
special agreement stipulating that funds provided to the diocese
were held in trust.
Plaintiffs’ lawyers have raised questions about financial transfers
in dioceses threatened with bankruptcy. These tend to go the other
way—moving money out of diocesan accounts and into parish accounts,
trusts of various sorts and any other receptacle at hand. According
to an independent report commissioned by a bankruptcy judge, at one
point priests in San Diego were taking cash out of accounts and
putting it in safes in the rectories because they wanted to keep it
out of reach of plaintiffs. Nobody becomes a priest, monk or nun in
order to spend their professional life as a financial manager, so
no doubt part of this money shuffling is down to innocent
incompetence. But the church does shift between considering all
assets as part of a single pool when that suits, and claiming that
funds have always been separate and ring-fenced when they are
exposed to claims.
Creditors in the Milwaukee bankruptcy case, which is still in
progress, have questioned the motives behind a $35m transfer to a
trust and a $55.6m transfer from archdiocese coffers to a fund for
cemeteries. Cardinal Dolan, who was Archbishop of Milwaukee at the
time, authorised both transactions. The creditors think the
movement of such large amounts had more to do with shielding cash
from sexual-abuse victims than with the maintenance of graves,
calling the manoeuvre fraudulent. Cardinal Dolan’s office responded
to questions about these allegations by pointing to blog posts in
which he described them as “baloney” and defended the transfers as
“virtuous, open and in accord with the clear directives of the
professionals on our finance council and outside auditors”.
As “debtors in possession”—entities that have filed for bankruptcy
yet retain their assets—bust dioceses have an obligation to enlarge
their assets to satisfy their creditors. On the contrary, “we have
seen a consistent tactic of Catholic bishops to shrink the size of
their assets, which is not only wrong morally but in violation of
state and federal law,” says Ken Brown of Pachulski Stang, a
California law firm that has represented creditors in eight of the
ten Catholic bankruptcy cases.
In a particularly striking example, the diocese of San Diego listed
the value of a whole city block in downtown San Diego at $40,000,
the price at which it had been acquired in the 1940s, rather than
trying to estimate the current market value, as required. Worse, it
altered the forms in which assets had to be listed. The judge in
the case, Louise Adler, was so vexed by this and other shenanigans
on the part of the diocese that she ordered a special investigation
into church finances which was led by Todd Neilson, a former FBI
agent and renowned forensic accountant. The diocese ended up
settling its sexual-abuse cases for almost $200m. If it had not
done so, the bankruptcy would have been thrown out of court and the
bishop and chancellor of the diocese and its lawyers might have
faced contempt charges.
Some assets are not listed at all. In a corporate bankruptcy, if
insurance is relevant to the reason for the company’s failure then
its insurance policy has to be listed as an asset. Not so those of
the Catholic Mutual Group (CMG), which stepped up its help for
Catholic dioceses in the mid-1980s—a time when liability insurance
became too expensive as a result of the increase in sexual-abuse
claims. Since the CMG is technically not an insurance company but a
voluntary religious “mutual benefit society”, its policies do not
have to be disclosed as assets in a bankruptcy proceeding, even
though it contributes substantial funds towards settlements.
One way to reduce costs is to reduce the number of parishes. There
are two ways to do this. The first is to merge one parish with
another parish and combine their buildings, congregations and
finances. The second, more controversial way is to “suppress” the
parish, which involves the transfer of all of the assets to the
bishop, who reassigns parish priests as he sees fit. The funds in
the parish bank accounts are placed in the general treasury of the
diocese, as are the proceeds of land sales, none of which is
subject to disclosure. Faced with shortfalls in Boston (where he
was a temporary administrator) and later in Cleveland, Bishop
Richard Lennon suppressed dozens of parishes as part of
reorganisation plans for each of the two archdioceses; given the
pervasive commingling of accounts, some of the money thus
accumulated could have gone to pay operating expenses and, at least
in Boston, court settlements.
The parishioners were unimpressed. Some heckled the bishop when he
visited their parish to celebrate mass. One of the Boston parishes,
St Frances Cabrini in Scituate, Massachusetts, has been occupied
for the past eight years by parishioners who have refused to accept
its closure. They have a roster chart to ensure at least one person
is at the church at any time, so that the archdiocese can’t change
the locks. Some parishes have filed appeals to Rome. In an unusual
move in March, the Vatican reversed the closing of 13 of the
parishes that Bishop Lennon had suppressed.
As well as questionable financial management, the church also
suffers from fraud and embezzlement, according to Jason Berry, an
expert in Catholic finance and author of “Render Unto Rome: The
Secret Life of Money in the Catholic Church”. In March the former
chief financial officer of the archdiocese of Philadelphia was
arrested and charged with embezzling more than $900,000 between
2005 and 2011. Hundreds of priests have been disciplined for taking
more than a little “walking around money” from the collection
basket.
In the corporate world, those who witnessed such malfeasance might
alert a higher authority. But priests make unlikely
whistle-blowers. It is often hard for them to imagine a life
outside holy orders, which could be their fate if they alienated
the bishop who has a hold over their salary, pension and private
life. Would-be whistle-blowers will also be aware that local and
federal authorities are loth to investigate mainstream religious
groups for fear of the political consequences. Assistant United
States attorneys in two different federal districts have pushed the
FBI to investigate concealment, coercion and financial
mismanagement in parts of the church but have got nowhere.
The taxpayer as good Samaritan
Growing financial pressures have encouraged the church to replace
donations from the faithful with debt. According to figures from
the Municipal Securities Rulemaking Board over the past decade,
state and local authorities have issued municipal bonds for the
benefit of at least 50 dioceses in almost 30 states to pay for the
expansion and renovation of facilities that would previously have
been largely paid for through donations. Overall church muni debt
has increased by an estimated 80% over that period. At least 736
bond issues are currently outstanding.
California is the biggest borrower. Although funding for religious
groups is prohibited under the state’s constitution, a series of
court rulings has opened the door to bond issues. Catholic groups
there have raised at least $12 billion through muni bonds over the
past decade. Of that, some $9 billion went to hospitals. In one
case, in San Jose, the money went to buy chancery offices for the
bishop.
The dioceses back their bonds with letters of credit from banks.
Among the most active guarantors are Allied Irish Banks (AIB), US
Bancorp and Wells Fargo. None of the banks was prepared to discuss
the financial terms of these contracts.
Muni bonds are generally tax-free for investors, so the cost of
borrowing is lower than it would be for a taxable investment. In
other words, the church enjoys a subsidy more commonly associated
with local governments and public-sector projects. If the church
has issued more debt in part to meet the financial strains caused
by the scandals, then the American taxpayer has indirectly helped
mitigate the church’s losses from its settlements. Taxpayers may
end up on the hook for other costs, too. For example, settlement of
the hundreds of possible abuse cases in New York might cause the
closure of Catholic schools across the city.
It is not wrong for churches to issue bonds. But, like many other
aspects of the Catholic church’s finances, this should be more
transparent. It is quite possible that church finances are, taken
as a whole, not as bad as the details coming out in bankruptcy
cases suggest. Dioceses and religious orders that go bankrupt
cannot be assumed to be representative. If so, then showing better
management in the rest of the church would do a lot to allay
concern. And increased openness might have the added benefit of
bringing in the acumen of a knowledgeable and concerned laity.
Some influential Catholics are keen to see better management and
more openness and accountability. Leon Panetta, America’s defence
secretary, called for outside oversight of church finances when he
was a director of the National Leadership Roundtable on Church
Management, a position he relinquished in 2009 to become director
of the CIA. Faced with competition from other churches and disgrace
from the behaviour of some of its priests, there has never been a
more important time to listen to such calls, and to invite in the
help and scrutiny that the church’s finances seem so clearly to
need.
NOTE: For more detail on how we calculated the annual income and
spending for the Catholic church in America see here.
http://www.economist.com/node/21560536
RoP,
Why post this article? Are you going to comment on it? What's
your point in this? What is this article supposed to show or prove?
I see you only have ONE post so far. Is this a hit-and-run post
where you create an ID just to post something and then abandon
ID?