January 31, 2003

On January 23, 2003, committee members Frank McGinity and Carol Murray attended the Archdiocese of Los Angeles Santa Barbara Regional Finance Presentation at San Buenaventura Mission. This report is to summarize the findings from the presentation. This report also details questions remaining after our discussion of the presentation at our finance committee meeting on January 28.

Cardinal Mahony gave an introduction of the presentation team and a general overview. He spoke highly of the Synod process, and the pastoral priorities that have emerged. The number one pastoral priority is "evangelization." Other pastoral priorities coming from the Synod process include (in no particular order) youth and young adults, adult formation, worship–Eucharist, Church governance (involvement of laity, regional and Archdiocesan pastoral councils, accountability), and peace and justice.

In response to the Synod process, the Archdiocese is restructuring its budget. Using zero-based budgeting, the highest pastoral priorities will be met first, with other priorities to follow as allowed by the budget. Cardinal Mahony spoke of the economic difficulties facing the Archdiocese, which reflect the realities in the general economy today. The dual issues of the stock market's decline and increases in expenses have now caused the Archdiocese to project an operating deficit for the fiscal year ending June 30, 2003, of $5.7 million. The Cardinal advised the parishes to exercise extreme caution in their spending and hiring, and to expect that economic conditions may result in decreased revenues in the future. He warned that insurance costs are rising dramatically, with property insurance increasing a possible 40%, and liability, health, and workers compensation insurance all seeing 20% increases. His hope is that the Archdiocese will subsidize some of the increase for the parishes, at least at first. However, the parishes will definitely have some increase in their insurance assessments.

Randy Steiner, CFO, presented the Financial Report for the fiscal year ended June 30, 2002. He explained that the financial statements are for the Administrative Office of the Archdiocese, and do not reflect the financial situation of affiliates such as the parishes, schools, Catholic Charities, etc. These entities prepare their own financial statements that are submitted to the Archdiocese and compiled for supplementary disclosure. He also explained that the financial statements do include "construction in progress" up until the time that the project is complete, at which time it is removed from the Archdiocesan financial statement, and becomes a separate affiliate. The Cathedral, for instance, accounts for $189.7 million of the property, plant and equipment on the statement of June 30, 2002. The Cathedral opened in September, 2002, and this amount will be transferred to the new parish, and eliminated from the Archdiocesan statement at fiscal year ending June 30, 2003.

Randy briefly went through the statements with us. Pledges receivable are down. These are pledges for contributions for the Cathedral, and they are down because the pledges have been paid. This is as it should be. Donations and assessments and the annual appeal were up. The $4.6 million of Cathedral expense was not capitalized because the expenses were incurred after the completion of the Cathedral, but before its opening. The entire amount has been repaid after the closing of the fiscal year by Cathedral donations. $3.6 million of expenses were incurred due to the legal fees, settlements, and other costs related to the sexual abuse claims against the Church. There was a $4.8 million negative investment return for the year. The parishes reported an increase in contributions of $5.3 million.

Randy also discussed the "investment pool," which includes a balanced portfolio and an income portfolio. Parishes send their reserves to the Archdiocese, where they are held in trust and invested. The funds are the property of the entities and are not accessible by the Archdiocese. The balanced portfolio is the more risky, designed for long-term growth, while the income portfolio is designed for a safer return, more along the lines of a fixed-income fund. He advised parishes that are anxious because of the losses in the balanced portfolio to review their overall investment strategy and their long-term versus short-term needs before making any changes in their asset allocations.

J. Michael Hennigan then presented a legal overview, reviewing the recent repeal of the Statute of Limitations for a one-year period, beginning January 1. He cites 200-300 cases, with several dating back to the 1930’s and 40’s, dozens from the 1950’s, and the bulk of the cases from the 1960’s and 70’s. The legal efforts of the Archdiocese have brought the plaintiffs together as a group in Los Angeles for mediation. Because this was a finance presentation, the focus of the legal overview was on the financial impact of the crisis on the Church, and on the individual parishes.

According to Mr. Hennigan, The Church’s liability is for how we did our job of protecting victims of abuse. He stated that his analysis of hundreds of files shows that we responded in an effective, swift, unequivocal manner in all cases. Either the offender was removed, placed in treatment, or placed in a "safe" ministry. Hennigan believes all our cases are defensible. He states we have about $150 million in insurance, and expects the losses to be covered by this amount.

However, if his analysis proves to be wrong, he wants the parishes to understand that their parish assets are not accessible by the Archdiocese for payment of these expenses. Parish assets are in the name of Cardinal Mahony, a corporation sole, but he has a fiduciary relationship as trustee for the beneficiaries, that is, the parishes. Canon and civil law protect parish assets under the fiduciary relationship. Also, parish funds sent to the Archdiocesan investment pool are not commingled with Archdiocesan funds. Rather, those funds are under the exclusive control of the parishes. "Together in Mission" contributions are also restricted to the stated purposes. However, it is possible that a parish that had a sexual abuse incident could be liable separately from the Archdiocese, and its assets could thus be at risk.

A Financial Summary was published in the Tidings the day of the meeting. The complete unqualified audit report can be found on the Archdiocesan website at www.la-archdiocese.org. Your questions may be sent by e-mail to FinancialServices@la-archdiocese.org.