Catholic Diocese of Spokane, Washington

From the

Official News Magazine of the Diocese of Spokane

(From the May 20, 2004 edition of the Inland Register)

May 3, 2004

Dear Sisters and Brothers in Christ,

The Bishop’s Finance Council wishes to present to you the annual financial review of the Administrative Offices of the Diocese of Eastern Washington. We are a council of 16 lay volunteers and one priest who serve in an advisory capacity to our Bishop on the economic life of the diocese. We are presenting this commentary because of the severity of the diocese’s financial status. During the past year, the financial picture of the diocese has changed significantly. It is important that parishioners understand the challenges facing the diocese. While the numbers presented here are for the fiscal year ending June 30, 2003, and do not include financial data of individual parishes, schools and other entities of the diocese, this commentary will include implications on the broader diocesan community looking forward.

We received the annual audit, as well as the advisory and management letter, from the auditing firm of Langenhorst Norwood & Hopkins CPA’s, P.S. As has been done in the past, the fiscal data of the annual audit of the Administrative Offices of the Diocese of Spokane is presented in this report. In this commentary we will address some of the key challenges facing the diocese, especially the cost of the sexual misconduct litigation.

The operation of the diocese is extremely complex with the sources of revenue coming from the Annual Catholic Appeal, endowed funds, grants, farm income, restricted and unrestricted bequests, investments, fees and trusts. These sources of revenue are used to provide for needed program and service costs of the Bishop’s ministry. This sounds simple, but it is not. For example, suppose the diocese receives a will that grants assets to the diocese for the specific purpose of educating children. Accounting and legal regulations guide us on how to disburse these assets. These are called endowed or restricted funds. They cannot be used for general operational purposes and are not available to settle any lawsuits or judgments against the diocese. If you look at the accompanying financial report, in the Statement of Financial Position you will see that the Total Liabilities and Net Assets is $18,801,818. Most of that is endowed or restricted. All unrestricted funds available for the operation of the Administrative Office of the Diocese are included in the unrestricted and undesignated net assets. These undesignated net assets have a fiscal year ending balance of a negative ($183,964). The ($183,964) balance is the net adjusted acquisition costs of the Administrative Office’s diocesan property at a positive $1,211,047 minus the cumulative operating deficit of the Administrative Offices of ($1,395,011). The Administrative Office of the Diocese’s operating fund has borrowed that money from internal sources to meet its obligations. This deficit will continue to grow for the foreseeable future.

The key challenges facing the Administrative Offices to get this growing deficit under control are: sexual misconduct litigation, a structural deficit in the budget, the rising cost of health care and having a seminary full of future priests. We would like to address each of these challenges.

First, and most significantly, is the cost of the sexual abuse lawsuits against the diocese from the actions of a few priests as far back as 50 years ago. As of April 27, 2004, the diocese had 15 lawsuits against it involving 48 claimants. There are also 17 other claims not yet in suit of which our attorneys are aware. The cases in suit are scheduled to begin to go to trial in November 2004 and continue through most of 2005. The costs to the diocese in these claims are driven by the aggressive actions of the attorneys representing the claimants and it is necessary for the diocese to respond to these actions. While the insurance carriers involved are assisting with litigation costs under a “reservation of rights” on many of the claims, the diocese still has significant monthly litigation costs which vary depending on activity in the lawsuits. Our legal team is telling us that these costs may well go beyond 2005 before they begin to decrease.

Our legal team’s best estimate is that the total litigation cost to the diocese may well be several million dollars. That does not include any amounts which may be required to resolve these cases either through settlements or trial. Funds expended for litigation costs are currently coming from invested income and internally borrowed money, mainly from the diocesan Deposit and Loan Fund. (The Deposit and Loan Fund is the diocesan banking system where parishes deposit their excess monies. Those monies are loaned to parishes and other diocesan entities involved in new or remodeled building programs.) While these legal costs will end with the resolution of the claims at some point in time, the difficulty is that as we borrow more and more money, there is significantly less money invested that will generate a return to offset these costs. The challenge is to find ways to pay back these internal loans in light of significantly reduced investment income.

The amount of these claims is unknown. Diocesan attorneys have advised us that claimants’ attorneys will be providing responses to requests for statements of damages in the next few weeks. Based upon information received to date from the attorneys representing the claimants, we expect those total demands will be for tens of millions of dollars. The claimants and their attorneys are looking to the diocese for this money. To date, the insurance carriers for the diocese have made no commitment to the diocese that they will indemnify the diocese for any amounts paid for resolution of the claims because of various coverage defenses which the insurance carriers are raising under the policies. A major unknown is the potential amount which will be required from the diocese to resolve these lawsuits. While one can look at the annual audit and see assets, in the view of the council, the majority of these assets are endowed and restricted and unavailable to resolve these claims. Parish buildings, parish bank accounts and other assets are not included in the audit of the Administrative Offices, but are also assets of the diocese. There are two questions about these assets:  Since these assets come from the charitable contributions of the parishioners, are the rights of the donors able to be nullified by litigation? Further, could these accounts and parish and school buildings be exposed to liquidation in order to pay for claims? In short, the diocese has very few unrestricted assets available to resolve these claims. It will take serious dialogue between the diocese, all the insurance companies and claimants’ attorneys to eventually resolve the claims. We are well aware of the broad range of stakeholders in this process, including all parishioners, all the children in our parochial schools, all our priests and those abused in the past by a few of the diocese’s priests.

The second key issue is the structural deficit in the budget. An amount of $450,000 was cut from the fiscal 2003/2004 budget and there is still a running operating deficit. For the fiscal 2004/2005 proposed budget we will have to cut another $250,000 to make it balance. To do this we will be looking specifically at fund raising costs and funding of our college level seminarians. This dialogue has just begun and is difficult. It is imperative that the budget be balanced or else there is no hope of ever paying back the internal loans mentioned above. This is not as simple as just mandating it. For example, if cutting $25,000 from fund-raising costs in next year’s 2005 Annual Catholic Appeal results in not achieving the goal by $50,000, then the diocese will have lost more money in lost contributions than saved in cutting costs.

Health insurance! Everyone reading this is aware of the escalating costs of health insurance. Health insurance experts say that average health care cost increases will be approximately 15 percent per year for the foreseeable future. Like every other employer, the current strategy will be to continue to cost share these increases with employees. Hopefully the medical community, state and federal agencies and related health insurance carriers will find a solution in the near future.

The final challenge to the financial operation of the diocese is the blessing of having a seminary full of future priests. In 2001 and 2002, the net cost of operating our seminary programs was about $230,000. With an increase in students, an increase in educational costs, and the devaluation of the dollar, this year’s net cost will be over $600,000. These estimates validate the necessity of the current Seminary Capital Campaign. This campaign is being conducted by the Catholic Foundation of the Spokane Diocese, which is a non-profit corporation of the State of Washington governed by its own Board of Trustees.  It is legally distinct from the Diocesan Corporation. All amounts pledged and raised for this campaign by the Foundation are restricted for the express purposes as defined in the Seminary Capital Campaign and are not available for settlements or judgments. At this writing the campaign is at 72 percent of its goal with a little over $7.2 million pledged. The Bishop and the Chairman of the Seminary Capital campaign, John Moloney, Moloney, O’Neil, Corkery & Jones Inc, are very pleased with the results and are confident we will meet or exceed our goal of $10 million. The people of Eastern Washington have been very generous in supporting the Bishop’s ministry and stewardship.

The preceding observations suggest to us that the diocese is in a serious financial condition, but not a hopeless one. With good management, continued financial support and your prayers, we will weather this storm and emerge a stronger Catholic Church in Eastern Washington.

As members of the Bishop’s Finance Council, we serve the Bishop by representing you, the people of Eastern Washington, and your concerns. We take this responsibility seriously. We feel Bishop Skylstad has provided excellent management and we want to thank him for his support and openness. He and his administration have made all financial information of the Administrative Offices of the diocese available to us. Our Bishop has been faithful in accepting the recommendations of this council.

Some difficult decisions lie ahead. They will take time and require sacrifice from many of us. We seek your continued prayers and support as we proceed to collect and analyze the information necessary to make sound financial recommendations to the Bishop.

Sincerely,

Your sisters and brothers in Christ,

The members of the Bishop’s Finance Council:

Chris Bovey (President)
Pam Barrett
Jim Bowles
Harvey Dubois
Steve Fazzari
Pete Fortin
Patrick Kirby
Paul McNabb
Jerry Monks
John Omlin
Janice Penar (Secretary)
Lucille Simmons
Rev. Eugene Tracy
John Vlahovich

Staff to the Council