Good News: ECUSA Did Not Mortgage 815; Bad News: It Pledged its Endowment Instead

When I reported in October of last year about the (then) latest meeting of the Executive Council of ECUSA in Salt Lake City, I had only the story posted by ENS about the meeting to go on. That story contained the following description of a Resolution passed by the Executive Council:

By way of a related resolution proposed by [the Finances for Mission Committee], the council approved borrowing of up to $60 million to refinance $46.1 million in debt that comes due at the end of this year. The $37 million renovation loan [to upgrade the headquarters at 815 Second Avenue] makes up the bulk of that amount. In addition, close to $10 million was spent on property in Austin, Texas, as a potential site for relocating the Archives of the Episcopal Church. The resolution said that the borrowing authority is also meant "to provide continuing working capital and liquidity."

The resolution requires that any refinancing agreements include a mandatory repayment schedule for the $37 million at a fixed interest rate. FFM chair Del Glover told his committee earlier in the meeting that because of past budget decisions, only about $500,000 of the principal has been paid off.

"To the extent that we are not paying debt, we are borrowing money to do the ministry of the church," he said.


The resolution calls for mortgaging the Episcopal Church Center in Manhattan and securing the rest of the borrowing with unrestricted endowment assets. The current debt is in the form of a line of credit.

(Emphasis added.)






Thus Executive Council gave the Treasurer of the Church the authority to borrow up to $60 million to pay off the $47 million already spent on renovations and acquiring land for the Archives, and to secure that debt with a first mortgage on the property at 815. And my post covering the meeting assumed that is just what the Treasurer would do.

It turns out I was wrong. The only way this fact could be discovered, however, was to wait for the publication of the official minutes of the October 2010 meeting, which appeared only recently, and also for the posting of the annual audited financial statements of the Domestic and Foreign Missionary Society (the actual financial arm of ECUSA -- the New York corporation which holds and spends all the money). To understand what eventually happened, and why, requires a bit of background.

First, please take note of the tiff which the October 2010 ENS story reports took place between the Treasurer, Kurt Barnes, and the subcommittee of Finances for Ministry which looked at ECUSA's total debt -- a subcommittee appointed and chaired by Executive Council (and Audit Committee) member Del Glover:

Finances for Ministry initially discussed the borrowing authority during an Oct. 23 session that grew somewhat heated when Barnes objected to Glover having appointed a subcommittee to look into the refinancing possibilities and the borrowing philosophies behind them. Barnes said he was told that the subcommittee was to be a council of advice for him, but said "the council of advice never invited my opinion, so I don't feel it's a council of advice."

He said that the subcommittee's report did not take into account the work that he and Margareth Crosnier de Bellaistre, the church's director of investment management and banking, had been doing for many months to explore refinancing options and solicit proposals from lenders. "It acts as if we've been asleep," Barnes said of the report.

"The way it was approached, my staff and I absolutely felt that our intelligence or ability was always being challenged," Barnes said. "We give 10 hours a day to this church and then we have other people who say, 'but you don't know what you're doing.' That's our problem and if we have misread it, then I am sorry."

Please remember Mr. Barnes's reference to the work that he and investment manager Margareth Crosnier de Bellaistre had done to explore "refinancing options" and to "solicit proposals from lenders." That work was done independently of Dr. Glover's subcommittee. And after hearing Mr. Barnes's complaint, Dr. Glover not only backed off, but was on the receiving end of a reprimand from the Presiding Bishop:

Glover said that the finance office staff had misread the subcommittee's intent. He said the group, made up of former members of the Joint Audit Committee of Executive Council and the Domestic and Foreign Missionary Society and those with expertise in the area, was in fact offering advice and contacts, not implementing policy. He said the need for the subcommittee grew out of the audit committee's concern about the level of debt the church has and about the payment coming due at the end of the year.

Jefferts Schori told the committee during its Oct. 23 session that the appointment of the subcommittee "points to a large issue in our system."

"The job of Executive Council is to set policy, not to implement it and that's where the rub has come," she said.

"It denigrates the staff, that's not helpful," she said of the creation of the subcommittee, adding that "it overreaches the authority of this committee."

"I think people have gotten past the anger and the insult," she told Glover, "but let's not have it happen again."

"It overreaches the authority of this [Executive Council] committee", she said. Really? The Church needs to borrow $60 million and a Committee of its Executive Council cannot inquire into the options without having its hands slapped?

To read between the lines here: the Treasurer of the Church, like all of the staff at 815, works for the Presiding Bishop, not for the Executive Council. When she tells him to "find money for litigation", his job is not to ask "Where?", but rather: "How much do you need?" And in exchange for such due obedience, she protects him from all incursions into his territory by the likes of the Executive Council -- who only imagine that they run the show when General Convention is not in session.

No, this is the Presiding Bishop's show -- lock, stock, and barrel. If the Church needs money to fund her agenda, then it will jolly well have to supply it, without any interference from the Executive Council. The Church is extraordinarily wealthy, with over $140 million in unrestricted securities and investments, the gifts of innumerable donors over the centuries. And in recent years it has not been shy about borrowing against the endowment to provide it with working capital for the Presiding Bishop's ongoing litigation agenda.

Thus it should now come as no surprise to learn that, in a face-off between the Committee's alternatives and those explored by the Treasurer and his investment manager, the latter prevailed. The headquarters building did not have to be mortgaged; the Treasurer simply ponied up more of the endowment as collateral for two new lines of credit. The audited financial statements for 2010 tell the tale (note that I have converted the auditors' numbers in thousands to the real figures in millions):

In early 2011, the Society completed new credit facilities to replace the previous line of credit with the Bank of New York. The new credit facilities are summarized below. At April 30, 2011, $46,340[,000] was outstanding of the $62,000[,000] total facilities available.

In January 11, 2011, the Society obtained a $37 million term loan secured by DFMS’s investment in unrestricted marketable securities, from U. S. Bank, to be used primarily for working capital and other business purposes. The facility is structured as a 5 year loan with a fixed interest rate and annual repayments on a 25-year schedule. Interest is payable monthly; annual principal of $1,480[,000] is payable on each anniversary date through 2016. If not extended or renegotiated, unpaid principal will be due in 2016. At April 30, 2011, $37,000[,000] was outstanding.

The $37 million loan was used to repay the bulk of the amount that had been previously borrowed to renovate the headquarters at 815, and for other working capital. As is typical of such projects, its original cost had been approved and budgeted at just under $30 million. And the then brand-new Treasurer, Kurt Barnes, had a different idea of what the costs would be, and of how the Church would repay the loan. As he was quoted in Episcopal Life on July 1, 2004:

Kurt Barnes, the church’s new treasurer, said the facts had won over the skeptics. “We worked with architects and engineers. We honed down the costs.”

He said “worst case scenarios” were developed, using conservative income estimates and the maximum interest that might be anticipated on the loans for finance the renovation. That amount totaled $29.9 million. “Yes, you could defer the project,” he told the council. “But it will cost more, as much as two to three times more.”

It is proposed to finance the project with 100 percent bank financing amortized over 30 years. The annual cost would be close to $1.9 million per year, offset by expected income from leasing space.

So much for that plan. The 30-year loan never materialized, and the Church took out a three-year loan instead, then refinanced it again in 2007, so that it was due and payable at the end of 2010. The other $10 million of the earlier amounts borrowed, which had been used to acquire property in Austin for the future expansion of the Archives, was repaid in April of this year by obtaining another loan twice that size from a different bank (quoting again from the notes to the 2010 audited statements):

Also on January 11, 2011, the Society obtained a one-year $5 million revolving credit facility from U.S. Bank. The facility, which is unsecured, bears interest based on the Eurodollar rate plus 75 basis points. Interest only is payable monthly. At April 30, 2011, none of the facility had been used.

On April 5, 2011, the Society obtained a $20 million revolving credit facility, secured by DFMS’s investment in unrestricted marketable securities, from Bank of America Merrill Lynch, to be used primarily for working capital and other business purposes. The facility bears interest based on the Eurodollar rate plus 1.0%. Interest is payable monthly. The revolving credit may be drawn and repaid at any time through April 2016. If not extended or renegotiated, unpaid principal will be due in 2016. At April 30, 2011, $9,340[,000] was outstanding.

So we see that, in the end, the Treasurer's negotiations and loan solicitations produced the arrangements which were implemented earlier this year -- without the need of mortgaging the physical headquarters. Note, however, that the terms of the loans arranged do not exactly match the criteria approved by the Executive Council in its Resolution: that "any refinancing agreements include a mandatory repayment schedule for the $37 million at a fixed interest rate." And as the October 2010 Executive Council minutes spell out, the price of that alternative is to tie up at least half of the Church's unrestricted investments (p. 17):

The $60 million requested amount represents 43% of the $140 million in unrestricted endowment assets available to the Society at 9/30/10.

That 43% figure (the result of dividing 60 by 140) is rather misleading. For as disclosed in the financial statements, the loan terms require that 133% of the loan amount be maintained as collateral if it consists of equities (stock) or bonds, and 111% of the loan amount if the collateral is cash or cash equivalents (CD's etc.). And as we also just saw, the Treasurer arranged for $62 million of credit facilities, not just $60 million -- although of that total, $5 million is unsecured. So, if bonds or stocks are the identified collateral for the remaining $57 million, the Church would have to set aside $76 million of its unrestricted endowment as collateral. That represents approximately 54% of the total -- not 43%, as reported to the Council.

One has to question the soundness, as a simple business proposition, of borrowing one's working capital for an enterprise whose budget is shrinking. The Church is a non-profit entity; its "revenues" are mainly donations -- although Government payments to it for running Episcopal Migration Ministries have increased significantly in recent years ($15.8 million in 2010, up from $11.4 million in 2009). Ordinarily, working capital is used to expand production facilities, in order to be able to meet increased demand -- and the idea is that any amounts borrowed will be repaid out of increased revenues from the ability to make and sell more products. No such parameters apply to the Church's case.

Indeed, looked at from the standpoint of voluntary contributions, the Church's revenues are declining as the Average Sunday Attendance and plate and pledge figures decline in tandem. Contributions from Dioceses went from $32 million in 2009 to $27 million in 2010. Moreover, the auditors' description of the credit facilities does not include any suggestion of how the Church intends to repay them. The interim amounts being paid on principal are insignificant until the full amounts fall due in 2016. At that time the loans will once again have to be renegotiated or extended, and the Church's level of borrowing will continue as before.

In short, mortgaging its headquarters will be the least of ECUSA's worries in the short term. But without a determined plan to retire its total debt in the next ten years, ECUSA will either have to sell the building, or else sell off around half of its unrestricted endowment. Borrowing money to finance litigation and other non-church-like ventures, and then asking for voluntary contributions to repay the debt, is not a Christian way to manage a church's affairs.

Think of the Roman papacy in the 16th and 17th centuries. It seems that the more enmeshed ECUSA becomes in secular concerns and their related activities, the less and less remains of a Church of Christ. (For anyone who wants to see the evidence, a close read of the latest minutes from the Executive Council will demonstrate this, as I will discuss in a subsequent post.)

In short: where ECUSA is concerned, the temporal bids to overwhelm the spiritual.