Core operating deficit shrinks to less than $500,000; balance sheet issues continue to improve;
Break-even result reported for World Meeting of Families—Philadelphia 2015
Contextual Background
For the fiscal year ended June 30, 2012, the Archdiocese of Philadelphia disclosed a core operating deficit of $17.6 million. Since that time, results have improved significantly as reflected in the graph below. The core operating deficit for the fiscal year ended June 30, 2016 was approximately $300,000.
Analysis of Fiscal Year Ended June 30, 2016
The financial statements discussed below are for the entity designated as the “Office for Financial Services (OFS),” which is the official title for the majority of administrative offices and ministries located at the Archdiocesan Pastoral Center (APC). OFS provides administrative and programmatic support to the parishes, schools, and other related ecclesiastical entities of the Archdiocese. For financial reporting purposes, it is considered a wholly-owned subsidiary of the Archdiocese.
The analysis below presents the “Change in Net Assets Before Other Items” for the year ended June 30, 2016. This amount (i.e. the $12.3 million surplus shaded below) can be found in the Statement of Activities and Changes in Net Assets under the caption “Change in Net Assets Before Other Items” in the “Unrestricted” column. We believe that the analysis presented below provides a meaningful disclosure of results after adjusting for the impact of items that are non-recurring in nature.
The “Recurring Deficit excluding Depreciation Expense” caption above represents what we refer to as our “core” (excludes items of a non-recurring nature and depreciation) run rate deficit.
While the result for the fiscal year ended June 30, 2016 compares favorably to the recent trend noted in the graph above, the Archdiocese believes that the sustainable run rate deficit is still higher and that it will need to take additional actions in the near term in order to achieve a sustainable break-even or better result. It should also be pointed out that while depreciation expense has been excluded in the final total noted above, cash is still needed for some level of capital expenditures for this entity. In 3 of the last 4 fiscal years capital expenditures for OFS have exceeded $500,000.
Discussion of Other Significant Matters
In connection with these recent financial disclosures the Archdiocese is providing specific commentary regarding certain balance sheet obligations. As of June 30, 2016 the following balance sheet obligations remain underfunded:
- Deposit and Loan Program Trust
- Lay Employees’ Retirement Plan
- Priests’ retirement plans
An update as of June 30, 2016 for each of these obligations below.
Deposit and Loan Program
Included in the financial statements for the Office for Financial Services are all assets and liabilities of the Archdiocese of Philadelphia Deposit and Loan Program Trust Fund (“Deposit and Loan Program Trust” or “D&L”). The Deposit and Loan Program Trust is a separate legal entity that provides a deposit and loan program for the benefit of parishes to assure continuation of the ecclesial goals of the Archdiocese and the parishes. If a parish deposits funds in the Deposit and Loan Program Trust, it receives a competitive interest rate. In turn, these funds are loaned to other parishes for construction and other projects.
During the year ended June 30, 2012, the Archdiocese executed a promissory note to the Deposit and Loan Program Trust in the amount of $82 million, which represented the excess of deposits over assets as of June 30, 2012. The promissory note is collateralized by specific pledged real estate assets which are documented in the note. As pledged properties are sold or monetized, net proceeds from these collateral transactions will be deposited into the Deposit and Loan Program Trust, in accordance with the provisions of the promissory note. In the event a transaction generates in excess of $20 million in net proceeds, the Archdiocese has discretion regarding alternative uses for the excess so long as remaining pledged assets are at least equal to the then outstanding principal amount owed.
As of June 30, 2016 the underfunded obligation (i.e. the excess of deposits over assets) in the Deposit and Loan Program Trust was as follows:
As of June 30, 2016 the balance outstanding on the promissory note was $43,532,482, which is greater than the underfunded obligation noted above. Subsequent to June 30, 2016 the Archdiocese completed the sale of a pledged property resulting in proceeds of approximately $1.5 million which were applied to the promissory note and also reduce the shortfall noted above.
The following properties are pledged as part of the promissory note
- Sproul Road property in Marple Township (Delaware County) and
- Manor Road property (Chester County)
The Archdiocese estimates that the value associated with the properties noted above and other pledged properties will be sufficient to resolve the remaining underfunded obligation in the Deposit and Loan Program Trust.
Lay Employees’ Retirement Plan
The Lay Employees’ Retirement Plan (LERP) is considered a multiemployer plan for financial reporting purposes. As such, the assets and actuarially determined liabilities for this plan are not included in the OFS financial statements. The Archdiocese froze this defined benefit pension plan effective June 30, 2014.
While not a direct liability of OFS the amount by which the plan liability exceeds plan assets is a liability of the Archdiocese. The preliminary estimate of the actuarially determined liability for this plan as of June 30, 2016 was $629 million.
When the estimated liability is compared to plan assets available for benefits as of June 30, 2016 (approximately $445 million), the plan’s shortfall is approximately $185 million.
Priests’ Retirement Plans
The Priests’ retirement plans are also considered multiemployer plans for financial reporting purposes. As such, the assets and actuarially determined liabilities for these plans are not included in the OFS financial statements.
While not a direct liability of OFS, the amount by which the plans’ liabilities exceeds assets is a liability of the Archdiocese. As of June 30, 2016 it is estimated that the Priests’ retirement plans’ liabilities (estimated at $98 million) exceeded assets ($85.7 million) by $12.3 million.
Looking Forward
The core operating deficit has improved each year since fiscal year 2012’s deficit of $17.6 million. While the Archdiocese has moved much closer to break-even, it continues to acknowledge that the core deficit needs to be eliminated completely in the very near future. As noted earlier the Archdiocese also does not believe it can improve upon, or even sustain, the fiscal year 2016 result without taking further action. The Archdiocese expects to achieve a break-even result in the fiscal year ended June 30, 2018.
The Archdiocese has also made significant progress against its underfunded balance sheet obligations.
As noted earlier, the Archdiocese estimates that the value associated with properties pledged for the Deposit and Loan Program promissory note is sufficient to resolve the remaining underfunded obligations once those properties are sold.
Going forward remaining issues will be the underfunded pension obligations. The Archdiocese is reviewing opportunities to fully fund the priests’ retirement plans in the very near term. It has also taken the following steps to address the Lay Employees’ Retirement Plan (LERP). That plan was frozen effective June 30, 2014. In calendar year 2015 the Archdiocese completed more than $100 million of lump sum distributions at a rate equivalent to 85.1% of the present value of their normal retirement benefit. During the fiscal year ended June 30, 2016 the Archdiocese made an unplanned contribution of $7.5 million to the LERP and increased the funding rate from 4% of “pension eligible payroll” to 5.9% of “pension eligible payroll effective July 1, 2016.
The Archdiocese will continue to explore ways to reduce the funding shortfall in the LERP and also hopes to make a significant unplanned contribution in the very near term.
Cumulative Results for World Meeting of Families—Philadelphia 2015 from Date of Inception to Fiscal Year Ended June 30, 2016
Last year, the Archdiocese was blessed to host the Eighth World Meeting of Families and the historic visit of Pope Francis to Philadelphia. Archbishop Chaput recently remarked that “The Church, the City, and the people of Philadelphia achieved something astonishing last year. No matter where I go, people from all walks of life still stop me to say that their experience with the World Meeting of Families and the Papal visit was transformational in deeply positive ways. Our efforts were successful beyond expectation. The credit goes to many people from various faith traditions throughout the Delaware Valley: civic and business leaders, law enforcement and first responders, a tireless staff, wonderful volunteers, generous donors, our clergy, men and women religious, and the lay faithful. Together they ensured that the World Meeting of Families would be the sign of hope God intended and that Pope Francis would see the very best of Philadelphia. The experience clearly moved the Holy Father as it did all of us.”
The Archdiocese has published the audited financial statements for the World Meeting of Families—Philadelphia 2015 (WMOF) entity as of June 30, 2016. It is believed that the net assets of $163,000 in the entity at June 30, 2016 will be sufficient for the remaining and necessary wind down activities.
The Archdiocese is pleased to report that the event was successfully managed to a break-even result. The graph below presents a summary of total revenue and expenses for the four year period ended June 30, 2016. This summary was compiled using information from the audited financial statements. The total cost of the World Meeting of Families was approximately $52.5 million. Contributions and grant revenue totaled $45.8 million – versus a stated fundraising goal of $45 million – and as of November 3, 2016 the entire amount had been collected. WMOF and the Archdiocese are extremely grateful to the many generous donors who made this wonderful, grace-filled event possible.
In addition to the $45.8 million generated through fundraising, $6.9 million of additional revenues were realized, most of which resulted from registration and exhibit income related to the World Meeting of Families events held at the Pennsylvania Convention Center prior to the arrival of Pope Francis.
Additional Financial Statements for the Fiscal Year Ended June 30, 2016
The audited financial statements for OFS do not include financial results for the Office for Catholic Education, Catholic Healthcare Services, Catholic Social Services, Saint Charles Borromeo Seminary, Catholic Charities Appeal or the Heritage of Faith—Vision of Hope Capital Campaign as all are separate entities. Audited financial statements for these entities will be published in the coming weeks.
Additionally, none of the reports released by the Archdiocese include financial statements for individual parishes. All parishes are independent and autonomous entities.
# # #
Editor’s Note: Complete copies of the audited financial statements for the Office for Financial Services and the World Meeting of Families—Philadelphia 2015 for the fiscal years ended June 30, 2016 and June 30, 2015 can be found at www.CatholicPhilly.com.
End notes:
[I] The amounts represent the net gains resulting from the sales of several Archdiocesan properties.
[II] The experience of the Risk Insurance and Welfare Benefits Trusts and Deposit and Loan Program Trust should be considered separately and treated as non-recurring. The assets in these trusts are not available for general operating needs.
[III] Ibid.
Contact: Kenneth A. Gavin
Chief Communications Officer
215-587-3747 (office)