Contextual Background

In July 2013, the Archdiocese of Philadelphia published audited financial statements for the fiscal year ended June 30, 2012. Those financial statements disclosed an overall $39.2 million operating deficit for that period inclusive of non-recurring credits and charges. When those non-recurring items were excluded, the result was a core operational deficit of $17.6 million. Additionally, several very significant and ongoing balance sheet liabilities that measure in the hundreds of millions of dollars were detailed.

These financial statements were 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. 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.

Action Steps Taken by the Archdiocese to Improve Liquidity, Reduce the Deficit and Address Balance Sheet Liabilities

Beginning in the summer of 2012 a series of steps were taken to begin to remedy Archdiocesan fiscal challenges. The Archbishop's residence along with a property in Ventnor, New Jersey, were both sold to provide necessary immediate cash flow. Many other actions followed including a reduction of 25% of the workforce at the Archdiocesan Pastoral Center in order to stem the operating deficit.

Additionally, an evaluation of various Archdiocesan real estate assets and operating entities was undertaken. This evaluation focused on assets that could potentially be used to remedy the unfunded balance sheet obligations. In August of this year, it was announced that the Archdiocese would market its six nursing homes and one assisted living facility for potential sale in addition to pursuing an outsourced management agreement and lease for its 13 cemeteries. Such an agreement regarding the cemeteries was reached and made public in late September. In November, it was announced that the Lay Employees Retirement Plan (LERP) would be frozen June 30, 2014 and that a new, defined contribution plan would be implemented for eligible employees at that time to assist them in retirement.

None of those measures were taken lightly, but all were essential. In order for the Catholic Church to maintain a viable presence in the Philadelphia region and provide for all those in need through its various ministries, it must re-establish a firm financial foundation.


Comparative Operating Results: Fiscal Year 2013 Versus Fiscal Year 2012

Archbishop Charles J. Chaput, O.F.M. Cap, said "Since my arrival in Philadelphia, we've worked hard to be transparent about the financial health of our local Church. We'll continue to do so. The Church is a steward. Her resources ultimately belong to her people. It's the duty of the Archdiocese to ensure that all of our ministries are operated in a fiscally responsible way."

He continued, "The Church is about mission, not material resources; but mission depends on good financial health. As our financial statements show, we're making progress. We still have a long way to go, but we'll get there together."

The abbreviated analysis presented below compares the "Change in Net Assets Before Other Items" for fiscal years 2013 and 2012. The "as reported" surplus of $3.9 million in fiscal year 2013 compares to an "as reported" deficit of $39.2 million in fiscal year 2012. The final portion of the analysis provides a comparison of each fiscal year after adjusting for the impact of items that are non-recurring in nature. All figures are in millions of dollars. Endnotes are provided to explain selected line items.

	Fiscal Year 2013	Fiscal Year 2012
Change in Net Assets Before Other Items	$3.9	($39.2)
Non-Recurring Credits
Net Gain on Sale of Real Estate Asset:	(10.3)	(15.8)
Gain on Ventnor Sale Released from Restrictions	(2.7)	-
Contribution from Cemeteries Office	(2.0)	(2.0)
Fidelity Insurance Recovery	(0.7)	-
Investment Gains	(0.5)	-
Non-Recurring Charges
Increase in Self-Insurance Reserve	-	13.0
Interest Rate Swap Loss	-	8.9
Investment Losses	-	1.8
Increase in Reserve for Loans	1.9	-
One Time Pledges/Subsidies	2.9	-
Legal and Professional Fees	1.1	11.9
Recurring Deficit Including Depreciation Expense	($6.4)	($21.4)
Depreciation Expense	1.5	3.8
Recurring Deficit Excluding Depreciation Expense	$ (4.9)	$ (17.6)

The recurring core operational deficit of $4.9 million for fiscal year 2013 compares favorably to the $17.6 million experienced in fiscal year 2012. It is expected that the core operating deficit for fiscal year 2014 will remain below $5 million. It is the goal of the Archdiocese to eventually eliminate the core operational deficit.

Status of Significant Balance Sheet Liabilities as of June 30, 2013

As previously disclosed in the financial statements for the fiscal year ended June 30, 2012, the Archdiocese faces several, significant underfunded balance sheet liabilities. Those obligations included the following: The Trust and Loan Fund, The Insurance Fund, The Lay Employees' Retirement Plan and the Priests' Pension Plan. Current information on the status of each of these items is provided below.

Trust and Loan Fund

Included in the financial statements for OFS are all assets and liabilities of the Archdiocesan Trust and Loan Fund. The Trust and Loan Fund is a cooperative deposit and loan program established for the benefit of parishes and to assure continuation of the ecclesial goals of the Archdiocese and the parishes. If a parish deposits funds in the Trust and Loan, it receives a competitive interest rate. In turn, these funds are loaned by the Fund to other parishes for construction and other projects. As of May 31, 2012, the Archdiocese executed a promissory note to the Trust and Loan Fund in the amount of $78.9 million, which represented the excess of deposits over assets at May 31, 2012. As of June 30, 2012, deposits in the Trust and Loan Fund exceeded fund assets - excluding the impact of the promissory note - by $82.0 million.

Subsequent to June 30, 2012 the promissory note has been amended to increase the principal amount to $82.0 million. 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 Trust and Loan collateral transactions will be deposited into the Trust and Loan Fund, 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, 2013 the unfunded obligation in the Trust and Loan Fund was improved slightly over fiscal year 2012's $82 million as noted below. All figures are in millions of dollars.

Deposits	$ 172.6 *
T&L; Fund Assets (excl. promissory note & related party receivable )	92.8
Excess of Deposits Over Assets	$ 79.8

* includes approximately $300K in Trust and Loan Fund Liabilities.


Insurance Fund

The insurance fund is used to account for the risk management program of the Archdiocese. As part of the risk insurance program, levels of self-insurance risk are retained. As of June 30, 2013 insurance related liabilities exceeded dedicated insurance assets as illustrated below. All figures are in millions of dollars.

Insurance Related Liabilities:	$47.6
Insurance Related Assets (excluding pre-paid expenses):	17.2
Excess of Liabilities Over Assets:	$30.4

When compared to the fiscal year ended June 30, 2012, this number has remained unchanged.

Lay Employees' Retirement Plan

The Lay Employees' Retirement Plan (LERP) is considered a multi-employer plan 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 plan liability exceeds plan assets is a liability of the Archdiocese. As of June 30, 2013, the liabilities of the LERP exceeded plan assets by $142 million. For the fiscal year ended June 30, 2012, the liabilities of the LERP exceeded plan assets by $152 million.

Earlier this fall, the Archdiocese announced that it would freeze the LERP effective June 30, 2014 and implement a new, defined contribution plan for eligible employees effective July 1, 2014. While the funding level is sufficient to meet the current and medium-term benefit payments, action was taken to ensure that the Plan can meet its long-term obligations to future retirees. No current or former employee experienced a loss or reduction of vested benefit as a result of this action. More information regarding that announcement can be found at https://www.archdiocese-phl.org/press%20releases/pr002266.php.

Priests' Pension Plan

The Priests' Pension Plan is also considered a multi-employer plan 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 plan liability exceeds plan assets is a liability of the Archdiocese. As of June 30, 2013, it is estimated that the Priests' Pension Plan liabilities exceeded plan assets by approximately $92 million. For the fiscal year ended June 30, 2012, the liabilities of the Priests' Pension Plan exceeded assets by approximately $90 million.


Looking Forward

The core operating deficit for fiscal year 2013 of $4.9 million was greatly improved relative to fiscal year 2012's deficit of $17.6 million. Fiscal year 2014 is expected to show further improvement. The Archdiocese is committed to eliminating the core operating deficit completely in the near future.

The Archdiocese remains focused on the balance sheet issues noted above. As previously announced, the Lay Employees' Retirement Plan will be frozen effective June 30, 2014 and a new, defined contribution plan will be established effective July 1, 2014 to assist employees in retirement. The Archdiocese will continue to make contributions to the plan after the freeze date. It is projected that the plan will be fully funded in 20-30 years.

It is hoped that closing on the previously announced transaction regarding Archdiocesan cemeteries will occur sometime in early 2014. The Archdiocese plans to use $30 million from the approximately $53 million in proceeds expected at that time for the Trust and Loan Fund shortfall. The remainder will be split equally between the Insurance Fund and the Priests' Pension Fund.

One additional update concerns the Archdiocesan property designated as the North Parking Lot of the Archdiocesan Pastoral Center. It had been previously disclosed that this parcel, which includes the Holy Family Center office building and extends the length of Vine Street from 17th Street to 18th Street, was being marketed for sale. Since the Archdiocese was not able to conclude a satisfactory transaction, it has been decided to take this property off of the market for the time being.

At the present time no further information on other potential transactions, including the nursing homes, is available. In keeping with past practice, announcements will be made publicly as transactions are completed.

Additional Financial Statements for the Fiscal Year Ended June 30, 2013

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 will include financial statements for individual parishes. All parishes are independent and autonomous entities.

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Editor's Note:
Complete copies of the audited financial statements for the Office for Financial Services for the fiscal years ended June 30, 2013 and June 30, 2012 can be found at www.CatholicPhilly.com.

Endnotes


i In FY 2013 the amount represents the gain on the sale of the Archbishop's residence; in FY 2012 the amount includes gains on the sales of the Northeast Catholic and Cardinal Dougherty High School properties.

ii The gain on the sale of the property known as "Villa St. Joseph by the Sea" in Ventnor, New Jersey was approximately $4.2 million. This amount was accounted for as a "Temporarily Restricted" gain and is reflected as such on the Statement of Activities and Changes in Net Assets for the year ended June 30, 2013. The proceeds from the sale are to be used for the benefit of Villa St. Joseph in Darby, Pennsylvania, a residence for retired Archdiocesan priests. Approximately $2.7 million of the gain was used for that purpose in FY 2013.

iii The $2.0 million annual contribution from the Cemeteries Office will cease after FY 2013.

iv The $2.9 million includes: $1.5 million of transitional support - $750K in FY 2014 and $750K in FY 2015 - committed to the Independence Mission Schools, a non-profit organization managing 14 Catholic elementary schools; $1.0 million pledged to the World Meeting of Families event to be held in September 2015; and $370K representing the outstanding commitment to the St. Martin de Porres Catholic elementary school.

v In fiscal year 2013 the $1.1 million in legal and professional fees is comprised of the following:

	(in millions)
Financial and legal costs incurred in connection with potential transactions	$ .5
Fees incurred for supplemental finance office staffing	.3
FY 2012 financial audit over-run costs	.3
	$ 1.1

In fiscal year 2012 the $11.9 million in legal and professional fees is comprised of the following:

	(in millions)
Investigation of actions by former CFO	$ .5
Investigations related to Priests on Administrative Leave	4.7
Fees associated with Independent Legal and Financial Assistance/Review; External Debt Retirement; and Criminal Trial	6.7
	$11.9

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Kenneth A. Gavin
Director of Communications
215-587-3747