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Dealing with excessive reserves at UM general agencies

by Ed Ezaki, CPA - GCFA

Editor’s note: The Rev. Edward F. Ezaki, a pastor in the California-Nevada Annual Conference, is a certified public accountant and a member of the General Council on Finance and Administration (GCFA). At the Fall 1997 meeting of the GCFA Audit and Review Committee, Ezaki recommended that GCFA adopt a policy regarding the excessive financial reserves of general agencies of the United Methodist Church. It was adopted. What follows is his rationale.

Recommended: That GCFA seriously consider formulating policy to establish logical and explicit maximum, minimum and optimal reserves for general agencies and make spending down of excessive net assets a part of quadrennial budgeting as well as considering other alternatives for addressing the use of net assets.

The case for the recommendation. Currently, GCFA has an approved policy that agencies retain a minimum of 25% of annual operating budget in reserve. It is my opinion that the current level of reserves (net assets) held by many agencies is excessive to the point of embarrassment to the General Church and frustration of the effort to solicit apportionment support. I believe that General agencies should be required to adopt formal policies for the maintenance of the net assets balances between logical and explicit maximum and minimum values and that quadrennial budgeting should budget the spending down of excessive net assets to attain reasonable levels.

For the past 8 years, I have been tasked by the Audit and Review committee with analysis and presentation of audited financial statements of selected General agencies. I remember well my initial surprise at the high levels of net assets in many agencies. This seemed to contradict the message I was hearing in the local church about the dire need to support the World Service and other apportionments. The agencies seemed wealthy; I remember remarking that "if we were a corporation, we would declare a dividend." Over the years, the issue of high net asset levels has been surfaced numerous times by other committee members as individual agencies’ audited financial statements have been examined.

I believe that there are at least three important problems with excessive net asset accumulation in General agencies. The following is a brief discussion of each problem.

Stewardship. High levels of net assets raise serious questions about the stewardship practices of United Methodist general agencies. Stewardship entails more than the safeguarding of net assets. It also concerns the best use of such assets. Jesus’ parable of the rich man who stored up riches in new barns (Luke 12) comes to mind. It is natural to question whether the accumulation of excessive net assets does not come at the expense of current investment in the mission of the Church. Unless the maintenance of high net asset levels compared to annual revenues are pursuant to explicit future needs, many within the Church will conclude that the wealth of the agencies is the goal.

Donor support. It is difficult to support good faith appeals to local churches to pay World Service and other apportionments when the agencies are perceived to be more wealthy than the churches. Furthermore, it is misleading to promote apportionment giving as missional when substantial amounts of revenue are being retained in marketable securities, employee loans, and other investments at the agencies. It is also detrimental to donor morale when apportionment revenue becomes a minor funding source for an agency; especially when investment gain and income exceeds apportionment revenue, donors may feel that their giving is immaterial.

Accountability. If the accumulation of net assets by general agencies allows for investment gains and other non-apportionment income streams to fund the majority of the agency’s operations, the agency’s financial reliance on connectional accountability is diminished. Unless the General Conference intends to create self-funded endowments for the general agencies, the desirability of such endowment is in question.

Narrative elaboration on financial statistics (see accompanying spreadsheet). I believe that the accompanying financial page illustrates that net asset levels in some agencies are excessive. There is no justification for retaining reserves so large that in some cases they begin to function as in-house endowments for the agencies. Consider the following from the accompanying data in detail. Agencies included are those which hold more than one year’s operating income in net asset reserve with the exception of GBOD which is included for comparison purposes.

The World Division of the GBGM

1.The World Division of the General Board of Global Ministries is the largest of the pre-1997 divisions making up the GBGM. Its total net assets as of 12/31/96 were $170,648,809. This is 3.3 times its annual $52 million revenue. Excluding the permanent reserve of $60, 328,349, the total of unrestricted and temporary reserves are $110, 320,460. There are some non-liquid type items in the reserve balance ($374,019 in fixed assets, $37.2 million in the Collins Forest and $13 million in accrued post retirement benefits), yet the liquid reserves are close to $100 million. This level of net assets represents an increase of $21,272,306 (14.2%) over the prior year, an increase of $96,742,517 (131%) over the past four years. The World Division holds $132,279,906 in cash and marketable securities alone as of 12/31/96, over 31 times the annual World Service Fund income.

Perhaps the single most conclusive evidence that the net asset balance is excessive is that of total revenue in 1996 of $51,979,213, only $4.3 million comes from the World Service apportionment while close to $25 million comes from investment income and gain on investments. The World Division comes close to being self-funded. Its net assets based on 1996 levels represent 40 years worth of World Service Fund income.

The National Division of the General Board of Global Ministries

The National Division of the General Board of Global Ministries had total net assets of $41,447,922 as of 12/31/96, $22 million of which is in non-permanent reserves. Cash and marketable securities of $28,421,558 produced investment income and gain of $4,199,521, almost the same amount as the $4,254,659 received from the World Service Fund. Total net assets as of 12/31/96 represent over 9.7 years of apportionment income.

The General Board of Global Ministries (World, National, MPS, and Women’s). The total of net assets for the largest divisions of the General Board of Global Ministries (World, National, Women’s, and MPS) as of 12/31/96 are $335,102,291. The net assets of these divisions have increased 61% in the past four years. $93,620,694 of all this total is permanent reserve, leaving $241,481,597 in unrestricted and temporarily restricted net assets. $30,767,890 is received by these divisions from the World Service Fund and Women’s Division allocations. The total non-permanent reserves represent 7.8 years worth of apportionment/allocation income. If net assets for these four divisions has to fund its apportionments and allocations, it could do so for over 11 years exclusive of any earnings on its investments.

The General Board of Church and Society. With net assets of $15,622,476, the GBCS’s total reserve represents 5.8 years of World Service Fund allocation at current levels. The net assets total has increased 42% over the past four years. The cash and investments of $12,400,027 produce $1,935,412 in rental and investment income while the World Service apportionment income is $2, 702,701. Thus, the reserve balances are functioning as an endowment for the Board.

The General Board of Higher Education and Ministry. The net assets at GBHEM at 12/31/96 were $75,807,672 of which $74,543,718 were not permanently restricted. This is an increase of $8,032,630 (11.9%) over the prior year. Total revenues are $30,382,329 of which $21,298, 639 is from the World Service and Ministerial Education Funds. The GBHEM could continue at current levels for 3.6 years without these two apportioned income items. Evidence of excessive reserves is indicated in that the GBHEM has designated $31,547,806 of its reserves "for loans and scholarships," yet only has $8,510,539 in student loans outstanding and spends $2.8 million on program services for the Office of Loans and Scholarships. There seems no logical connection between the designated reserve and the actual level of loans and scholarships. This appears to indicate that the Board sees these designated reserves as an endowment.

The General Commission on Archives and History. The GCAH is a smaller agency that nonetheless has accumulated over one year’s worth of net assets. Total net assets are $818,602. Over the past four years, the net assets have increased by 41%.

The General Board of Discipleship. GBOD is the one agency included in the comparison which has less than one year’s revenue in net assets (it has 93% of annual revenues in net assets). It is included for comparative purposes. Note that GBOD’s investment income and gain is less than 3% of its annual revenue and is only 13% of apportionment revenue. However, even GBOD has experienced a 35% increase in net revenues over the past four years. At that rate, it is accumulating net assets in excess of revenue growth.

Conclusion. The case is based on a limited examination of General agencies and simplifies many unique issues that may exist in any General agency. Nevertheless, it is my belief that the sheer size of cumulative reserves and the number of problem issues surfaced above substantiate the need to work toward formulating the recommended policies.

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