Management Discussion and Analysis FY05 Discussion & Analysis of the Financial Statements Introduction The most recent audited financial statements of the Roman Catholic Archbishop of Boston, a Corporation Sole (Corporation Sole) available are for the two fiscal years ended June 30, 2005. These statements, including the combined financial information for the parishes as a group, the central office, the insurance funds and the endowment funds, are provided in section five of this presentation. The Corporation Sole financial statements are complex. The purpose of this report is to explain what these financial statements are telling us and provide a context to help readers further their understanding of them. This is done by answering a series of key questions about the financial statements, with a focus on the following concepts: What does Corporation Sole own? How is it owned, or who has an interest in it? How did that ownership change during the year? What is the assessment of its financial condition? This analysis also answers questions about such matters as the status of the Revolving Loan Fund, activities of the Parish Reconfiguration Funds, the impact of the Clergy Benefit Funds on Corporation Sole and other matters not readily answered by the audited financial statements. The questions related to the sources and uses of funds for the sexual abuse settlements are the subject of a separate report that is being issued simultaneously with this report and therefore are not included in this discussion. Some underlying principles are important to understand in order to use this analysis effectively. Corporation Sole follows the accounting practices used by not-for-profit organizations. Ownership or equity is defined for a not-for-profit organization as "Net Assets," that is, the amount by which assets held exceed the recorded liabilities of the organization. If these assets were received from donors with restrictions on their use, then they are restricted net assets. Some restrictions are imposed in perpetuity (e.g. the establishment of a permanent endowment fund), in which case the net assets are "permanently restricted." Donor-imposed restrictions that can be fulfilled with the passage of time or by using the net assets for the specified purpose result in net assets that are "temporarily restricted." All other net assets are considered to be "unrestricted net assets," that is, there are no external restrictions on how they can be used. Finally, even though there may be no external restrictions on net assets, the amounts may have been internally earmarked or designated for a specific purpose. Some designations result from the nature of the assets involved (e.g. land, buildings and equipment are designated as "Investment in land, buildings and equipment" because they are effectively used for the operations of the organization). Some designations result from the activity with which the net assets are associated (e.g. assets associated directly with the insurance programs of the Archdiocese have been segregated and are used for insurance and risk management purposes). Finally, some assets have been specifically designated by the governing board or the Archbishop (e.g. the net assets associated with the reconfiguration of the parishes have been segregated so that these funds can be reported separately). The financial statement highlights for 2005 listed below summarize the financial picture of the Corporation Sole at June 30, 2005. Clearly, Corporation Sole is in a difficult financial position as it faces many challenges. 2005 Financial Highlights Net assets totaled $329.7 million, however, unrestricted/undesignated net assets show a cumulative deficit of $46.3 million. Net assets increased $4.3 million, primarily as the result of gains on property sold to fund operating needs. Provisions in 2005 for the handling of clergy sexual abuse claims were $25.0 million. Unfunded pension fund costs of $135.0 million, $38.3 million in debt and $28.9 million in reserves (this includes the $25.0 million above) are major liabilities. At this point, new external borrowing is not a real alternative. Revolving Loan Fund had a $15.2 million deficit at year end Parish Reconfiguration Fund net assets totaled $22.8 million at year end Clergy Benefit Trusts Fund balances declined $6.8 million, as the cost of medical, disability, pension and other benefits increased. These highlights are explained more fully in response to the "Key Questions" that follow. The response to Key Question #10, "What has been and is being done to deal with the financial challenges we face?" is the most important part of this discussion. Key Questions 1) What was the financial position of Corporation Sole at June 30, 2005? The pie chart below shows the $329.7 million of Corporation Sole 2005 net assets separated into its four divisions. Parishes at $270.4 million account for about 82% of the total, with Central Fund, Insurance Fund and Endowment Fund accounting for the remaining 18%. Additional information about the content of Corporation Sole's assets and liabilities will be provided in Questions #4 and #5. 2) How much of the 2005 Net Assets are subject to external restrictions or internal designations? It is important to understand that much of what is owned by Corporation Sole is subject to restrictions or designations. Only the undesignated resources are readily available to meet its many financial challenges. The following table shows the portion of the net assets that is subject to external restrictions or internal designations as of June 30, 2005. Unfortunately it shows that there are no unrestricted, undesignated net assets, but rather a deficit of $46.3 million. 3) How have the Net Assets changed during the year? Overview of Changes in Net Assets Overall, the net assets increased by $4.3 million during 2005. Parish net assets decreased in total by $10.4 million. As discussed, the net assets related to parish reconfiguration were transferred from the Parish division to the Central Fund division. The total amount of this transfer was $33.9 million. In addition, the Parish division incurred clergy retirement costs, net of contributions, of $9.8 million (a portion of this cost was due to the decrease in the discount rate). These decreases to net assets were partially offset by net gains on sales of property of $14.6 million, transfers of $13.8 million to the parishes from Central Fund, including the Parish Reconfiguration Fund, in the form of property, operating and construction aid and other net capital expenditures and operating items of $4.9 million. The principal reason for the $6.5 million increase in the Central Fund was the net assets from the parish reconfiguration transfer offset by operating deficits and additional reserves for defense costs and settlements of clergy misconduct claims. The Insurance Fund increases came from positive operating results, while the Endowment Fund increases were the result of additional donor-restricted gifts. The Statement of Activities explains the changes in net assets. Changes in net assets result from operating and nonoperating activities of Corporation Sole. Operating activities are summarized as revenues (increases) and expenses (decreases) in net assets. A more detailed explanation of the revenues, expenses and non-operating activities follows: Operating Activities-Revenues The table below summarizes the comparable revenues, gains and other support for fiscal 2005 and 2004. Overall, revenues declined $1.0 million between the two years. Tuition and Fees increased by $7.0 million or 7.2%. This was the result of tuition rate increases at the parish schools ranging from 3.5% to 9.0%. In fiscal 2006, there are approximately 30,500 students in parish grammar and high schools. Parish collections declined. The Catholic Appeal revenues as presented here are for the fiscal years ending in June. The Catholic Appeal measures its performance on an appeal campaign year so the above amounts differ from the published results of the Catholic Appeal. Investment income, which changed by $2.4 million, includes the yield from participation earnings or from participation in the Common Investment Fund Roman Catholic Archbishop of Boston, Fixed Income Fund Roman Catholic Archbishop of Boston, short-term investments and outstanding loans to Related Organizations. Parish collections and other fundraising decreased $4.7 million or 3.3%. They included: Rental and Revenue from services provided decreased by $0.5 million or 2.3%. It included: Other revenues decreased by $1.9 million from $26.2 million in fiscal 2004 to $24.3 million in fiscal 2005. Other revenues consist of all other parish and school revenue that does not fall into other categories. The decrease is consistent with the decline in the number of parishes and schools. Operating Activities-Expenses Overall operating expenses increased $4.3 million or 1.3% for fiscal year 2005, and primarily consisted of costs associated with pastoral programs and the parish reconfiguration process. The composition of Corporation Sole's program and other expenses includes: Most of Corporation Sole's expenses are incurred at the parish level in connection with pastoral services and education programs. Pastoral services primarily includes operating expenses of the parishes and also includes support towards the work of pastoral service agencies, such as the Multi-Cultural Ministries, Ethnic Apostolates, Health Care Ministry, Pastoral Ministries, Youth Ministries, Family Life and other pastoral-support