Saturday, May 13, 2017

Grace Church: Teeing Up to Borrow?

Recent signs suggest that Grace Episcopal Church is trying to address its deferred maintenance and other financial issues by preparing to borrow money. What is the evidence for this conclusion? And why, in my opinion, is it unlikely to be successful in this effort?

To focus on the evidence, the church recently reviewed its trustees. This group, who holds legal but not equitable title to church assets under law, is often ignored until there is a need for a mortgage. In those cases, churches typically scramble to fill vacant or non-functioning trustee slots.

True to form, as part of that process, Grace announced that it was filling several trustee slots, including naming Alison Campbell, in my opinion a bully if there ever was one, to be a trustee. This strongly suggests that the parish is trying to clean up its act, at least on paper, in advance of a major borrowing initiative. That is because banks require 100 percent compliance with a church's canons and bylaws in order to qualify for a loan.

But this initiative is unlikely to succeed. Having handled numerous non-profit loans, I can tell you that banks look to trends in average Sunday attendance (ASA), giving, and overall quality of governance to assess whether a church is a worthy credit risk. This includes insisting on a full-blown audit, which, as previously described, does not happen at Grace Church. And a deficit of any size, which is apparently what the church ended with last year, is a deal-breaker.

So, with pledges down almost 30% in the past two years, chaotic recordkeeping, and numerous breakdowns in internal controls, Grace is highly unlikely to qualify for a loan. If it does, it will do so at a high rate of interest, and with the trust fund or other capital assets required as collateral.

Moreover, any large-scale debt requires diocesan approval, which I strongly suspect will not be granted until Grace Church actually does an audit and complies with diocesan governance canons.

This is important, as it means that another potential avenue of escape from its current fiscal woes is closed to Grace Church and its members.

At the end of the day, the only thing that will matter is that Grace has a clean financial house, and that it is making a concerted effort to grow. With neither of these in place, Grace surely is lurching towards a difficult place.