Wednesday, July 25, 2018

Reality Check: Grace Church’s HVAC Project Signals Big Trouble Ahead for the Church

One of the recent discussions amongst the vestry, clergy and staff of St. Dysfunction, aka Grace Church, is about how to fund next year’s HVAC work in Merrow Hall. As a component of that discussion, some have suggested that a capital campaign is not necessary, but that the church should borrow the funds needed for the work, and that it may be possible to pay off a loan of that sort within five years.

Those discussions illustrate three key points:
  1. The management of the church and its temporal affairs has been inept, at best.
  2. The proposed HVAC project is problematic on multiple fronts.
  3. The church’s problems extend far beyond the issues at hand.
Before we go further, some important context. 
  • Today, twenty-four years after the 1994 renovations, major HVAC system components already have outlived their actuarial life expectancy by four years. In other words, the church has been living on borrowed time for years. The failure of the HVAC system in key areas of the building now drives home the fact that this issue cannot be ignored any longer; nor can one ignore the fact that the church has done nothing to prepare for the inevitable.
  • The primary beneficiary of this project will be not the church, but the school. The school uses rooms in Merrow Hall for more than 40 hours a week, while the church directly uses the space for about four hours a week—two for La Gracia, and two for coffee hour, or  about 9% of total usage. Yet half of the projected $1.2 million cost is to be borne by the church.
In the case of the nave, however — the focal point of the parish — total usage is about 9 hours a week. Of that total, roughly 8 hours is attributable to the church, while 1 hour a week represents the school’s weekly usage. (These numbers shift somewhat in the summer, but the for-profit summer camp that has used Merrow Hall over the past few summers largely has kept the ratio relatively constant, while greatly increasing wear and tear on the building.) Thus, the school’s usage represents about 11% of the total, yet there is no cost share. This, despite the fact that school staff refer to the nave as “our chapel.”

Meanwhile, the nave’s air conditioning is inadequate on hot days, or when load is heavy, as happens with large weddings or funerals. Yet there is no plan to address the serious issues with the system, including:
    1. The inadequate airflow available via the existing ductwork.
    2. The lack of humidity control.
    3. The temperature differential surrounding the pipes of the organ, resulting in it being frequently out of tune.
Thus, one wonders why these issues weren’t addressed in 1994, and why there is no plan to address these issues now, despite the proposal to spend more than $1.2 million on an HVAC project that primarily benefits the school.

Looking at the Numbers

Now, let’s look at the numbers.

As currently envisioned, the church’s share of the costs of the project will come to $600,000. Assuming the church can raise $100,000 of that (a doubtful proposition), that would leave $500,000 to be borrowed. Assuming the five-year term presently discussed by the vestry, and the 5 percent interest rate also discussed, the monthly payment would be $9,435.62. Total cost of the loan, excluding origination and processing fees, and the full audit likely to be required by the bank (an estimated $20,000 expense), would be $566,137.01.





Given the church’s tight budget, its ability to come up with an extra $113,000 a year seems improbable. Even assuming that the entire $40,000 annual draw on the trust fund is devoted to repayment, that leaves a gap of $73,000 annually. Thus, predictions that the church could pay the loan off in five years seem optimistic, at best.

There is, of course, also the issue of interest. By virtue of borrowing the money, versus paying cash and carry or having a capital campaign, the church will wind up paying $66,137.01 in interest over the life of the loan—a bad example of interest working against you, versus saving and having interest working on your behalf. Plus, again, there are the indirect costs of acquiring a loan, including the likely $20,000 cost of a full audit (not a bad investment, though, considering the dismal condition of church records in past years), origination fees, title search fees and all the other incidentals that make borrowing money such an unpleasant experience.

Keep in mind, too, that $66K is roughly the annual cost of one full-time assistant rector. Or, put in other terms, it’s a lot of money to be giving to a bank, when it could be used for ministry, helping the needy, and more. 

As I’ve said before: Not saving for the future tells me the church doesn’t think it has a future. And given the average age of parishioners, and the relatively few whose estate plans include the church, it’s just plain foolish not to save.

Can the Church Even Get a Loan?

But would the church qualify for such a loan?

There is reason to be dubious. Consider:
  • The church has lost more than 100 of the 320 pledging units it had only a few years ago. 
  • Average Sunday attendance, or ASA (a key metric of parish health), has dropped by 17% over the past two years.
  • Pledge revenue is down sharply, and it was only year-end gifts of appreciated stock and other major gifts that kept the church from running a deficit last year. 
  • The church devotes no portion of its pledge income to savings, and, as stated previously, is dangerously reliant on a handful of major donors, some giving more than $60K annually. Loss of even one of these pledging units could throw the church’s finances into a tailspin.
  • The church has burned through much of its management and replacement reserves, in some cases drawing on savings to fund luxuries like Chris Byrnes’ farewell party. And, of course, there is the $100,000 bonus paid to Bob Malm in 2014.
There also are signs that parishioners are getting stretched pretty thin. Participation in events like the altar guild tea is sagging, as are flower donations and other non-essential expenditures. Loss of any further membership or giving well could push things to the breaking point.

Of course, to qualify for a loan, the church would need to submit a repayment plan to its proposed lender. Additionally, under Canon 14 of the diocese of Virginia, debt exceeding 20 percent of the prior year’s total receipts must be approved by the diocese. Total receipts cannot include funds from an endowment when such funds are designated for other purposes, which means that repairs paid for by the endowment in 2018 cannot be counted as revenue for purposes of the 2019 project.

Moreover, when one looks at the diocesan debt repayment worksheet available here in PDF, it asks the same sort of tough questions any good banker would ask, including growth or decline in number of pledges, as well as pro forma budgets for the next five years. The latter is problematic, if for no other reason than Bob Malm must, under church canons, retire by the time he turns 72. That will almost certainly erode revenue, as this happens at all churches when there is a change of rectors. And in Bob’s case, having lingered on for 27 congenial but ineffective years already, the effect of his retirement likely will be substantial.

There’s also the challenge that none of this occurs in a vacuum. As noted in a previous post, the faux slate roof needs to be replaced, numerous double-paneled windows need to be replaced, there is extensive deterioration of the rake boards, window trim and other exterior wood, the stained glass is due for restoration, the parking lot is due to be resurfaced, and much of the interior finish of the 1994 renovations is at the end of useful life or beyond. Thus, overall costs will continue to climb in the coming 5-10 year period. Meanwhile, given the average age of the parish population, one should expect the number of pledging units to decline during that time. Plus, there are a number of expenditures in the offing that likely will upset parishioners greatly...more on those issues in future posts.

Then there is the issue of the church, its power dynamics, and its suitability for mission. Specifically, I am not the only person to leave St. Dysfunction having concluded that the place is toxic. Whether it’s bullying, Bob Malm’s little power games, urging people to commit suicide, or disclosing confidential giving information, there is irrefutable evidence that this is one messed-up church. That does not bode well for the long-term health of the church, financial or otherwise.





Summing Up

No matter how one parses things, St. Dysfunction is in a bad way. It’s been doling out 100K bonuses, paying for lavish parties from savings, and otherwise living high on the hog, all the while not saving for the future. Even worse, it’s lost sight of its real purpose, which should be a place of healing, welcome and reconciliation for all persons. Instead, it’s become a religious-themed fraternity/sorority, in which people think it’s okay to bully others, to gossip, to shun people, and to engage in behavior few would contend is Christian or even ethical. (The gossip about an allegedly gay married man in the parish is particularly ugly. If nothing else, it’s none of your business, folks, and if I were his wife and found out about your stupid chatter, I’d be more than a little ticked off.) People aren’t stupid, and they instinctively know when a church has become toxic (look for further documentation on those issues this fall). And few want to give generously to a church that thinks shunning, bullying, and other adolescent antics are acceptable. That would be doubly the case as people increasingly realize that Bob Malm and the vestry have not been accurate, for example, in their recounting of recent events, including the false claim that I resigned from the church in 2015.

So, paying for the HVAC work is going to be a major problem for the parish, but it’s only the tip of the iceberg when it comes to the problems facing St. Dysfunction, aka Grace Church.