Saturday, September 15, 2018

Disgraceful Waste: Bob Malm Flushes $2 Million of Church Funds Down the Toilet on His Personal Residence

Speaking of dysfunction, in 2014 the Grace vestry decided to write off half of the value of a loan it had made 10 years earlier to Bob Malm. The loan had been provided so that Bob could purchase a private residence. But writing off half the loan, especially at a time when the church was in relatively dismal financial condition, was a bad and irresponsible decision, as we’ll see below. And before you ask, as a vestry member, I was the sole person to vote no on the forgiveness, which amounted to $100,000 of a $200,000 loan.

But there’s more to it than just the loan. As we’ll see below, the loan is just the tip of the iceberg in a series of spectacularly ill-advised business decisions made by the vestry at Bob Malm’s urging. In this matter, Bob placed his perceived personal interests ahead of those of the parish he claims to serve, while the vestry lost sight of its fiduciary obligations.

First, an important disclaimer, which is that a loan for a personal residence is the one exception to the canonical prohibition on churches lending money to their clergy. Thus, there is nothing inherently wrong about a church lending its rector money for the down payment for a personal residence.

That said, it is important to note that, at the time Bob decided to buy a personal residence, he resided in a perfectly livable rectory, much larger than his current home. Yes, it needed work, perhaps as much as $200,000 worth, but it was comfortable, convenient, and owned free and clear by the church.

But Bob appears to have had it in his head that if he had his own place it would be a nest egg for retirement. That of course, presupposes adequate maintenance and upkeep—neither of which has happened in practice. Thus, Bob traded a large, poorly maintained home for a small, poorly maintained home, all while spending a small mountain of donated cash. Nice move, Bob. 



So, despite considerable misgivings and resistance on the part of the vestry, Bob bludgeoned a proposal through the vestry to help him buy a private residence. This he did by dint of much noisy argument, and by remaining present during the vestry vote on the matter, with the result that more than one vestry member feared that, if they voted no, they would face retaliation. Yes, imagine that.

But the proposal went further. At Bob’s urging, the church tore down the rectory, an asset with a value of roughly $700,000, at an all-in demolition cost of about $200,000. (Such projects are surprisingly costly.) Thus, the parish was down about $900,000, of which roughly $200,000 was a wash versus the cost of updating the rectory.

To get Bob into his new residence, the parish extended what was then a $100,000 loan for the down payment, and boosted Bob’s total compensation via a housing allowance and other perks from a little more than $70,000 a year, plus the use of the rectory, to a total well more than double the original figure.

To make matters worse, the original loan amortized accrued interest. In other words, the loan just sat there like Jabba the Hut, getting bigger and bigger over time, with no payments or interest due. Thus, Bob’s personal residence needed to increase in value by 7% every year if the loan was not to erode any potential profit that Bob would make at the time he resold the house. Hardly a done deal in the best of times, and a very tall order indeed for a small, older home with few updates and much deferred maintenance.



Jabba would look better with a hair transplant, don’t you think?

When the note first matured in 2009, Bob already had signaled that he would likely seek another position, one in a different church. But it appears that Bob did not find another church willing to match his insanely generous compensation package, nor provide a laissez-faire governance regime in which, to closely paraphrase one of Bob’s former assistant rectors, “Bob could get away with murder.” So, in true Grace Church fashion, the vestry decided to add insult to injury for all parties and kick the can down the road. The maturation date on the loan was set back another five years, conveniently ignoring the deferred maintenance and interest that was piling up on Bob’s personal residence and thus eroding the parties’ equity in the property.

By this time, Bob still had made not a single payment of interest or principal. Making monthly payments, regardless of the imprudent terms of the loan, would of course have been sensible, but Bob has never been one to let such niceties intrude. As a result, when the loan matured in 2014, the value of the loan had ballooned to $200,000, double its original size.

So, in 2014, the vestry decided to “solve” things by writing off $100,000 of the loan, in recognition of Bob’s years of “service,” and requiring repayment of the original loan over a five-year period. That’s right—the church walked away from the original deal and gave Bob a $100,000 bonus. Keep in mind, too, Bob is far from stupid. He knew full well what he was getting into. So, why should he not have been held to the terms and conditions to which he agreed?

There are, of course, circumstances under which this may have been appropriate. For example, if the parish were awash in a sea of cash. Or if Bob’s job performance were exemplary. As in, if he adhered to the terms of his letter of agreement. Or grew the parish. Or had regular mutual ministry reviews. But the reality is that, while Bob can be engaging on an interpersonal level, he views being a priest as, in the words of someone close to him, “Just a job.” So no need to get too caught up in notions of Christian charity—that’s not part of Bob’s worldview, and I can tell you firsthand he doesn’t extend that approach to others.

Bob Malm’s Mediocre Job Performance

Moreover, Bob’s attitude towards being a priest is reflected in his work performance. Consider:
  1. For years, parish business records were a hot mess. 
  2. One of the parish registers has gone missing. 
  3. For more than a decade, church financial records were facially disorganized, and no audit was done, nor was any meaningful effort made to clean up the books. (The parish does an agreed-upon procedures review, which has no external attestation value. In other words, it doesn’t prove anything, but instead recites information provided by the client.) 
  4. Staff has often behaved badly, and one staff member was a hoarder. Bob consistently refused to address these issues.
  5. There still is no strategic plan.
  6. Bob comes and goes pretty much as he pleases; there have been times when he has taken leave far in excess of that permitted under his letter of agreement, and without vestry approval.
  7. Basic canonical requirements, such as a written finance manual, are still not in place, more than 25 years after Bob started his job. (See the Manual of Methods in Church Business Affairs for this and other requirements that Bob has conveniently ignored.)
  8. Even his sermons have become pointedly short, and more than one parishioner has said that Bob seems thoroughly burned out. Bob has become both increasingly lackadaisical and autocratic, while appearing convinced that he is somehow special. Yes, he can turn on the superficial charm when he chooses to, but that’s all it is — superficial charm. I mean, if Bob really cares about the church and its people, as some members claim, why the dysfunction and the indifference? And it’s not like there’s any dearth of folks who’d be willing to help fix things; many parishioners are both intelligent and highly skilled.
Where does that leave things? As things stand, Bob is paid better than a great many Episcopal bishops. For example, below are 2017 salaries for bishops on the staff of the presiding bishop, including Todd Ousley, the bishop in charge of pastoral development:

Nor does locality account for Bob’s overly generous compensation. See, for example, data below for priests in the Episcopal Diocese of Washington, which has some of the highest salaries in the country:


Another data point is reflected below, which is the Church Pension Group’s (CPG) 2016 salary survey of Episcopal churches of Province III, which reveals that Bob is compensated at annual rate more than 40 percent higher than comparable clergy in the region (look at the Program category)—and that is without factoring in his $100000 bonus in 2014! (CPG’s numbers include housing and any bonuses paid; the imputed value of a rectory is included).



Bob has about another year of payments left on the original $100,000 loan; meanwhile, the church (including its component entity, the school) is preparing to spend $1.2 million on HVAC improvements that will primarily benefit the school, with half the money coming from the church. The faux slate roof needs to be replaced, the stained glass windows need costly restoration, the parking lot needs repaved, and the original elevator needs to be overhauled.

The Debacle by the Numbers

Total Loss to Grace Episcopal Church, 2004-2018
Total
-$2,000,000.00
ItemCost
Loss of equity, rectory$700,000.00
Write-off, accrued interest$100,000.00
Total compensation increase, 14 years$1,200,000.00
Avoided costs, rectory repairs$200,000.00
Rectory tear-down costs$200,000.00

These numbers become particularly compelling when we look at the capital expenses and extraordinary costs the church will face in the next few years:

Anticipated Capital and Extraordinary Expenses, 2018-2021
Total
-$1,137,500.00
ItemCost
Miscellaneous HVAC repairs$45,000.00
HVAC replacement, church share$600,000.00
Elevator refurbishment, church share$30,000.00
Stained glass restoration$60,000.00
Parking lot repaving, church share$25,000.00
HVAC blueprints, church share$22,500.00
Faux slate roof replacement$60,000.00
Replace failed double-pane windows$40,000.00
Replace exterior rotted wood trim and rake boards$40,000.00
Replace obsolete fire alarm control panel$15,000.00
Contingency funds (needed for HVAC replacement and other major projects in light of facility age)$200,000.00

Outcomes

Keep in mind that, when all this work is done, there still will be major challenges with the building. For instance:
  • The nave still will not be able to maintain temperature during hot summer days or major events. 
  • Plumbing will still be obsolete, with piping in original parts of the building at actuarial end of life (for the record, copper pipes, which comprise most of the plumbing in the building, do not have an indefinite lifespan). 
  • Neither elevator will meet modern Americans with Disabilities Act (ADA) standards. 
  • There still will be no ADA-acessible entrance. That means not just a ramp, but Braille signage and an electro-mechanical door opening system to assist wheelchair users and others of limited mobility.
  • Interior directional signage will remain crude and non-ADA compliant.
  • Interior finish, notably much of the 1994 renovations, will still be at end of life. 
  • The commercial kitchen will still be obsolete.
  • Several local HVAC units will remain out, including the one in the rear fire tower.
  • The lower hallway under the original narthex will still lack adequate HVAC.
  • Humidity and temperature control in the undercroft will remain spotty at best due to poor air flow control and the oversized, 20-ton unit that services the space. As a result, summer humidity levels routinely exceed 70 percent, which is neither healthy, nor good for the grand piano and other musical instruments in the choir room.
Nor is the HVAC work likely to come in under budget. Builders are doing well right now, and with the third floor of the building out of service, it will be clear to bidders that the church has little leverage. Further, older buildings such as Grace’s physical plant have one consistent characteristic, and that is their ability to throw curve balls into the path of anyone doing capital improvements. In short, procurement under duress rarely is the most cost-effective procurement, and even more so in a building that is now more than 60 years old.

Nor do things look much better for Bob Malm. Although comparable homes in the area have appreciated by about $200,000 since the date of this purchase, the extent of deferred maintenance on Bob’s private residence, the antiquated layout, the very small size, the perilous exterior steps, the lack of landscaping, the original windows and the obsolete bathrooms leave Bob in a position where he will be lucky to break even. Moreover, despite the influx of donated cash, Bob’s penchant for lengthy vacations, expensive private schools for his children, cosmetic procedures, and other indicia of keeping up with the Hillers left the family in precarious financial condition for many years. See, for example, the judgment recorded in 2010 by Suntrust Bank,  now a matter of public record, six years after the church’s original loan, against Bob’s wife Leslie, for what appears to be an unpaid personal loan; it appears the default occurred on August 2009. (Source: Alexandria General District Court public records)



Similarly, public records reveal what appear to be unpaid dental bills for two of Bob’s children at about the same time; the cases were scheduled for hearing on 12/15/10, but the cases dismissed. My opinion: Getting your kids sued for medical bills is not cool. Actually, it’s pretty damned dysfunctional.  (Source: Fairfax County General District Court public records)


Rising interest rates, bad credit history, and the fact that the original mortgage has an adjustable interest rate also suggest that the house will get more costly over time. A re-fi may take some finagling, and terms for a new loan likely will not be great. So the entire transaction winds up looking even worse with the passage of time, not better.

At the end of the day, Bob engaged in a highly speculative real estate transaction, and now has been bailed out by the church for his remarkably bad business decision. It also is troubling that the loan to Bob was recorded off the books, not showing in the financial reports, for the first ten years. This raises some disturbing issues concerning financial transparency, candor, and accuracy of financial reports. If nothing else, why did the church’s “auditors” not insist that the underlying receivable be reflected in the financials? It is a basic premise of good governance that insider deals such as this be reported publicly. Again, why was this allowed to happen?

Summary

In summary, the church’s current financial posture is best described as a hot mess. Over time, Bob has increased the church’s carrying costs, while reducing its assets and eroding both giving and attendance. Yet the decline in the church’s financial position would be more than adequate to pay cash and carry for upcoming expenses, and even more so had the cash involved in underwriting Bob’s desired lifestyle been appropriately invested.

Meanwhile, the church is placing itself in existential peril, for its continuing declines in giving and attendance could well result in its being unable to meet its financial obligations as this wave of capital expenses hits in the coming years. And regardless of the ultimate outcome, the parish is out more than $2 million dollars as a result of Bob’s self-serving lack of business acumen. At the same time, it is shocking, appalling, and outrageous that Bob Malm should get both a 2014 bonus of $100,000, and annual compensation that exceeds that of many Episcopal bishops, given his feckless job performance. Even his decision to pursue a personal residence, at a time when he couldn’t so much as come up with a down payment, shows a remarkable lack of concern for the wellbeing of the parish and a dearth of common sense.