Mark Koscinski NFP

Being Tone Deaf, Part 2

Last week I began reviewing the Annual Report of the Diocese of Metuchen, NJ (the “Diocese”). In that entry, I concentrated on the seemingly devastating loss in its investment portfolio. Just as a reminder  I want to emphasize the phrase “seemingly devastating” since there is not enough information in the Annual Report to make that determination. I also want to reiterate that I am in no way being critical of the management of the Diocese except for how it didn’t address the unrealized losses in the mailing.  I am “picking” on the Diocese  to make some points.  If anything, its marketing arm is tone deaf to how some of its materials might be received by potential donors. 

 This week I want to focus on some of the other concerrs I have with the Annual Report: 

  •  The Annual Report was issued almost a year after the period end.  I received it in May 2023, eleven months after the period being reported on ended. By itself, this gives you some pause.  By comparison, public companies issue their financial statements within 90 days of year end.  Obviously,  a Catholic diocese isn’t a public company and doesn’t have the resources or the legal requirement to issue such a report that quickly.  However, taking so long to issue a financial report  is  often taken as a sign of weak financial management.  This is particularly important when you are sharing bad news such as the unrealized investment losses the Diocese incurred. 
  • There is no indication of an outside accountant’s review or audit of the financial data. The financial statements seem to be in good form so there is obviously  a capable financial team in place. Nevertheless, there are some very complex accounting issues involved.  For instance, the Diocese self-insures and has an Incurred But Not Reported (IBNR) liability of $22.5 million.  Similarly, the clergy retirement and post retirement obligations amounted to $24.5 million. I don’t know about other potential donors, but I  would feel much better if  an outside reviewer could provide me with some comfort about  these balances.  How would a donor know the correct actuarial assumptions were included in the computation of the liabilities and the accounting principles are correct? 
  • Donating should be made easy.  The Annual Report doesn’t say where to send donations and what they will be used for. Perhaps a QR code or a Paypal address would be helpful. Why make potential donors search for where to send their hard-earned money?

With all of that being said, I truly applaud the Diocese for hitting the “Abuse” issue head on.  It did a great job of outlining its programs to control and eliminate such a terrible plague. The importance of this can’t be underestimated as the now disgraced former Cardinal Theodore McCarrick was once the Bishop of the Diocese.  Finally, I wish the Diocese well in its activities for the upcoming year.  It has been a tremendous force for good in Central New Jersey.  With the help of its donors and parishioners, it will be for many years to come.

The lesson to be learned for any NFP organization is to stop and  ask what the perception of its stakeholders is.  Management needs to scrutinize its communication strategy to see if the proper message is being conveyed. Alternatively, can the message be misconstrued by the public?  Sometimes management is too close to the issue to see how this information is being  received.  

Mark Koscinski NFP

Being Tone Deaf

Sometimes, we don’t really appreciate what some of our marketing material can do to our fundraising.  The NFP world relies on fundraising as its lifeblood but we sometimes don’t pay enough attention to how the world sees us. Let’s look at a case in point:  The 2022 Annual Report of the Catholic Diocese of Metuchen. This is the first of a two part blog on things that I quickly picked out from its  annual report. For those of you not familiar with this organization, the Diocese of Metuchen (the “Diocese”)  is a very large Central Jersey Catholic diocese responsible for 90 parishes, 26 schools and a hospital, among other things. The Diocese does an amazing job in  four NJ counties.  It has a strong financial condition, with net assets of about $125 million and a strong positive cash flow.  Nothing in this article should be construed to be a criticism of how the Diocese operated. The Annual report itself is  a very fine piece  of marketing material, but was tone-deaf to fundraising concerns. There are several reasons for this, but for this week  let’s start with the 800 pound gorilla in the room. 

The Diocese reported unrealized investment losses of $51.2 million during the year, resulting in a decrease in net assets of $36 million dollars for the same period.  To put this in perspective, the decrease  was approximately 18.1% of  ending total assets and 25% of the ending total investment portfolio. At the same time, the Diocese reported positive net cash flow.  In short, a very creditable performance in managing operating cash flows in a tough economic environment was swamped by what appears to be a cataclysmic decrease in the investment portfolio. 

How could this be?  Unfortunately, the Annual Report does not disclose the reasons why, nor does it disclose the composition of the investment portfolio.  So, let’s make the assumption (and it is only an assumption!) the investment portfolio had a heavy element of fixed income securities. What happened to interest rates over the year? The Fed discount rate (the marginal cost of borrowing for a bank and therefore the rate that drives other other interest rates) was .25% at the beginning of the fiscal year (June 30, 2021) and 1.75% at the end of the period. The prime rate also increased from 3.25% to 4. 75% over the same period. Interest rates were rising as the Federal Reserve was trying to deal with inflation.  As interest rates rise the value of fixed income securities fall. Such a large increase in interest rates is presumably the reason why at least part of the investment portfolio took such a beating.  The stock portfolio also could have taken a beating in the same time period.  For instance, the Dow Jones Industrial Average was 34,292 on June 30, 2021 and 30,824 on June 30, 2022 a decline of about 10%. Again, there simply isn’t enough information provided to see how the various components performed. 

Why is this disclosure important?  If the investment portfolio is heavily concentrated in fixed income securities there will be no loss if the securities are held to maturity.  The loss will turn into unrealized gain in subsequent periods. As the investments securities near maturity the market value of those securities will begin to approach the maturity (par) value of the securities.  On the other hand, there is no assurance that a stock portfolio will ever recover its value.  It seems to be that any donor would be vitally interested in knowing this information.  Financially responsible management of a fixed income investment portfolio will lead to zero unrealized gain or loss over time.  However, if the loss was due to a stock portfolio, would you want to donate to an organization that  could blithely lose such vast amounts of money?  And heaven forbid such a loss could be due to speculative derivative securities…. Based on what I have seen, I find it highly improbable that the investment portfolio includes such problems.  I am only using this Annual Report to make a point. 

I will readily acknowledge what happened may not be completely the responsibility of the Diocese.  For the life of me I can’t figure out why the Financial Accounting Standards Board (FASB) would require fair market value accounting if the NFP organization could demonstrate it has the ability to hold the securities to maturity.  Clearly the Diocese does.  Even more unfortunate is the fact that a business entity incurring such unrealized losses might be able to mitigate the losses by recording deferred taxes, thereby reducing the impact to the “bottom line”.  Since the Diocese is a NFP organization there is no tax effect for such losses.  Nevertheless, the Diocese needs to do a better job of explaining what happened. 

In the next installment, I’ll examine some of the other issues contained in the Diocese’s Annual Report. Stay tuned.