20 December 2016
Path to Financial Stability
Address by Senior Warden
Tom Keyse December 18, 2016
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Good Morning: “Purify our conscience, Almighty God, by your daily visitation, that your son Jesus Christ, at his coming, may find in us a mansion prepared for himself.” Those words come from our collect for today, the Fourth Sunday of Advent, as we ask God to help us make our whole selves, individually and collectively, ready to know Christ and to make Christ known. Those same words also describe the prayerful work of your vestry, dean search committees, clergy, staff and numerous parish leaders as we prepare Saint John’s Cathedral for the coming of a new dean, and it is that work that I wish to report to you today. First: The interview committee has completed its visits to the current parishes of the remaining dean candidates and is currently discerning which candidates best embody the teaching, preaching, pastoral, liturgical, outreach, administrative and stewardship skills we seek in our next dean. On January 17, the interview committee will present two or three finalists to the vestry. Thereafter, the vestry and Bishop O’Neill will meet with the finalists and their families prior to the vestry electing a new dean. The timing of that election will depend on how quickly meetings can be arranged, and how clearly the call of God’s spirit is revealed, but we are hopeful to complete the election within the next several months and within the 18-24 month period originally laid out following Dean Eaton’s departure. Second: To prepare our Cathedral to welcome a new dean, and to provide that person with a clear and honest picture of our financial, physical and human resources, the vestry has made some significant recommendations regarding our endowment, which currently is valued at approximately $24 million: One: In addition to the customary draw of 5% of the endowment’s 13 quarter average value, which for many years we have used to fund approximately one-half of our annual operating budget, the vestry is recommending we take a one-time special draw in January 2017 of up to $2.1 million to repay existing debt of about $1.6 million and to fund approximately $500,000 of working capital – money in the operating account – to reduce and hopefully eliminate future reliance on a line of credit to fund temporary cash flow needs.
Two: The vestry is recommending a one-time draw in January 2017 of up to an additional $2 million to fund capital repairs and maintenance of Cathedral buildings and grounds. Some of these repairs already have been completed or are underway, like a new boiler, tuck pointing repairs and a new roof (which is largely being paid for with insurance proceeds). Others, like elevator, electrical and water damage repair will need to take place over the next two years to bring this facility into compliance with current laws and to complete maintenance that has been deferred in past years in order to ensure that our buildings and grounds can continue to thrive for years to come. Drawn funds will be set aside into short-term interest-bearing accounts and will not be used except as work is approved and completed in compliance with our customary budget and operating guidelines, and any money not spent for critical repairs will be returned to the endowment. Three: The vestry recommends that beginning in 2019, in order to preserve the on-going value of the endowment and to reduce the Cathedral’s long-standing dependence on endowment funds for operations, we begin to reduce the annual draw by ¼% per year, until we arrive at a 4% annual draw for 2023 and beyond. The vestry also recommends that beginning in 2023, the draw be calculated based on liquid assets like stocks and bonds and any interest bearing promissory notes, but that any non-income generating assets like real estate be excluded from the calculation. The vestry made these recommendations by unanimous vote at its meeting on December 12. Per the Cathedral’s endowment policy, the vestry gave notice of this vote, which represents an amendment to the endowment policy for 2017, to the Cathedral investment and finance committees last week and will post a notice to the congregation on our website early this week, along with a copy of the endowment policy. The vestry invites feedback from all of these groups on the recommendation prior to taking a second vote at its meeting on January 9, 2017. If three-quarters of the vestry, including the interim dean and wardens, approve these recommendations by affirmative vote in January, they will be implemented. One obvious implication of these recommendations is that the annual endowment draw to support Cathedral operations will be reduced. Over the past several years, Cathedral clergy and staff have done an incredible job of cutting expenses while maintaining the vast majority of our ministry and programs, but we have reached the end of what we can trim and still retain what is vital to our life as a parish and a Cathedral. For 2017, the vestry has adopted a budget with a deficit of approximately $172,000. This number is significantly less than the $700,000+ deficit budgeted for 2016, but it is the vestry’s and interim dean’s goal to move as close as possible to a balanced budget for next year. And the most obvious way to do that is, of course, to encourage increased pledging and giving. When Dean Malloy told us a year ago that our average pledge was $1,000 less than the average diocesan pledge, many of us were shocked and we responded with increased giving.
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When Dean Pogue told us several weeks ago that our mean pledge has reached the diocesan average, it was a sign of progress, but our median pledge still lags behind and several hundred families who pledged last year or in prior years have yet to make a pledge for 2017. To address this situation, the vestry has unanimously volunteered to contact all of these families to invite their renewed support and to attempt to raise at least an additional $170,000 in pledges. We recognize that the dean search has been a long process, and that it is difficult to maintain momentum and support through an interim period, but we have actually grown our pledging and giving over the past two years, and if we grow just a bit more, by everyone pledging, or by people increasing their pledges by 1% of their annual income as we invited everyone to do in our Story by Story Campaign this year: 1. We will balance our budget, 2. We will reduce our dependence on endowment funds to support operations, and free up endowment funds for future facility improvements and funding special outreach like addressing homelessness issues on Capitol Hill – an issue that nearly thirty people from Saint John’s met to discuss last Sunday on 24 hours’ notice and from which responses already have been put into action, and 3. In this season of gift giving, we will present our new dean with the gift of a debtfree, deficit-free financial statement, a contributing and supportive congregation, and a mansion prepared for the coming of Christ and the unfettered opportunity to develop and implement a shared vision for mission and ministry to know Christ and to make Christ known. Thank you.
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Statement of Endowment Policy Approved by the Vestry on November 20, 1995 Amendment and Restatement Approved by the Vestry on April 11, 2016
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I. Introduction Throughout its history St. John’s Cathedral has received gifts and bequests of funds intended to provide for the future of the Cathedral. Over time these funds have become known as the St. John’s Cathedral Endowment Fund (“Endowment Fund” or “Fund”). The Vestry of St. John’s Cathedral, in its desire to preserve and protect the future of these funds and any similar funds that might be received in the future, hereby adopts this Statement of Endowment Policy. II. Endowment The St. John’s Cathedral Endowment Fund includes all those funds that are true endowment funds and those funds that are “quasi-endowment” funds. A detailed listing of these funds can be found in the attached Schedule III. True endowment funds are funds where the donor has stipulated that the original principal is to be maintained in perpetuity and only the income generated by the fund can be distributed. Generally, true endowment funds are created and governed by some form of legal document. (i.e. trust agreement) Quasi-endowment funds are funds that the Vestry has determined will be retained and invested similar to endowment funds. It is the policy of St. John’s Cathedral that all gifts and bequests in excess of $10,000 that are not a part of annual giving will become part of the St. John’s Cathedral Endowment Fund unless otherwise directed by the donor and will therefore become subject to this and any other policies that provide for the distribution, designation, investment, or other aspects of the Fund. III. Management The Endowment Fund consists of multiple pools of funds. The majority of the assets of the Endowment Fund are invested in a liquid pooled fund referred to as the St. John’s Cathedral Investment Fund (the “Investment Fund”). The Investment Committee of St. John’s Cathedral, as described in the Charter of the Investment Committee of St. John’s Cathedral attached as Schedule I, is authorized to administer the Investment Fund. All remaining assets in the Endowment Fund, such as real estate, notes, leases, and all other “non market invested assets,” are not considered part of the Investment Fund and are subject to the oversight of the Finance Committee, pursuant to its charter, on behalf of the Vestry. IV. Distributions Due to the fluctuating nature of the income stream generated by the St. John’s Cathedral Endowment Fund and the desire to maintain the purchasing power of the Fund over time, the Vestry of St. John’s Cathedral has adopted and hereby readopts a “Total Return” policy with respect to annual distributions from the Fund. Simply stated this policy is to distribute no more than 5% of the average market value of the Fund on an annual basis. More specifically, the 5% is calculated before the start of the fiscal year based on the
average of the prior thirteen calendar quarters’ total market value of the Fund ending with September 30. This way an exact distribution can be used in preparing the coming year’s operating and capital budget. Prior to the Vestry’s consideration of the annual budget for each fiscal year, the Investment Committee and the Finance Committee shall recommend an annual distribution to the Vestry with a calculation of the annual distribution in the format set forth on Appendix I. Prior to approving the annual budget, the Vestry shall review and approve, by separate resolution, the annual distribution from the Endowment Fund in the format set forth on Appendix I. This distribution policy applies to the entirety of the St. John’s Cathedral Endowment Fund and in no way overrides the terms of any true endowment funds. Nor does it preclude any donor from creating true endowment funds in the future. It means that in years when the income generated by true endowment funds is less than 5% an amount greater than 5% will be taken from quasi-endowment funds. Likewise, in years when the income generated by true endowment funds is greater than 5%, an amount less than 5% will be taken from quasi-endowment funds. V. Designation The amount distributed from the St. John’s Cathedral Endowment Fund will be used to enhance the Cathedral’s operating and capital budget beyond what is possible through the monies raised during the annual stewardship campaign. Specifically, annual distributions from the St. John’s Cathedral Endowment Fund will be used for capital maintenance and improvements, and program and ministry needs, including such things as Christian Education, Music, Worship, and Outreach. This designation policy applies to the entirety of the St. John’s Cathedral Endowment Fund and in no way overrides any designations that may have been placed on funds by their donor. Nor does it preclude any donor from designating funds in the future. VI. Amendment This policy may be amended by the Vestry after consideration at two consecutive meetings and after giving the notices as provided below. (a) A proposed amendment to this policy shall be first considered by the Vestry at a meeting for which at least 21 days prior written notice outlining the proposed amendment has been provided to the Vestry. The Vestry may, by a three-fourths vote affirmative vote of the entire Vestry, including the Wardens and the Dean, decide to move the proposed amendment forward to a second meeting, which shall be held no earlier than 28 calendar days after the first meeting. (b) If the decision is to move the proposed amendment forward to a second meeting, the Vestry shall give written notice, including a copy of the proposed amendment, to the Chair of the Investment Committee and the Chair of the Finance Committee within 3 calendar days of the first meeting, for each committee’s review and comment. The Vestry shall also give written notice, including a copy of the proposed amendment, to the entire congregation within 8 calendar days of the first meeting.
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(c) The Investment Committee and the Finance Committee shall each provide the Vestry with their comments, including if appropriate, a recommendation with respect to the proposed amendment prior to the second meeting. The Vestry shall review the comments and recommendations and give further consideration to the proposed amendment at the second meeting. If the Vestry wishes to approve the proposed amendment, it may do so only by a three-fourths affirmative vote of the entire Vestry, including the Dean and the Wardens. (d) The Vestry shall give the Chair of the Investment Committee and the Chair of the Finance committee written notice of its final decision to approve or reject the proposed amendment within 3 business days of the second meeting. The Vestry shall give written notice to the entire congregation of its final decision to approve or reject the proposed amendment within 8 business days of the second meeting. If the proposed amendment was approved, the notices shall include the language of the amendment as approved. This Section VI shall not apply to an amendment to the Schedules or the form of the Appendix. VII. Schedules The following schedules are available upon request and are considered part of this Statement of Endowment Policy: Schedule I: Charter of the Investment Committee Schedule II: Statement of Investment Policy and Guidelines Schedule III: Schedule of Assets
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APPENDIX I Format for Annual Endowment Distribution Approval The annual approval of the annual draw from the Endowment shall be in the following format: The Vestry of St. John’s Cathedral is responsible for the oversight and management of the Endowment Fund. Before the beginning of each fiscal year, the Vestry shall approve, by separate resolution, the amount to be distributed from the Endowment Fund for the coming fiscal year. Pursuant to the approved Endowment Policy, the amount of the distribution may be no more than 5% of the 13 quarter average total value of the Endowment Fund, although it may be less. Based on the 13 quarter average total value of the Endowment Fund as of September 30, 20__ of $__________, the annual distribution for FY 20__ shall be 5%, which is $________. The following chart outlines a current estimate of the portion of the distribution each component of the Endowment Fund is expected to provide in dollars and as percentage of each component’s 13 quarter average value.
Asset
13 Quarter Average
Calculated Draw %
TOTAL
Calculated Draw $
5%
Recommended by Investment Committee:
Recommended by Finance Committee:
_______________________________ __________________________, Chair Date: ____________________
______________________________ _________________________, Chair Date: ____________________
Approved by the Vestry on ______________________________ _________________________________________
_____________________________, Senior Warden Date: _______________________
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Debt Repayment
and Buildings & Grounds Maintenance and Repairs Motions for Vestry Meeting 12/12/16
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The motions proposed herein are based upon research and represent significant and prayerful deliberation and conversation by the Vestry over the past year. As with any plan that runs multiple years, it should be regularly reviewed. In this instance, it is recommended that Finance Committee review the progress and report to Vestry at least annually and recommend any adjustments necessary based upon new circumstances. 1. Motion regarding debt repayment (Starts 2017: occurs over one year): a) Approve a special draw (in addition to the annual 5% draw used for operating expenses) from the SJC Endowment Fund up to a maximum special draw of $2,100,000. Proceeds are to be calculated to payoff entire balance on line of credit, payoff internal fund transfers, and provide working capital for operations. Transaction to be completed no later than later than 1/31/17. b) Approve a reduction in line of credit from $5,000,000 to $500,000 effective immediately upon repayment of outstanding balance on line of credit in (a) above and no later than 1/31/17. c) Approve renewal of $500,000 line of credit and spending authority on that line of credit through 12/31/17. The line of credit to be repaid in full no later than 1/31/18. Line of credit should revolve during year as it is for timing purposes and not for permanent borrowing. 2. Motion regarding funding for buildings & grounds maintenance and repairs (Starts 2017: occurs over next four years but no later than 12/31/20): a) Approve maximum special draw of $2,000,000 from SJC Endowment Fund to fund critical repairs and maintenance of the Cathedral Buildings & Grounds. Draw to occur no later than 6/30/17. This amount includes funds previously approved of $353,000 for immediate capital maintenance approved during the October 2016 Vestry meeting. It is noted for this section 2, the motion only approves the draw from the SJC Endowment Fund. All other necessary approvals are to be obtained prior to expenditures per standard SJC Budget Process and Procedures. Funds will be expended based on actual work to be completed, documented through the annual budgeting process, monitored through finance committee, and reported to Vestry by Finance and Buildings & Grounds. 3. Motion regarding annual draw percentage for operating budget (Starts 2017): a) Continue the existing 5% draw calculation (based upon 13 rolling quarters) on entire endowment fund balance for the next 3 years (2017, 2018, 2019). The 5% draw calculation is based upon the overall Endowment Fund and the actual percentage allocated to each component may be different. b) In order to reduce reliance on the Endowment Fund to support and fund operations and to be prudent and consistent with current market knowledge on the appropriate percentage to draw, the annual percentage rate drawn will be reduced beginning with the 2020 annual budget. Therefore, effective with the 2020 annual budget, the annual draw percentage on the entire endowment fund balance is to be reduced by a minimum of 1/4% (.25%) per year until the draw percentage equals 4%. Thus, the maximum draw percentage is 5% through 2019, 4.75% for 2020, 4.5% for 2021, 4.25% for 2022, and 4% for 2023 and beyond. c) Beginning in 2024, the calculation of the draw percentage will change to be based only upon assets in the Investment Fund plus any interest-bearing notes held in the Endowment Fund. The draw percentage on any interest-bearing note shall be the lesser of the interest rate paid on the note or the draw percentage for the Investment Fund (i.e. 4% as of 2023). To be eligible for inclusion in the draw calculation, any note must be current and interest payments received at least quarterly. Assets such as houses and other non-income producing assets will not be used in draw calculations and only liquid, marketable securities/cash and interest bearing notes will be utilized from 2024 forward.
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