New normal realities: religious financing, compensation/benefits & fundraising (part 1)FEATURE STORIES, FINANCE, Financial Services Tuesday, September 3rd, 2013
By RaeAnn Slaybaugh
At a Church Executive live roundtable, high-level religious financing, compensation/benefits and fundraising experts surveyed the landscape surrounding these key areas of church management.
Our Roundtable Panel
- James R. Cook, National Outreach Manager, MMBB Financial Services
- Steve Hron, Senior Vice President, Ziegler
- Bill McMillan, Executive Vice President, RSI Stewardship
- Joel Mikell, President, RSI Stewardship
- Dan Mikes, Executive Vice President, Bank of the West
- William Scrivens, Reserve Specialist, Miller Dodson Associates, Inc.
- Paul Weers, Senior Benefit Consultant, MMBB Financial Services
On July 12, 2013 — at the National Association of Church Business Administration (NACBA) annual conference — Church Executive hosted a live roundtable on a timely topic: “new normal” challenges and solutions in the areas of financing, compensation/benefits and capital campaigns. Several high-level executives representing each sector came together to share their observations.
The highlights and takeaways of this insightful discussion will be published as a two-part series in this issue, as well as in our October/November 2013 issue.
Here, the panelists outline the pre- and post-recession climates in their areas of expertise. In the second installment, they’ll drill down on strategies church leaders can employ to overcome the unique obstacles presented by the new normal economy.
How do the lending climates for religious institutions compare pre- and post-recession?
Dan Mikes: Everyone knows real estate values declined during the downturn. But, to a greater extent, the adverse impact we’re feeling now is a function of the 300-plus foreclosures and stress sales that happened as overleveraged church borrowers couldn’t pay their debts on time.
An appraiser must cite comparable sales in the marketplace as part of the process for valuing the real estate. Financing offers are typically subject to a loan-to-valuation ratio of 75 percent. In certain states with a lot of foreclosures, some churches are coming in with appraisal valuations at half of what they were five years ago, when they took out the loan. The result is the church does not qualify for competing offers. This is really unfortunate because even churches that were fiscally prudent and did not overleverage themselves are subject to higher interest rates because they can’t shop around.
But, as far as credit criteria — at least in our shop — nothing’s been broken, so nothing’s been fixed. We’re not doing anything different than we were, pre-recession. During the 2000s, we walked away from a lot of opportunities. We were saying, “Pastor, your borrowing capacity is $10 million. You should design your project backward to that number.” We were told, “Well, you’re not giving us the statement of faith that the credit union or the big bank is giving us; they are offering $12 million or $12.5 million.”
So, from my perspective, it’s not about the downturn. We have made approximately $3 billion in loans to churches, yet we have never had to foreclose on any of those churches. With $1.3 billion in outstanding church loans at the worst part of the downturn, our 30-day delinquency rate was only 2 percent.
Steve Hron: Property values have been one of the biggest challenges since 2008 for churches, as well. Good loans are still getting done just like they were pre-recession; but, property valuations just aren’t always there. It’s requiring churches to put more cash into projects, which was challenging for some ministries during the recent recession.
In tough times, if you have some cash reserves to fall back on, you have more runway time to adapt, to change ministry focus, to do some things differently or direct that cash into a project or renovation. For example, in our database of existing clients, the median of cash reserves is about 60 days. The 25-percent quartile has about 30 days’ of cash reserves. So, having a rainy day fund is easy for us to recommend, but sometimes not as easy for churches to execute.
Another challenge for churches is that industry lenders have been forced to tweak some of the metrics. In 2006 and 2007, some lenders were loaning four, five and even six times a church’s gross support and revenue. (They aren’t around anymore, so that issue has kind of taken care of itself.) Coming out of this recession, lenders are focused on more normalized leveraged metrics — maybe three, three-and-a-half or four times maximum gross support and revenue.
Lastly, like Bank of the West, we like to take the conservative approach. If a church is considering a building project, a property acquisition or otherwise, we ask, ‘What kind of cash flow is available to pay for the proposed loan?’ We’re all about looking over the dashboard at the growth of the church. But, if we can look at the church’s financial statements now, and validate that the cash flow is there to service the debt, that’s a good, conservative approach.
William Scrivens: The lenders that deal with our core business are seeing a much stronger emphasis on cash reserves. They’re asking, “How much money do you have set aside to take care of the assets you already own and are responsible for — before we start giving you extra money for whatever you want to do into the future?”
Even HUD is changing its regulations. Before this recession, an individual got the loan. Now, HUD is look at whole communities to ensure capital assets are adequately funded.
There’s some spillover there into the church world. Lenders are saying, “You want to build this new complex, but the front of your building is falling off because you haven’t taken care of it for 30 years. That makes you a higher risk.”
A conservative approach was mentioned earlier — where a church has adequate reserves and is practicing stewardship by maintaining what it owns. Then, if it wants to expand, maybe a loan is appropriate.
I think there’s a drift away from evangelizing an immediate need to build toward an acknowledgement of the responsibility to care for what they already have. I think the whole country learned, to a degree, that you can’t just borrow, borrow, borrow; you have to be more conservative. And, churches have a moral responsibility to actually lead in that sense, in how they manage their facilities.
Steve Hron: Again, declining property values are requiring churches to bring more cash into the financing equation. Where do they get more cash? Well, maybe from a capital campaign. But, when is the right time to do one? How to they approach that?
If a church isn’t accessing more cash through a capital campaign, then it’s through savings or the general fund. There just hasn’t been much ability [in the past several years] to pack a savings line item in the general fund when giving is maybe flat or modestly up. A pastor once told me, “Steve, the new ‘up’, year-to year, is to break even. Just to be flat on giving.” That church just wanted to hold its own in the 2008-2012 environment.
What effects has the struggling economy had on the compensation and benefits church leaders are able to offer their staff members?
James R. Cook: Early in the recession, I was actually surprised at how little impact the economy was having on some of our larger church clients. That didn’t last long.
What we’re seeing, broadly, in churches right now is the stagnation of wages. We did a quick study coming into this roundtable, and we’re just not seeing huge wage increases in churches.
The exception is some of the larger churches that are really growing. If their cash flow is solid and giving is good, we’re not seeing stagnation. In fact, in those cases, we’re seeing some very large increases.
But overall, there’s a considerable stagnation in our marketplace. From a benefits perspective, that means we are seeing a lot more routine reevaluations of the benefit packages churches are offering — in two- and three-year RFP cycles where they are evaluating what they are offering and shopping with cost as a key consideration.
Paul Weers: As [Hron] said a moment ago, and echoed by [Cook], there’s a flat line when it comes to compensation and benefits. We’re not seeing a lot of increases. In churches, if there’s a desire to provide benefits, it’s not based upon financial decisions, but more a gesture of love and concern — a commitment to provide something for the pastor. Affording him or her something from the church is looked upon a little differently than financial data for a building program, for example.
Dan Mikes: We just looked at data across our several-hundred-church customer base, and from 2009 to 2010, we saw a 1-percent decline in general offerings. The next year, it was up 1 percent. One year later, it was up 4 percent.
So, yes, some churches did cut salaries and benefits in the downturn. These were common line items to cut in an effort to manage cash flow. Queuing off [Hron’s] comment earlier — and he’s so right — the cash reserves, in the meantime, fell to the floor.
Churches are very sensitive to their employees and were slow to make hard business decisions during the recession. But, you have to make them; otherwise, they can have lasting impact on your church’s credit rating. That’s secondary to the viability of your organization, the remaining employees you’d like to keep in secure positions, and the outreach and ministry they’re going to provide.
Although hiring is back, this scenario underscores the importance of having a qualified business administrator to handle those tough decisions. Once you get to about 500 in attendance, you should be able to afford — and really should hire — a qualified business administrator.
Have senior pastors’ and executive pastors’ compensation and benefits been similarly affected?
James R. Cook: For most churches, there’s a real recognition that if those people are struggling, the whole ministry suffers. Among some of the larger churches we’ve worked with, putting together personnel budgets for the next year — even if cash flow has been down — top staff have maintained solid compensation and benefits.
At that level, I haven’t seen any benefits or compensation cuts that weren’t voluntary. I can think of a several instances in which these top-tier folks have said to their boards, “Thanks very much for that 2- or 3-percent increase. But, if you don’t give that to us, the funds can be allocated to the raise pool, and other people down the line who are struggling a little more in this economy can get a more substantial raise.”
How does the capital campaign climate for religious institutions compare pre- and post-recession?
Joel Mikell: In 2000, when Bill and I came to RSI, we couldn’t hire consultants hire fast enough. There was so much low-hanging fruit. While that’s not the case anymore, the good news is that the capital campaign never went away — it just changed. As churches changed, as the economy changed, the way we do capital campaigns has changed significantly.
Actually, what we’re seeing at RSI is an uptick in churches doing capital campaigns. Our consultant group is maxed out.
So, churches aren’t hesitant commit to a campaign based on any obstacles; they’re just doing their due diligence. That means churches are choosing the right partner first. Then, they’re asking, “Should we do a feasibility study? An audit? Should we just do some pre-campaign work?”
And they’re more attuned, I think, to articulating the vision needed to accomplish the great commission and make disciples.
Bill McMillan: The “capital campaign-in-a-box,” one-size-fits-all model doesn’t apply anymore. Three-year campaigns, two-year campaigns, blending of capital into annual budgeting — everything you can think of is on the table now.
It used to be that a church could hire a consultant who could just “do the process” and follow the dots. Not anymore; consultants need to be able to listen, strategize and think outside the dots. So, there’s a lot more discussion on the front end of a campaign. Now, we might have a year of conversations, strategy and planning before we ever do anything — if we do anything.
Joel Mikell: I agree; we’re seeing a lot more pre-campaign assessment. I don’t just mean analyzing giving trends, but also digging deeper into how a church communicates. How does social media factor in? What are they doing with major donors? Today, churches do more due diligence on the front end.
Bill McMillan: Interestingly, in the last three years, we’ve seen more seven-figure gifts in church capital campaigns, or in giving to church ministry, than we’ve seen in the past 10 years.
At a church with a $500,000 budget in Houston, we saw two $1 million pledges in a two-year campaign. The largest gift they’d received before that was $150,000 — and those donors were church members then, too.
We’ve also seen a $16-million gift to pay off debt for a church outside of a capital campaign.
We’re seeing the major donors — we call them “financial leaders” — really come alive. Meanwhile, the middle tier of giving is shrinking.
William Scrivens: Related to this conversation, an administrator stopped by my booth yesterday and we talked for a while. She had 10 buildings, all in very poor condition. She said she had a lot of pressure to launch a capital campaign to build a new facility, but she’s told everyone she won’t pursue that until they get a handle on what they already have. She told me, “If I spent $500,000 a year for the next 10 years, I might be able to bring everything back up to snuff.”
Editor’s Note: Look for part 2 of this roundtable round-up in our October/November 2013 issue.