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Issue Date:  June 17, 2005

A good deal wrapped in questions

The Austin diocese’s test run of the “new paradigm” of finance for the Catholic church promoted by Goldman Sachs, the global investment banking firm, reveals some obvious benefits. What institution, facing a projected doubling of its service-needy membership in the next generation, would reject the idea of retiring expensive debt in return for cheaper credit, while financing needed construction at the lowest-possible interest rate?

From a financing perspective it’s hard to argue with that approach; just ask any mortgage strapped homeowner facing the prospect of funding college for his or her children.

Next, the $79.8 million bond transaction is not a fly-by-night scheme. The deal is underwritten by Goldman Sachs, backed by Wachovia Bank, rated by Standard & Poor’s and Moody’s, approved by the Texas attorney general, and includes the “unqualified opinions” of some pretty bright bond lawyers. The bonds have been purchased largely by savvy institutional investors such as tax-exempt money market funds; no one is fleecing retirees out of their Social Security checks.

These powerful institutions add considerable credibility to the transaction. It is to the diocese’s credit that they didn’t try to do the deal on the cheap.

Further, the Austin diocese is now, because of the disclosure requirements associated with any public financing, perhaps the most financially transparent church in the country. Students of church finance will be looking to the legally mandated “Official Statement” accompanying the bond issue for years to come. It spells out the financial condition of the church of Austin in a manner that is, we think, both unprecedented and welcome. Other dioceses, whose level of financial disclosure generally ranges from poor to nonexistent, should adopt the Austin official statement as a model of fiscal transparency.

Still, the Austin transaction, and Goldman Sachs’ program to peddle the municipal debt market as a ready source of capital for cash-hungry dioceses around the country, raises as many concerns as the problems it might solve.

There is, for example, the inherent messiness associated in dealing with the local government entities that actually issue the bonds. It’s a highly political process, where who you know can be just as important as what you know.

In Austin’s case, it would be positively laughable if it weren’t so serious. There, the tiny village of Creedmoor (population 300) established a quasi-governmental corporation whose sole purpose was to provide the church with nearly $80 million in low-interest financing. The diocese denies that it has any control over the corporation, though the corporation’s “managing agent,” who is also Creedmoor’s village administrator, says that two members of the corporation’s board are “representatives from the Catholic diocese.”

In return for issuing the bonds, Creedmoor gets a $50,000 issuing fee -- money the village will use to build a community center. This worthy use of its profit was one reason the diocese selected Creedmoor, said a diocesan spokesman. Perhaps. And we’re delighted that the residents of Creedmoor will now have a place to gather.

But it’s equally clear that the diocese, and its high-priced help, chose Creedmoor because they could control it. If they had asked Travis County (population 857,000) to issue the bonds, they might have faced some difficult questions because the county, unlike Creedmoor, is an experienced public issuer. Travis County does this sort of thing all the time. Their elected officials and staff are equipped to question what might not be obvious and to seek information and disclosures that otherwise might not be sought in such a complicated transaction. Creedmoor’s officials are not.

The selection of an inexperienced newly created entity in a village with fewer people than Mayberry to issue nearly $80 million in debt to a Catholic diocese would have to raise serious questions.

Further, the idea -- as stated in the bond issue’s official statement and promoted by Goldman in its correspondence with at least one other bishop -- that the bishop of a diocese has the right to tax any Catholic entity within diocesan borders is canonically correct, but realistically laugh-out-loud hysterical. In the real world, it’s exceedingly unlikely that a Catholic hospital, university or fraternal organization would jump at the chance to bail out a diocese that so mismanaged its affairs that it could not produce the funds to cover its debt payments.

The leaders of these organizations have a fiduciary responsibility not to the diocese where they are incorporated, but to the organizations they manage. To think they would abandon such an obligation is ludicrous. If the rating agencies gave credit to the Austin bond issue based on this assumption, they need to learn more about how the church operates. And if other dioceses considering tax-exempt financing plan to peddle this line to Wall Street, they should reconsider.

Likewise, the idea that a diocese has a “moral obligation” to assist another financially distressed diocese is canonically accurate, as far as it goes. Problem is, it doesn’t go too far. Just ask the bishops of Tucson, Ariz., Portland, Ore., and Spokane, Wash., who are leading their churches through various stages of bankruptcy proceedings.

Two other points: Bishops considering such transactions would be wise to know the character and credentials of all the principal players in the transaction. Not everyone has the church’s best interests at heart, particularly when there’s big money involved.

Further, while we don’t doubt that the state of the law is such today that church-state issues are of less concern to sectarian institutions seeking tax-exempt municipal financing than they once were, prudence should be the watchword. Diocesan use of such funds to construct church halls and parochial schools (as opposed to nonprofit church-affiliated universities or hospitals) is new terrain. Will some group (the American Civil Liberties Union?) sue to prevent the practice if it becomes increasingly widespread? Could restrictions be placed on the church’s ability to use its property as it sees fit?

Finally, as is the case with so many areas of church governance, a new initiative arrives fully formed with little consultation outside of a small circle of interested principals. No one doubts that the bishop is doing this with the best interests of the community in mind, but apparently few in the community were consulted. That is not surprising, for the church, in the broadest sense, has no real mechanisms for consulting the wisdom of the community on such questions.

The bottom line: The Austin diocese gets cheap money, wrapped in layers of questions.

National Catholic Reporter, June 17, 2005

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