242. Church Boards and Unfunded or Deferred Liabilities — A Chairperson’s Concern

An unfunded liability is a financial obligation contracted or accepted in some way by an organization but which exceeds an organization’s ability to pay. A deferred liability is a financial obligation that the organization recognizes it will have responsibility for, but does not take immediate steps to address it. I think congregations often assume such unfunded and deferred liabilities, but church boards tend to ignore them until some crisis emerges. The pressure of current liabilities prevents them for various reasons from attending to them.

What might be some examples of unfunded liabilities?

1. For various reasons you might have arranged loans from some church members to complete needed repairs on the church building. However, your plan for repayment is that hopefully through special offerings or perhaps the generosity of the donors the loans will be dealt with. Five months after the arrangements have been made and monies received, a divisive action splits the church and several of those who made the loans are now calling them in. The congregation, however, has no funds to repay them. You have a kind of unfunded liability.

2. Five years ago the congregation was growing significantly and new staff were being added. However, two years ago growth leveled off and last year twenty-five members moved away for various reasons. The budget implications are severe and you cannot resource the current level of staff. So three staff people need to be released. However, to do this well requires some degree of severance pay. The bill for such severance is about $50,000. The congregation has already used up its reserves and only is managing to maintain services through a revolving line of credit with the bank. So the church board finds itself dealing with an unfunded liability in terms of current resources.

3. Eight years ago the congregation built and occupied a new facility. However, during the intervening years no provision was made for depreciation or replacement of key systems such as heating and air conditioning or replacement of carpets or roof. Now for a variety of reasons the carpets need to be replaced and the air conditioning system has to be renewed. The costs total $250,000. The congregation is still repaying a million dollar mortgage and has no reserves. Here again is a kind of deferred liability.

4. Your congregation is in a smaller town dependent upon a single industry. Three years ago the company was booming and the this meant new people were moving in. The local church grew substantially and decided to build a new structure. They spent two million dollars doing this. Even though the congregation gave generously, there is an outstanding mortgage of $1,500,000. Last month the company announced that it was suspending operations because of a serious deterioration in its markets. Property values have tanked overnight. Ten families in the church have decided to move to other places for employment purposes. This means the weekly giving of the congregation will be affected seriously. Another eight families are giving this serious consideration. It is probable that within six months the congregation will be about 30% of its current size. Yet, the mortgage remains, largely unpaid. If the congregation dissolves, it will leave an unfunded liability of perhaps $1,000,000, unless the church property is sold at a much reduced value. Even then the proceeds may not cover the indebtedness.

5. A church member who works with children’s ministry has been charged with child abuse because of an incident at a recent church event. The parents have brought a suit against the individual and the congregation for failing to provide a safe environment for their child. The church does not require children’s ministry volunteers to have a criminal records check completed before serving. The congregation is facing significant legal fees and damages of half a million dollars. The church board recently had debated the possibility of securing officers and workers liability insurance, but several board members had balked at the costs. So nothing was done. If the congregation loses the case, this will mean that the property must be sold to pay the costs. This is an unfunded liability.

Your congregation and church board may not face such situations. However, they do raise for you as chairperson several questions. First, what insurance coverage do you have that will cover possible unfunded liabilities (e.g. potential lawsuits, mortgage insurance)? Second, is your church board building any contingency funding into your annual budget? It is a good rule of thumb to try to develop a large enough contingency fund to cover two to three months of the current operational budget. This kind of cushion gives the board time during a crisis to make good decisions and seek effective alternatives. Third, does your church have any kind of replacement or depreciation fund? Or is the current congregation borrowing from future members in its use of the facility today? Most church boards operate with the perspective that when a significant facility need arises that they will go the congregation to raise the funds. However, this can place a huge burden on those people who just happen to be part of the congregation at that point in time. Would it not be fairer to have all the people using the facility contributing a small portion to replacement on an ongoing basis? If God sometimes provides during emergencies, surely we can trust him to supply financial in an ongoing manner. Fourth, from the standpoint of human resources have you done a calculation that determines what your financial responsibility to staff would be if you had to release half of them because of an unforeseen crisis? What kind of severance would be required? Having this knowledge might help you calculate the amount of contingency that you should be aiming to develop.

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