Your Eminences, Your Graces, most Reverend Clergy, brother Archons of the Order of St. Andrew, fellow members of the Archdiocesan Council, and representatives to the 2018 Clergy Laity Congress
Vice President Archon George Tsandikos, Secretary Cathy Walsh and I were elected to serve as Officers of the Holy Greek Orthodox Archdiocese of America (the “Archdiocese”) in October 2016. Mrs. Elaine Allen was subsequently appointed as the new Chairperson of the Archdiocesan Audit Committee, and Archon Lazaros Kircos was appointed as the new Chairman of the Archdiocesan Finance Committee.
With the blessings of His Eminence, Archbishop Demetrios, Geron of America, the five of us, led by His Grace, Bishop Andonios, Chancellor of the Archdiocese, constitute the executive leadership team that successfully restructured the Archdiocese from an administrative, organizational and financial perspective in a very brief period of time.
From the first day of our tenure, this team committed itself to making the critical structural changes required to restore the stability of Archdiocese. Our goal was to create a world-class institution from a perspective of accountability and transparency. We are very proud of our progress on all fronts.
This Leadership Team has worked tirelessly, methodically, analytically and professionally on behalf of the Archdiocese. We have discovered, disclosed, confronted and solved a significant number of very serious administrative, organizational, financial, budgetary and accounting challenges formerly confronting the Archdiocese.
The Archdiocese is now fundamentally transformed as a result of many difficult and decisive actions. While a significant number of the actions were very impactful individually, collectively, they were transformative.
We are pleased to report that the Archdiocese has satisfied its financial obligations, including all amounts formerly owed to St. Nicholas Church and National Shrine (“St. Nicholas”), Hellenic College Holy Cross, the Pension Plan, and to donor restricted and custodial funds that required replenishment. I would like to repeat – paid in full.
We are very encouraged by the speed and effectiveness of the changes we implemented. Everyone knows that change is difficult for people and organizations. Even though the Archdiocese is a canonical, hierarchical, traditional, ecclesiastical institution, it successfully managed through a period of extreme transition that would have challenged any institution.
The principal of accountability has guided our efforts through every step in the transformation of the Archdiocese. We are committed to creating a culture where every single dollar donated by every single member of the Faithful is treated with respect and humility.
The principal of transparency has also guided our efforts through every step in the transformation of the Archdiocese. We have provided the Faithful with complete and timely disclosure of all matters during our tenure in office. Starting in October 2017, the Archdiocese has released a constant stream of press releases that have informed the Faithful of key events happening in real time. The Archdiocese has also publicly released the Executive Summary of the 2017 Grant Thornton Operations Review, the 2018 Archdiocesan Budget, the 2016 Grant Thornton Financial Statement Audit, and the Phase I of the St. Nicholas Report to the Special Investigative Committee by PricewaterhouseCoopers Advisory Services LLC (“PwC”). The Officers have given speeches, held talks, spoken to the media, and addressed Metropolis Clergy Laity meetings with the blessing of our beloved Metropolitans. The Orthodox Observer and the Archdiocesan web site have also provided full and timely disclosure of all substantive matters. Consistent with this practice, the Archdiocese will continue to provide full disclosure to the Faithful.
The Executive Committee, the Officers and Audit and Finance Committee Chairs of the Archdiocese are now focused on the future and only the future. While it is exceedingly disappointing that the Archdiocese experienced a recent financial crisis, this period is now behind us. It is time to turn the page and embrace the future.
Everything is new:
The Archdiocese is now led by new lay leadership at the most senior level, led by Archon George Tsandikos, Vice President, Ms. Cathy Walsh, Secretary, and me, serving as Treasurer.
The Archdiocese is now under new administrative management and implemented a new organizational structure. His Grace, Bishop Andonios, Chancellor, assumed key administrative responsibilities after the resignation of the former Executive Director of Administration in September 2017. Father Soterios Baroody was appointed as Chief Financial Officer (“CFO”) of the Archdiocese in April 2017. Prior to his appointment, the Archdiocese did not have the position of CFO.
The former Archdiocese Executive Director of Administration resigned and the former Director of Finance was terminated. In addition, the former Chairman of the Finance Committee was relieved of his position.
Critical governance and organizational changes were made that would have prevented the financial crisis. First, prior the creation of the CFO position, the former Executive Director of Administration had control of Administration and Finance. There has now been a clear separation of these functions. Second, leadership of the Audit Committee and the Finance Committee have now been separated, accompanied by appropriate professional reporting structures.
Archon Lazaros Kircos was appointed as the new Chairman of the Archdiocese Finance Committee. Under Chairman Kircos’ leadership, the Finance Committee has taken on its proper role, the role it should have always played in the administration and supervision of the finances of the Archdiocese. Chairman Kircos has made numerous critical contributions, especially in the development of the 2018 Budget and the budget that will be discussed today. Chairman Kircos and the Finance Committee now are responsible not only for the success of the Archdiocese Total Commitment Program, but also for the Finance Committee’s supervision of budgets, expenditures, finance, treasury, and long term financial goals.
Mrs. Elaine Allen was appointed as the new Chairperson of the Archdiocesan Council’s Standing Independent Audit Committee, accompanied by a new group of very qualified and credentialed financial and legal professionals who serve as members of the Committee. I would like to emphasize three critical words – independent, qualified and credentialed. Mrs. Allen’s critical contribution to the Archdiocese over the past year cannot be overstated due to the incredible complexity and technical nature of the multiple work streams undertaken and successfully completed by the Audit Committee. The responsibilities of the Audit Committee now properly include assessing the reliability and accuracy of financial reporting; selecting external auditors; meeting with those auditors to review audit plans and results; reviewing internal controls and developing any necessary remediation plans; and monitoring compliance with applicable laws and regulations pertaining to financial controls.
The intent of my address today is to present an overarching view of the administrative, organizational and financial transformation of the Archdiocese, and to present the critical, but very manageable, tasks that remain to be completed. Many of these topics were discussed in great detail in the various Committee Meetings in Boston, but the Faithful who are not present in Boston deserve to be informed of our progress.
First, as a result of our collective efforts as a team, and by the Grace of God, the Archdiocese has achieved financial stability. The Archdiocese has closed on and funded a bank loan, the proceeds of which refunded all of the amounts owed to St. Nicholas, Hellenic College Holy Cross, the Pension Plan, and to donor restricted and custodial funds that required replenishment. The Archdiocese’s current financial stability is validated by its ability to obtain a loan from an independent and regulated banking institution that put its capital at risk, after a thorough due diligence involving accounting and legal professionals retained by the bank.
The Archdiocese is now operating on a balanced budget that generates funds to satisfy its financial obligations in 2018 and beyond, including the debt service associated with the new bank loan.
The financial stability of the Archdiocese was achieved without any additional burden placed on its parishes. This is critical. Parish contribution levels in 2018 were maintained at the 2017 levels, resulting in a $1.6 million of savings to our parishes.
The Archdiocese achieve financial stability by taking the following actions: (1) establishing new leadership accompanied by critical organizational changes already discussed, (2) establishing and implementing new internal controls, policies and procedures governing spending, (3) significantly reducing operating cash costs and expenses, (4) creating a real-world, ground-up, fact based 2018 budget, (5) completing a number of serious critical audits, after a difficult, complex and time intensive task of reconstructing the books and records of the Archdiocese, and, finally (6) obtaining a bank loan to satisfy amounts owed by the Archdiocese to donor restricted and custodial accounts that required replenishment.
(2) Establishing and implementing new internal controls, policies and procedures governing spending
The Archdiocese established and implemented internal controls, policies and procedures beginning in spring 2017 by management directive, including policies and procedures governing travel and expense accounts, general and administrative expenditures, staff cell phones, and credit card access and terms of usage. Further, new vendor management protocols and controls were implemented.
These controls were exceedingly effective in reducing spending, but they were not enough.
In furtherance of this objective of creating a world-class institution from a governance and controls perspective, the Archdiocese retained Grant Thornton to conduct a thorough, independent review and analysis of the operations of the Archdiocese finance function, and to provide an in-depth, third party view of areas where the finance function and the Archdiocese can become more efficient, effective and transparent.
I am pleased to report that the Archdiocese Council, including its Executive, Audit, Legal and Finance Committees, received the Executive Summary of the Grant Thornton Operations Review in January 2018. The Operations Review made recommendations on best practices that can be implemented, and has acted as a critical guide for the Archdiocese regarding internal controls, practices and procedures. The task of documenting, communicating, and enforcing these policies is in process. Other recommendations that are focused on efficiency and effectiveness of operations are being evaluated for their cost benefit.
(3) Significantly reducing operating cash costs and expenses
The Archdiocese reduced approximately $8.0 million or approximately 25% of annual operating cash expenditures. As a result, the Archdiocese now has a budget where committed revenues exceed expenses, and extra funds can be used to satisfy its financial obligations. The cost reductions, which are permanent and structural, were achieved primarily by reducing Archdiocesan staff levels, reducing general administrative costs, and implementing new vendor management protocols and controls.
The Archdiocese reduced the number of direct employees from an average of 183 in the first quarter of 2017 to an average of 136 in the first quarter of 2018, a reduction of almost 26%. In addition, a large number of non-employee professionals on payroll from outside vendors and contractors were also eliminated.
Please consider the magnitude of the cost and spending reductions that occurred, and reflect on how quickly and decisively the Archdiocese acted. A majority of the $8.0 million in cost cuts involved people and payroll. Reducing such a significant number of loyal, dedicated, committed and faithful employees was very difficult. This action effected many families, and these reductions were only made after very thoughtful considerations.
Our work is not completed. We say this with conviction. The Archdiocese is committed to the process of continuous improvement, and will strive to become better and more efficient.
(4) Creating a real world, ground-up, fact based 2018 budget
For the first time, a budget was developed by the Archdiocesan finance staff with the guidance and assistance of the Chancellor and CFO, the Officers, the Finance Budget Sub-Committee, and the Audit Committee Chair, that reflects the actual revenues and expenses of the Archdiocese. The budget was designed to meet the financial needs of the Archdiocese, and its commitments to the Ecumenical Patriarchate, Hellenic College Holy Cross, our Metropolises and ministries, while still generating resources to satisfy financial obligations and debt service. After adoption by the Executive Committee, the budget was posted on the Archdiocesan web site.
This budget process, and the resulting balanced budget, was the critical step in establishing a solid foundation for the Archdiocese finances.
For the first time, the CFO and the Finance Committee are actively monitoring variances in the 2018 budget relative to actual performance. If the Finance Committee had monitored actual to budget variances prior to 2018, the Archdiocese would have avoided its recent financial crisis.
We are pleased to report that year to date through May, the revenues of the Archdiocese are above budgeted levels, and expenses of the Archdiocese are below budgeted levels. This allowed the Archdiocese to replenish over $2.0 million of amounts owed to donor restricted and custodial accounts and fund payments to the Metropolises and the Pension Plan out of internally generated cash flow, including $1.0 million to St. Nicholas.
We must be very direct regarding the budget process of the Archdiocese. No organization meets every other year to establish a budget in the real world. A budget must be constructed by involved and informed parties, by leaders, by department heads, by managers, and, if necessary, with the assistance of outside professionals, at least once a year, not every two years. The budget must be grounded in fact, analysis, and actual financial performance. Then the budget has to be monitored compared to actual performance.
The budget passed at the last Clergy Laity Congress two years ago did not reflect the actual or projected financial performance of the Archdiocese as evidenced by the acute financial crisis experienced between July and September 2017.
Therefore, as Treasurer I endorse the proposal that will be voted on at this Clergy Laity Congress that clarifies the Executive Committee’s authority to have the dynamic flexibility to make changes to the budget as required by unforeseen events.
(5) Completing a number of critical audits
The Archdiocese is in receipt of its 2016 Financial Statement Audit by Grant Thornton and the St. Nicholas Special Committee is in receipt of the PwC “Phase I” Report. The Grant Thornton audit and the PwC report are the result of truly heroic efforts by Mrs. Elaine Allen, the Audit Committee, Father Baroody and the Archdiocesan staff. Please understand that the books and records of the Archdiocese and St. Nicholas were unbelievably deficient in so many respects, were not current, and needed to be analyzed and reconstituted. This was a time intensive, arduous and thankless task that needed to be completed as a condition precedent to receiving the 2016 audit from Grant Thornton and the St. Nicholas report from PwC. Mrs. Elaine Allen and Father Baroody were assisted by an independent accounting firm named Kiwi Associates that continues its work. A second resource, CFO Consulting Partners has also been retained by the Archdiocese to assist in revamping the financial systems, becoming current on financial reporting and documenting controls.
The Archdiocese also engaged Kiwi Associates to assist the Audit Committee with a review of Archdiocesan payroll records, and a subsequent review of credit card expenses took place. As disclosed in a press release, certain matters were discovered, and the Audit Committee proactively first informed, and is now fully cooperating with government authorities. Our insurance carrier has also been notified.
(6): Satisfying amounts owed to certain donor restricted and custodial accounts
The Archdiocese previously disclosed that funds from certain donor restricted and custodial accounts were used to fund operations. The Archdiocese had to prioritize the expeditious return of funds to those accounts, and this activity has consumed the energy, time, attention and efforts of the executive leadership team for the past year.
The Executive Committee, given the critical imperative of satisfying the amounts owed to these accounts as quickly as possible, decided to obtain a bank loan.
We are pleased to report that the Archdiocese successfully obtained loan commitments from ALMA Bank totaling $8.5 million. A $5.5 million mortgage has been obtained with a 5 year renewable term and a 4.25% interest rate. In addition, the Archdiocese now has a $3 million line of credit with a floating rate of interest set at prime. The mortgage proceeds were used to satisfy amounts owed to donor restricted and custodial accounts, including the final $2.5 million to St. Nicholas plus interest of $322,000, as well as certain other financial obligations. Only $2.0 million of the line of credit capacity was used at this time. Full and complete disclosure on the use of loan proceeds has been provided to the Clergy Laity Congress by the Finance Committee.
Very simply, the obvious mismanagement by former financial administrators of the Archdiocese created $10 million of legacy financial obligations. The Archdiocese, remarkably, was able to satisfy $2.5 million of those obligations from internally generated cash flow in 2018, but unfortunately had to borrow the remaining $7.5 million due to the imperative of time.
The Archdiocese should be able to repay the bank loan in a reasonable period of time without placing any additional burden on our Parishes. This is important and should be repeated: there is no additional burden placed on our Parishes as a result of this loan. While other costs increases may need to be covered by increases in the Total Commitment Program as result of inflation in insurance, utilities, maintenance, salaries and other operating expenses, the budget today is generating amounts sufficient to repay the bank loan at current revenue levels. Further, the Parishes are not party to this loan. We ask the media, respectfully, not to suggest the repayment of this loan will fall on the Parishes, or that the Parishes are responsible for the loan.
There are several critical initiatives that remain to be addressed in an immediate and timely fashion, with full disclosure to the Faithful, and with the proper resources to accomplish these critical tasks: (1) as previously discussed, documenting, implementing, communicating and enforcing the recommendations of the Grant Thornton Operations report. This will make the changes structural and permanent, (2) forming a special task force to address the issues regarding governance, administration and funding of the Pension Plan, (3) determining funding levels for Hellenic College Holy Cross, and (4) establishing a plan and creating a structure to complete the construction of the St. Nicholas.
We are pleased to report that the Archdiocese has satisfied its monthly obligations to the Pension Plan in full. The Archdiocese is now completely current on its required payments to the Pension Plan. However, the current structure of the Pension Plan is not sustainable, and this matter is an active subject of discussion and analysis by the Finance Committee. The Pension Plan is currently $53 million underfunded according to Mercer, actuaries to the Pension Plan.
Please consider the following facts that must be confronted and solved quickly: (1) the Pension Plan is owed approximately $3.3 million by the Parishes, and it is reasonable to assume that perhaps 50% of this amount may never be collected and may probably be written off, (2) while the Parishes contribute $650 per month to the Pension Plan, the actual cost a Priest’s monthly benefit is almost double that amount, which is obviously not sustainable, (3) only 70% of the monthly cost pays for the pension benefit, while 30% of the cost pays for disability, life insurance and administrative costs, and (4) not all Priests participate in the Pension Plan, as they are required to do in accordance with agreements signed prior to their ordination.
In order to address the long term problems confronting the Pension Plan, including its governance structure, the Archdiocese and Priests will form a special task force to immediately get to work on a solution that is beneficial to our Archdiocese, Parishes and Priests.
We are pleased to report the Archdiocese has satisfied all of its financial obligations to Hellenic College Holy Cross. HCHC is an independent entity, governed by its own Board of Trustees, with its own budget, endowment and financial resources.
The prior Clergy Laity Congress authorized $1.5 million of funding from the Archdiocese to HCHC. The Executive Committee, as evidenced by the facts and recent history, determined that in the 2018 budget, the Archdiocese could not afford more than $1 million of funding to HCHC given its other financial obligations. If this Clergy Laity Congress decides to increase the Archdiocese financial obligation to HCHC, either (1) Parishes will have to fund this amount through an increase in the Total Commitment Program by $500,000, (2) the Archdiocese will have to reduce expenses by an additional $500,000, or (3) a combination of both. Once again, the money has to come from somewhere.
We are pleased to report that the Archdiocese has repaid all amounts owed to the St. Nicholas. The Archdiocese remains committed to completing the Church. We are the only Christian denomination that has a Church present at Ground Zero, therefore, this National Shrine will be the most visible and visited Orthodox Church in the United States.
In order to promote transparency and accountability, the Archdiocese released the results of Phase I of the PwC investigative report (“Report”) regarding the rebuilding of St. Nicholas. PwC was retained by Baker Hostetler, counsel to the Special Investigative Committee, which was authorized by the Archdiocese to conduct an independent review of the St. Nicholas project.
According to the Report, PwC confirmed that all expenditures charged to St. Nicholas funds were, in fact, used for St. Nicholas-related purposes and met donor restrictions. The Report also stated that the Archdiocese owed St. Nicholas the sum of $3,504,550 plus interest. The Archdiocese voluntarily decided not to charge to St. Nicholas for funds expended on general Archdiocesan expenditures related to St. Nicholas such as fundraising. This amount has now been repaid in full.
I must address to dismiss a continuing serious misstatement of fact. PwC, one of the world’s four giant accounting firms put its name on the Report that stated the maximum borrowings by the Archdiocese from St. Nicholas was never more than $4.5 million. As late as last week, even after the PwC report was published and released to the public, a newspaper in Greece reported that the Archdiocese had borrowed $17 million. Let me be clear, and for emphasis, the PwC reports states that the Archdiocese never borrowed more than $4.5 million from St. Nicholas. To write or state anything to the contrary is not true.
Phase II of the PwC Report will discuss procedures and observations regarding the baseline costs of the St. Nicholas Shrine; the causes of cost increases and design changes to the Shrine; and undisclosed relationships, if any, between the Shrine’s project management and vendors paid from St. Nicholas funds. The findings of Phase II will be made available to the Faithful.
Once the new structure is established to restart the fundraising and construction of St. Nicholas, we exhort the Faithful to recommit to the completion of this project.
In conclusion, with the deep respect, humility, and love, we would like to thank our Parishes for their extraordinary stewardship. The Finance Committee reported that for 2017, the Archdiocese Total Commitment receipts from its Parishes across the country met 100% of the budgeted Total Commitment for the sixth consecutive year. The truth, supported by facts, is that the financial support of the Parishes is remains extremely strong in 2018. This year, over 88 Parishes from all over the country have demonstrated their faith in the Church by pre-paying their respective Total Commitment support aggregating $2.7 million. I do not deal in headlines. I deal in reality. I am a business and financial person. I look at the numbers. Math is objective. Math tells the truth. The math demonstrates that the Parishes’ support of the Archdiocese in 2017 and 2018 is very strong.
In a short period of time, by the Grace of God, the Archdiocese has made strides to achieve its objectives of accountability and transparency necessary for its mission to proclaim the Gospel of Christ in the U.S.A and beyond.
The Officers, with the blessing of His Eminence, Archbishop Demetrios, and the most Revered Hierarchs of our Holy Eparchial Synod, have brought order, structure and integrity to the operations of the Archdiocese.
We ask for your prayers as we proceed with our endeavors.
Everything I have said today is with respect and humility.
Michael Psaros, Treasurer