Hockey Stick Dilemmas and the Future of Mormonism
The Church of Jesus Christ of Latter-day Saints is at a historic crossroads thanks to compound interest.
Greetings,
Last time I wrote about the finances of the Church of Jesus Christ of Latter-day Saints and concluded that, based on some plausible numbers that I've seen, its spending relative to reserves is more or less in line with that of other non-profits.[1] I spent a bunch of additional time this week playing with numbers, trying to get a picture of Church finances in the future based on various assumptions. I'm not a finance guy and I've got very limited data, so I'm very skeptical of my own conclusions, but based on my spreadsheets, I think that the Church is at a major financial crossroads.
If one graphs any number that is growing exponentially, the graph will tend to be shaped like a hockey stick, gradually increasing before bending up dramatically. This is especially true when you start at a very low level. This hockey stick shape presents the Council on the Disposition of the Tithes with the basic dilemma that, I suspect, it faces today.
By the early 1960s, the Church had essentially zero reserves, having spent them all in a massive and at times poorly executed building expansion. In response, President N. Eldon Tanner overhauled the finances of the Church, putting in place modern accounting procedures, budget processes, and cash controls. Key to these reforms was putting some percentage of tithing donations into a reserve fund that was then invested. I don't have any hard numbers, but based on a knowledge of Church and economic history in the period, I'd hazard the following guess as to the story of Church finances over the last half century:
Initially, Church reserves relative to expenditures weren't that substantial. Growing from a base of zero, they accumulated slowly. During this period Church membership – and thus Church expenses – was growing rapidly. At best reserves were a rainy day fund that could be called on if another crisis such as that of the 1960s occurred, but the most important thing about the Tanner reforms was that they averted such a crisis by rationalizing and limiting spending. During the first decades of the regime, I also suspect that reserves, as an investment, performed poorly. The energy crisis, inflation, and recessions of the late 1970s and early 1980s were hard on dollar-denominated savings. By the mid-1980s, the Church had a functional financial model, but its reserves had been hammered for a decade or more in a period of rapid membership growth. From the point of view of the Council on the Disposition of the Tithes, they were likely comforting to have but not something to which one looked in terms of the basic structure of spending.
That began to change with the great post-Volker moderation. Inflation came down, the business cycle became less extreme, and the rate of return on investment increased. Reserves began to grow more rapidly. Since 2009 there has been more volatility, but I suspect that the growth has continued. We now know that they have become very large. I don't think that President Tanner set out to create a vast pool of reserves. I think he was solving the problems of the 1950s and the 1960s, but the relentless logic of compound interest has transformed his rainy day fund into something else.
On those rare occasions when Church leaders do discuss reserves, they speak in terms of the rainy day fund. If we take this literally, then it implies a model in which expenditures are less than donations indefinitely into the future. This implies that reserves will grow to enormous size, while Church expenditures grow at only a modest rate. Indeed, based on plausible scenarios of stagnant or shrinking membership in the developed world, expenditures might drop in real terms and decrease dramatically on an expenditure per member basis. But reserves would be monstrously huge. Let's call this Model 1.
The other alternative is that the "rainy day fund" language is a holdover from the Tanner model and a folksy way of referring to a very different reality. In this model the reserves are like the corpus of a foundation. They aren't being held in the expectation of being spent in some future crisis. Ideally, they are never spent at all. Rather, their purpose is to provide a perpetual source of future income by spending some fraction of the appreciation. In the early days of the Tanner regime, thinking of reserves in this way would have made little sense. The permanent income generated by reserves relative expenses would have been trivial for many years. As my post last time suggested, however, that is no longer the case.
The future finances of the Church look very different if the idea of a rainy day fund is ditched, and we just spend 4 to 5 percent of reserves annually. Let's call this Model 2. It is very difficult to predict the future and much depends on assumptions about membership growth, tithing donations, and economic conditions. That said, given what I think are plausible assumptions, Model 2 looks very different from Model 1. First spending grows substantially and within a decade or two, it surpasses annual tithing donations. Reserves continue to grow but at a much slower rate than under Model 1. This holds true even if tithing donations are flat.
Because cash is fungible, it's not dear whether the Church has been pursuing Model 1 or Model 2. Church leaders have consistently articulated Model 1, and for much of the last half century, that would have been prudent. Looking at the future from the bend of the hockey stick, however, it looks increasingly dysfunctional. Given compounding returns on investment, it implies amassing gargantuan reserves relative to spending. Under Model 2, reserves right now don't look particularly large relative to spending. They support something like current spending levels and when coupled with tithing donations allow for a modest increase in spending each year in the near term. Over time, however, spending becomes really quite dramatic under Model 2. The question then becomes "Spending on what?"
One approach is a more resource rich model of Latter-day Saint devotional life. More temples. Perhaps more resource intensive programs. Perhaps more money spent on nicer chapels. I think that we are already seeing this in increased temple construction, including in places with small Latter-day Saint populations, e.g. Winchester, Virginia. In very rough terms, we seem to have gone from a model in which there must be some critical mass of Latter-day Saints in an area before a temple is built to a much more expensive model in which the goal is for all Latter-day Saints, regardless of location or density of LDS population, to live within a relatively short distance of a temple. I'll admit that I have been worried about the financial sustainability of building and maintaining these temples. After playing around with my back of the envelope models, I no longer am. I suspect, however, that there just isn't a ton to be spent on the devotional activities of the Church, which probably can't absorb all of the increased spending. I don't predict the rise of luxury chapels, which would radically change the aesthetics of Latter-day Saint worship in ways that I think are unlikely. Obviously, I could be wrong. Another possibility would be to expand Church education. I think we may see this in more money spent on BYU, the Pathways program, and perhaps even new Church schools. If I was on the Council for the Disposition of the Tithes, however, I would be skeptical of how big of a benefit the Church gets in terms of its core mission from funding additional universities. I suspect that as it stands, BYU is no longer a great use of Church funds and massively scaling up that model seems unlikely. On the other hand, this is an area where the Church does have some institutional experience and expertise. Again, I may be wrong.
The other possibility is a big increase in humanitarian spending. When the Church announced that it had spent $1 billion in a single year on humanitarian spending, many were skeptical in light of earlier levels of aid spending by the Church. I'll admit to being skeptical of precisely how spending gets counted. When it comes to numbers, I like audited statements prepared by accountants not press releases prepared by PR professionals. However, I am not skeptical about the basic scaling up of amounts. Given plausible financial assumptions, it is very possible for the Church to spend more money on humanitarian aid in a single year than it had spent previously in decades. This is what the hockey stick of exponential growth can imply.
A final possibility is that the Church starts taking in less in donations. It could do this while increasing spending, at least under certain economic conditions. We've already seen this in the elimination of regular drives for donations to Church building funds, Church-wide humanitarian fasts, ward fundraisers, and the like. The trend since 1960 or so of centralizing more of Church spending decisions in Salt Lake has implied a lower percentage of members' income donated to the Church over the last half century. This could continue informally. For example, we might see a decreased emphasis on tithing in official Church teachings. It could also happen more formally. For example, the Church might drop full tithing as a requirement for a temple recommend or increase welfare support for low-income members from Church funds. Most dramatically, one could imagine theological reinterpretations of the tithing requirement, for example by interpreting the idea of "increase" more narrowly to explicitly include only a portion of income.
There are some wrinkles and limitations to this analysis. Ramping up humanitarian or other spending rapidly without substantial waste would be difficult, and I expect the Council on the Disposition of the Tithes would behave cautiously. I suspect that spending on the scale that could be possible under some future scenarios would require that the Church create its own humanitarian institutions, which would be hard and require the development of new managerial expertise that the Church currently lacks. It would be slow and difficult. I strongly suspect that there is a lot more volatility in the value of reserves than in the value of tithing. It’s difficult to create institutions on the back of highly volatile income streams. Thus Model 2 implies a much more difficult budgeting process than Model 1. Most importantly there is a lot of uncertainty about the future.
First, whether the Church takes in, holds, and spends too much or too little money is not a matter of the absolute amounts involved. Rather, what matters is Church spending relative to Church membership. I suspect that at this point total Church revenues from investments and donations are increasing faster than Church membership. I doubt this was true from 1970 to say 1985, although I don't know. I certainly don't know what the future of Church growth looks like. Church growth in the 1940s looked nothing like Church growth in the 1970s. I see no reason to assume that Church growth in 2060 will look like Church growth in 2023. Just taking current trends and extending them into the future has not proven a good way of predicting Church growth in the past.
Second, so much depends on financial conditions. It's easy to create projections of massive future income or reserves by extrapolating consistent but modest rates of returns and tithing donations. The real world is very different. Market volatility will have a huge impact on reserves and the spending that they can support. It will also have a big effect on tithing donations. The real purchasing power of future spending depends on inflation. Globally, we've had very modest inflation for 40 years but that seems to be changing. As a saver, the Church is unusually exposed to inflation risk. And so on.
With those caveats, I think that the Council on the Disposition of the Tithes faces two basic choices. First, do they dramatically increase spending in the coming decades or do they dramatically increase their already substantial reserves into something astronomical? Second, if they do massively increase spending, on what do they spend the increase? I like the idea of the Church scaling up humanitarian spending on a huge scale and doing so indefinitely. I think that this would be possible, but doing so without massive waste would be very difficult and would take time.
All of this analysis is subject to the always substantial limitations of my ignorance and the inherent uncertainties of the future. But if I'm right, we are at a moment when huge decisions about the future of Mormonism are being made.
Until next time.
Nate Oman
[1] I heard from a number of folks suggesting that my analysis was off because the Church is spending less than tithing revenues and thus not touching reserves at all. A couple of quick responses. First, cash is fungible, so from an overall economic perspective it makes no difference if spending "comes from reserves" or "comes from tithing." Second, if the Church spends less than tithing revenues then reserves grow over time. If you spend at a constant level of your reserves then spending also grows. Third, I was assuming that spending is based on a percentage of reserves not revenue. Thus tithing in Year 1 has no effect on spending in Year 1, but it does affect spending in Year 2 because reserves grow. This is in line with cautious non-profit practice. You don't set your spending this year based on what you think you will take in in donations this year. You spend based on the money you actually have this year. I repeat: I'm just looking at big numbers. I have no idea exactly how budgets are set by the Church or even what the budgets are because of the opacity of Church finances. I think that this opacity is bad.
I have also seen many people upset by the idea that the Church runs just like any other corporation bent on financial gain. Two points. First, the Church is NOT run like a for-profit entity. For example, if it was an investment fund bent on maximizing returns for profit it would have huge amounts of leverage. It has no leverage. It’s just not being run like a for-profit business. It's being run like a large non-profit entity. Second, the Church IS a large non-profit entity. It is going to have to have a financial model if it is going to operate in the material world. I’ve little patience with the notion that there is something inherently wrong about the Church having ANY financial model or that the right financial model – e.g. spending all revenues each year – is the one that has certain well known risks that have in fact afflicted the Church several times throughout its history. I’ve even less patience when the critics seem unaware of these risks and resistant to the idea of thinking through the tradeoffs of accepting or mitigating them.