Is the Church of Jesus Christ of Latter-day Saints hoarding wealth?
If you run the numbers, not really. But it's hard to know for certain. That's the Church's fault.
Greetings,
The finances of the famously tight-lipped Church of Jesus Christ of Latter-day Saints are in the news again. The stories swirl around an asset management firm created by the Church called Ensign Peak and questions of whether the Church has violated tax laws (no good evidence that they did at this point) and securities reporting laws (yup), and the idea that the Church is hoarding wealth in a unique and troubling way. Everything is wrapped in a narrative of mystery and cover-up.
To put my cards on the table, I think that the Church is wrong to maintain its current level of secrecy. I think that it breeds mistrust and led the Church to overly aggressive legal positions that crossed the line into legal violations. That said, many of the allegations about Ensign Peak don’t seem to hold much water. It’s an investment vehicle, and it seems to have made investments. It’s big. City Creek Mall is an investment, as is a loan (which seems to be the form of the “bailout”) to an insurance company. The fact that investment vehicles make investments is…not surprising. It also seems to be the case that Ensign Peak is distributing money to the Church in the form of cash, which for reasons that make no sense to me the whistle blower seems to think is suspect or doesn’t count as a disbursement or…something. I don’t get it. Is Ensign Peak supposed to give the Church securities, real estate, loan participations? It seems obvious and unobjectionable to me that the distributions would be in cash.
Enough throat clearing.
I want to ask a simple, big picture question: Is the basic financial model of the Church unique or wildly different from that of other non-profits? Does it hoard wealth to an unusual degree?
This is a hard question to answer because of the Church’s secrecy (see my opinion above), but we have some numbers that are kicking around the news. I don’t know if they are correct, but they seem plausible to me. Here are the numbers:
Each year the Church takes in about $7 billion in tithing revenue, it spends about $6 billion, it puts about $1 billion into its savings, and it has savings of about $150 billion. These are big numbers, but the Church is a really big institution with millions of members in hundreds of countries. The question isn’t whether the numbers are big but whether the relationship between the numbers reveals something surprising or unique in the Church’s behavior.
Think about a large non-profit institution like a university.[1] It will also take in tax-exempt donations, which will be put in a university foundation. The university will spend a portion of its money from donations and the foundation each year. The goal is to create a kind of financial perpetual motion machine in which the institution can continue to operate indefinitely. No university that wishes to operate indefinitely spends all of its donations, living hand to mouth each year. That model would create a very fragile institution, and such institutions don’t live for centuries like, say, my employer, The College of William & Mary, which is 330 years old. (Go Tribe!) Institutions also don’t want to spend at a rate that will cause their foundation to diminish in value each year. Again, an institution that pursued this strategy would eventually find itself living hand to mouth, would become fragile, and ultimately fail. So the trick is to set spending at a level that can be maintained indefinitely, drawing money from the foundation without depleting it. What is that number?
The answer for most universities is 4 to 5 percent.
It’s a little more complicated than that because the size of foundations gyrates quite a bit with background market conditions, sometimes institutions in effect borrow against their own future revenues by ramping up spending for a period and then spending less in the future, and so on. But basically, you spend at 4 to 5 percent. If you are spending at 4 to 5 percent of your foundation value, that level of spending can be maintained indefinitely.
So let’s ignore all of the distinctions between the Church and Ensign Peak and money from tithing versus cash payouts from investments. Treat everything as one big organization. This makes sense, because while the distinctions between particular entities may be important in various legal contexts, they aren’t really all that important when it comes to thinking about Church finances at the macro level. All of these entities are controlled by the Council on the Disposition of Tithes, which also controls all Church spending. Cash is fungible.
So, how is the Church being managed? If the Church is spending $6 billion a year and has investments of $150 billion,[2] what is its rate of spending?
4 percent. Exactly 4 percent.
I’ll be honest. I am surprised by that number. I expected it to be smaller. In other words, I expected that the number would suggest that relative to other non-profits the Church was run really, really conservatively, spending far less relative to its reserves. But it seems that relative to its size and revenues the Church spends at more or less exactly the rate of a conservatively managed university. Viewed in another way, the Church spends at exactly the rate it needs to spend in order to operate indefinitely. Its spending can grow over time as the size of its reserves grow, but I assume that the Church expects to grow in size and thus have more expenses in the future. It’s basically behaving exactly the way that we would expect that a large non-profit would behave. By the numbers, it’s normal.
There are obviously complications here. These numbers may be wrong. One can argue that the Church should spend more on outside (ie non-Church operations) charitable activities. The Church reports humanitarian spending of about $1 billion per year. If the numbers above are right, that’s about 16 percent of annual spending. That’s actually quite substantial. No large university, for example, spends 16 percent of its annual budget on humanitarian activity. Maybe it should be larger. (I’m pretty sympathetic to this.) Again, I’m not sure how accurate any of these numbers are (see again my opinion about secrecy).[3]
So my conclusion is that actually the Church’s basic financial structure isn’t particularly shocking or unique. It is not being managed in a way that suggests the mindless hoarding of wealth. It seems to be managed more or less exactly the way that a large conservatively managed institution that expects future growth and wishes to operate indefinitely would behave.
If these numbers are right (a “big if,” I admit), then once you strip away all of the Sturm und Drang over secrecy and the Church’s questionable legal maneuvers to maintain secrecy, there isn’t any big story here. The Church operates for the long term within pretty standard parameters. It is a very big organization that spends a lot of money, including a lot of money on humanitarian aid. It could spend less on Church operations and more on humanitarian aid. It could increase spending relative to reserves slightly, but couldn’t do so dramatically while maintaining a model of indefinite operations.
If I’m right, then that’s all the more reason for the Church to ditch the model of absolute secrecy and just publish some stripped down, audited, financial disclosures. Once people accept that institutions that seek to operate indefinitely must maintain constant reserves and spend relative to those reserves only a small percentage, there’s not really much to see.
Until next time.
Best wishes,
Nate Oman
[1] The university will have revenue from tuition and other sources, and it will have expenses that it meets out of that revenue. I am going to ignore this in my analysis. By ignoring it, I am holding Church financial practices to a higher standard than university practices because tuition is a massive revenue source for universities, while Church’s fee-generating activity (think selling stuff in distribution centers) is probably trivial. But I don’t know. Disclosure would be good.
[2] I’m talking about investments not assets. The Church owns chapels, temples, mission homes, and the like. These are valuable assets in an accounting sense. However, in practice they are liabilities. Temples cost lots of money to run and produce no revenue. Similarly, a university owns very substantial assets in the form of the campus’s real estate, library collections, etc. However, no university that wants to continue to operate indefinitely treats its campus as an investment property.
[3] In addition to not knowing if the overall numbers on revenue, expenditure, and savings are accurate, there are all sorts of technical accounting issues about how everything gets valued that make big macro-conclusions dicey. Again, this is why audited financial disclosures are good. Three cheers for accountants!