Lutheran Foundation Loses $40 Million of Your Dollars
by Rev. Jack Cascione

See the related article by Rev. Al Loeschman, "What Can You Do To Help?"

 

The LCMS Foundation reported a $40,000,000 loss in the past fiscal year. This means the loss is also shared by all the LCMS colleges and seminaries which are required to place their foundation funds with the LCEF. Funds were also lost by LCEF and CPH, but no report has been forthcoming on the Synodical Pension Fund.

The inability of LCMS Convention delegates to have full access to the Synod’ s financial institutions demonstrates the loss of Walther’s "Church and Ministry" as the theological basis for the operation of the LCMS. The Voters are no longer supreme. In fact, the Voters, the delegates, and the Convention are completely in the dark.

There were repeated efforts in the past five LCMS Conventions (86, 89, 92, 95, and 98) by the Lutheran Concerns Association led by Ed Hinnefeld to pass resolutions that would open the Synodical financial books to member congregations of the LCMS. The efforts were repeatedly rejected by campaigns mounted by the Synodical President, Ralph Bohlmann. After Bohlmann was replaced by A.L.Barry in 1992 the vast majority of the Council of District Presidents (COP) also campaigned to keep the Synodical financial books closed and elect and reelect their choice for treasurer, Norm Sell.

One of A.L.Barry’s campaign promises was that the Synod’s books would be opened for examination. Thus far Barry has failed to deliver on this promise and, as is reported, will never deliver on this promise.

After Sell resigned as treasurer of the Synod he remained as treasurer of the Foundation. He was replaced by the auditor from Ernst and Young as the Synodical treasurer. It is now impossible for the current LCMS Teasurer to disagree with any of the audits that have taken place in the past 15 or so years even if he wanted to.

Those in the business of buying and selling mortgages report to this writer that financial instruments that deal only with the interest on mortgages are a high risk investment.

Hinnefeld, the former owner of the largest specialty auditing firm in the America with more than 300 employees, repeatedly warned the LCMS Conventions that member congregations are not permitted to examine the financial operations of the Synod’s Foundation, Pension Fund, and Church Extension Fund. All Synodical and District Staff, and District Presidents are entitled to low interest loans from LCEF for housing and other uses. Hinnefeld wanted to know who had the loans, how much, and at what rate. The COP actively campaigned to reelect Sell in 1998.

Hinnefeld also wanted to know exactly where all the funds were invested, who they were invested with, what was the rate of return on each investment, what commissions were paid, who received the commissions, and how many times the funds were invested and reinvested. The total amount funds in Synodical institutions is now nearly 5 billion dollars.

At this time, the LCMS Convention, the Synodical President, and the Synod’s Board of Directors do not have full financial access to the Synod’s financial institutions. The U.S Government does not require full financial disclosure from church related institutions. Members of the COP have advised the Convention not to examine the finances of these Synodically held corporations. In other words, the reader will have to take every statement in the article in the REPORTER as the absolute truth.


Foundation acts to avoid repeat of loss
LCMS Reporter, September 1999

The fixed-income investments managed by the LCMS Foundation suffered a loss of some $40 million in the fiscal year that ended June 30. Foundation President Norman D. Sell says specific steps have been taken to avoid a repeat in the future. Among steps taken, the foundation has revised its investment strategies and has retained an outside firm to manage the fixed-income portfolio, rather than continue to manage the funds internally.

"We deeply regret that our efforts to generate interest income for your [fixed-income] accounts resulted in market- value losses of principal this past year," Sell wrote in a letter last month to the foundation's custodial customers various synodical institutions, including colleges, districts, congregations and the Lutheran Church Extension Fund.

This is the first time the foundation has experienced such a loss, which represents a negative 7 percent total return in its various fixed-income funds for the year. That stands in contrast to a total return of nearly 8 percent for the previous 12 years. Industry benchmarks for these periods were some 4 percent for the last fiscal year and about 8.5 percent for a like multi-year period, according to Sell.

"Fixed-income funds" are invested in debt instruments, such as mortgages, which generally pay a fixed ate of return. The foundation also manages "equity funds," which are invested in stocks and so pay a variable rate of return. Because of an $18 million gain in its major equity-funds last year, losses were offset and the foundation overall was down about $22 million. The LCMS Foundation was established in 1958 as a stewardship ministry and has grown over the past 40 years to some $700 million of assets under its responsibility. It is entrusted with the funds of, and serves as an investment manager for, individuals, congregations, colleges, seminaries, auxiliaries and other agencies of the Synod. Dan Leeman, executive director of the Worker Benefit Plans, did report, though, that the Plans has less than 5 percent of its investments in the LCMS Foundation. The holdings of the Plans — the administrator of synodical retirement, disability and health-care benefits — total some $2.9 billion and were not significantly affected by the foundation loss, he said.

Sell said that a major factor contributing to the losses last fiscal year was heavy involvement in mortgage—backed investments especially investments in instruments that were backed only by mortgage interest income, and not principal. "In going strongly into mortgage-backed securities a number of years ago, the foundation was striving for a higher yield for its investors," Sell said. "We had reason to be confident, based on many years of impressive success with such securities." However, in the fixed-income market that existed this past year, this strategy proved unsuccessful.

Money was lost in part because, with lower interest rates people paid off their long-term mortgages and secured new ones at a lower rate. This left the foundation with a loss on its interest-only investments, because these securities approximately 15 percent of the fixed-income investments held by the foundation) did not include the principal of the mortgages but only the interest collectable from them.

Although interest-only instruments had performed well in the past, a variety of factors created problems for the investments last year, Sell said. For example, when the U.S. Federal Reserve Board responded to economic problems in Russia, Asia and Brazil by lowering interest rates three times in rapid succession, the value of the interest-only investments dropped as a result of accelerated mortgage refinancings.

At the same time, he said, the addition of a Federal Reserve-initiated bailout of a major leveraged-investment fund created the worst bond-market in 50 years. This dried up the market for the interest-only instruments as inves tors sought safety in U.S. Treasury notes. That added to the loss.

Sell said that the foundation has taken action to assure that the experience of the last fiscal year does not recur. Initial steps included:

Hiring an outside firm, Western Asset Management Co., to evaluate the fixed-income portfolio managed in-house by the foundation.

Reviewing the foundation s investment policies and guidelines and making appropriate changes.

These moves have led to: Retaining Western Asset Management Co. to manage the portion of the fixed-income portfolio previously managed in-house by the foundation. The firm repositioned the portfolio in the third quarter of this past fiscal year, limiting the concentration of investments in mortgage-backed securities.

Initiating the process of outsourcing the investment management of the foundation s equity funds.

Sell said that although it indeed suffered serious market-losses in its fixed-income portfolio, the LCMS Foundation was only temporarily set back. He said it has now implemented changes to help achieve its goal of meeting or exceeding industry benchmarks in the future.

Reprinted from REPORTER, with permission

See the related article by Rev. Al Loeschman, "What Can You Do To Help?"


Rev. Jack Cascione is pastor of Redeemer Lutheran Church (LCMS - MI) in St. Clair Shores, Michigan. He has written numerous articles for Christian News and is the author of Reclaiming the Gospel in the LCMS: How to Keep Your Congregation Lutheran. He has also written a study on the Book of Revelation called In Search of the Biblical Order.
He can be reached by email at pastorcascione@juno.com.

September 20, 1999