ECCU Blog

One thing many ministries discovered during the economic downturn is that they weren’t as financially solid as they thought. As revenue declined, their financial vulnerability became increasingly apparent. Loan payments, for example, that once seemed realistic suddenly weren’t.

One way ECCU responded to this situation was by forming a new team to help struggling member ministries become financially healthy again. I asked Don Hughes, who led that team and is now one of ECCU’s regional directors, a couple questions about what we learned from this experience.

First question: By working with ministries that struggled financially during the recession, you discovered a link between strong leadership and financial health. Is leadership really that important?

Don: When it comes to financial health, solid leadership is not just important, it’s essential. We’ve learned that ministries with well defined organizational structures, appropriate levels of true accountability, and leaders who have transferable educational and business skills tend to be highly effective. These ministries don’t react to economic changes, they actually plan for them. Their strong leaders translate the ministry’s vision and goals into a workable budget that becomes a tool to help the ministry meet its financial obligations and continue to pursue its mission. Their disciplined financial leadership also includes implementing appropriate financial controls, closely monitoring and managing the ministry’s financial position, and making course corrections to stay on track.

Second question: How does a ministry decide how much debt is too much for them?

Don: This can be a complicated question to answer, but the first step should be to consider where their vision is taking them and whether acquiring debt is the most effective way to achieve that vision. Assuming it is, they’ll need to take a comprehensive look at their income. Based on historical data, is it reliable and sustainable? Is it stable, growing, or declining? They should then evaluate all their expenses and other financial obligations. This information will reveal whether there’s enough margin (positive cash flow) in their budget to maintain adequate reserves and financial flexibility. For churches, some experts use these budgeting benchmarks: Less than 35 percent for debt service, less than 35 percent for salary-related expenses, and at least 30 percent for liquidity and ministry. These are not absolutes—and certainly not applicable to all ministries—but they do provide a starting point for a “right-sized” debt discussion.                                  

I asked Don these questions because he’ll join two of his fellow regional directors to present a webinar on February 21 titled How to Look Like a Healthy Borrower.                                                                         

If you’d like more information about this webinar, you’ll find it here.

 I was saddened to read some stats recently showing that fraud in the church costs more each year than what is given to missions. The numbers were $35 billion in fraud in 2012 and $23 billion given to global foreign missions. How can this be true and what can we do to combat fraud?

 According to the Center for the Study of Global Christianity at Gordon-Conwell Theological Seminary who published the 2012 Status of Global Mission, financial crime at churches is estimated to hit $60 billion in 2025 if the same trends continue.

  Here are two key things those of us who have been entrusted to steward ministry funds can do each day to combat fraud:

1.  Create an environment of “Trust, but Verify”.  We first heard this phrase from the President Ronald Reagan, who used it often when discussing U.S. relations with the Soviet Union. It suggests that we maintain an environment of trust while also verifying that information is accurate and procedures are followed. This involves accountability, dual custody, and separation of duties in the financial area of your ministry. By doing these things, you can literally eliminate opportunities to commit fraud.
2. Stay connected with your staff and volunteers.  The precursor to fraud is a motive that causes an individual to have an intense need for money. It could be a financial hardship, a gambling problem, a family financial crisis, or negative work-related feelings. Once there is a motive, the individual then just needs to rationalize that what they are contemplating is okay given the circumstances. Staying connected with your staff and volunteers and knowing what is going on in there lives will provide you not only with an opportunity to minister but also an indication of the need to monitor actions and behaviors more carefully.

 These two steps will help keep your ministry from becoming the next bad news story.

 What have you found to be helpful for combating fraud at your ministry?

Before mid-2008, most ministries had little trouble qualifying for financing. If they met a lender’s criteria, they were deemed a healthy borrower and it was simply a matter of time and paperwork before the needed funds were in hand.

Then the Great Recession hit, and when it was over, the definition of a “healthy borrower” had changed dramatically. I asked Mike Boblit, one of ECCU’s regional directors, a couple questions about this dramatic shift.

First question: What is one criterion used to underwrite loans that is dramatically different today?

Mike: I’d say the debt coverage requirement. Prior to 2008, if a ministry didn’t have past cash flow statements that demonstrated their ability to make mortgage payments of a certain size, they could meet this lending criterion by presenting a strong budget. Meaning, if their budget showed how they could cut other expenses to make a new mortgage payment, that would satisfy the debt coverage requirement. Today, borrowers must demonstrate, from historic cash flow statements, that excess funds are available to make a new loan payment.

Second question: During and since the recession, the term “tight credit” became commonplace. What does it mean and what is one significant way it has affected ministries?

Mike: Tight credit can be interpreted a number of ways. One is lenders being “tight” about lending money, with “tighter” borrower criteria. This has certainly affected ministries by making it difficult to find a willing lender or more difficult to qualify for a loan. Another way to look at “tight credit” is in reference to ministry borrowers. In this case, it means a ministry is highly leveraged. This looks like a loan payment that is 30 percent or more of a ministry’s income, which creates a tight budget that limits the ministry’s ability to make choices about how they use ministry funds.                                  

I asked Mike these questions because he and two of his fellow regional directors will present a webinar on February 21 titled How to Look Like a Healthy Borrower. Besides their lending expertise, all three of these men gained a wealth of experience by working with ministries during the recession and helping them return to financial health.

When I asked Mike what people could expect to learn by attending this webinar, here’s what he said:

“We would expect attendees to have a better understanding of how a lender will evaluate their ministry’s ability to qualify for a loan. In other words, the criteria a lender will use to make lending decisions. Additionally, by understanding these criteria, attendees will have a better idea of how to prepare financially to borrow funds if their ministry’s strategic plan includes purchasing or building a new facility and using a loan as a portion of the funds to accomplish this.”                                                                                                      

If you’d like more information about this webinar, you’ll find it here.

Taxes have gone up and we are all concerned about the potential negative impact on giving to our ministries. Should we be bracing for lower donations, or is it possible the tax code changes could actually be beneficial?

To find out, let’s take a look at several provisions in the new tax code.

Tax Rates. The tax rates went up for the highest income earners, as you can see here. 

Before looking at an example of the new tax rate’s impact for a high income earner, let’s look at another provision.

Itemized Deductions. Itemized deductions for higher income earners has a phased out provision. Coupled with the higher tax rate, this sounds like it will create a double blow to our largest donors. Here are the details on this phase-out provision: Singles with incomes over $250,000 and couples with incomes over $300,000 lose the lesser of 3% itemized deductions above this threshold or 80% of allowable deductions.

This can all be confusing, so here is an example of the impact the changes in tax rates and itemized deductions will have:

Under the new tax code, a couple with an adjusted gross income of $650,000 and itemized deductions of $75,000 will lose $10,500 in itemized deductions because of the phase-out limitation of itemized deductions while the taxes paid by this couple will increase $30,608 over 2012 rates.

This sounds like it could have an equally negative impact for our ministries since donors now have less incentive to give. But before we jump to that conclusion, let’s keep going with this example to see the potential impact if this couple were to increase their giving.

If this same couple donates an additional $10,000 to your ministry, their taxable income would decrease by $9,700, thus saving taxes paid  at the higher rate of 39.6% or $3,841. This is a $341 increase in tax savings for the additional $10,000 gift compared to 2012, when the top tax rate was 35%.

(To see all the details and calculations behind this example, click here.)

One thing that distinguishes ECCU from other banking resources is the way we pursue our mission. While we are a financial institution, at the core we’re an alliance of Christ-centered people and organizations, mutually committed to fueling ministry worldwide.

This cooperative spirit will come into play on January 24 when David Lee, long-time ECCU ministry development officer, presents a webinar offered by a long-time strategic partner of ECCU—the Christian Leadership Alliance (CLA). Titled 6 Things Financially Healthy Ministries Do Right, this webinar will present insights and best practices from ministries like yours that stayed healthy during the recession.

To give you a preview of David’s presentation, I asked him a few questions:

MBG: Are the ideas you’ll present opinions or are they based on actual ministry experiences?

David: I’ll be presenting ideas and insights gleaned from discussions with hundreds of ministries by our relationship managers over the past several years. And while some of what I’ll cover is based on anecdotal rather than empirical data, all of it has been clearly evident in ministries that are financially healthier.

MBG: What’s one idea that every ministry should know?

David: We live in a world of quick fixes and hopes of an app that can resolve our problems, but there is no perfect solution, answer, or path to creating a financially healthy ministry. What may work for Ministry “A” may not be the best solution for Ministry “B.” However, there are foundational principles that we can all consider to help us mitigate risk and refocus our ministries on fulfilling God’s calling.

MBG: Will the ideas you present account for the fact that mistakes are sometimes the best teachers?

David: Absolutely! In fact, many of our findings are based on different ministries that have made similar kinds of mistakes. What makes learning from mistakes so effective is that we can see the actual consequences of mistakes made by others without having to personally experience those consequences.

MBG: What are three important takeaways attendees will learn during this webinar?

David: Here’s what I’m hoping they’ll walk away with. First, a better understanding of the six things financially healthy ministries do right. Second, at least one proven method for aligning their money with their mission. And third, practical measurements or metrics that we’ve found to be great indicators of a financially healthy ministry.

If you’d like more information, visit www.eccu.org/cla-webinar.