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How the Laws Look the Other Way When It Comes to the Financial Improprieties of Religious Institutions, And How They Should Be Amended to Make Them Accountable

Thursday, May. 04, 2006

As I have documented in my recent book, God vs. the Gavel: Religion and the Rule of Law, religious institutions are perfectly capable of acting in ways that harm others. Yet elected representatives, whether state or federal, tend to have a huge blind spot when it comes to religious organizations. The operating assumption is that religious groups do good, are good, and deserve to be trusted. The facts on the ground, however, transform this blind spot into an abdication of their obligation to protect the weak from abuses of power.

This column will address the financial improprieties of religious entities - improprieties that I believe deserve public scrutiny. Examples are legion, but the limits of space lead me to analyze only a handful.

Depleting Employee Pension Funds

As a general matter, the federal pension laws require federal employers to comply with certain regulations, and to obtain federal pension insurance that will cover pension proceeds in the event the pension fund becomes underfunded. The pension fund insurance law was prompted by concern for employees who relied on pensions for retirement, only to discover that the pension fund had been raided by the company, and the funds diverted to other purposes. The law was intended to protect employees from such devastating consequences.

But religious institutions succeeded in persuading Congress not to burden them with the same requirements other employers, and their workers, now take for granted. Predictably, Congress acceded to their request and created an exemption for religious institutions, and for institutions affiliated with religious organizations in some way. Due to the exemption, not only can a religious institution opt out of the federal system, it can actually receive a refund for insurance premiums paid for years before they withdraw. The upshot is that the religious institution's employees are no longer protected by federal insurance, and that their pension fund is open to diversion to other uses within the religious organization.

And diversion, of course, occurs. For instance, the New York Times reported this week that the Roman Catholic Archdiocese of Newark had an affiliation with a community hospital, and elected to take advantage of the exemption. The result is that hospital employees -- who actually had no idea that their hospital was affiliated with a religious institution -- were blind-sided: They only recently learned that their pension fund had been depleted to the point that it contained only slightly over 50% of pension commitments. There was no requirement that the hospital inform its pensioned employees that it was affiliating with a religious institution, and no requirement that employees be told once the exemption was taken.

It is patently obvious that the reason behind federal pension insurance - to protect employees from having their pension funds raided by the employer - is just as compelling in the religious context as it is in secular context. The same harm befalls the secular and religious employee: Retirement security is directly threatened. And the fall-out is the same for both: They must work more years than planned, live at a level below that which they planned, and have less to cushion them against medical or other emergencies. Moreover, it is a fact beyond contradiction that some religious organizations are so huge that their pension funds run into the hundreds of millions, if not billions, of dollars, so the impact on the economy from these funds being in jeopardy is potentially enormous.

The employees of religious institutions cover a broad swath of workers. Sad to say, there are instances where religious organizations have raided the pension funds of their own clergy, not to mention teachers, nurses, and others.

It is especially problematic that religious entities appear to have no affirmative obligation either to inform employees of a secular organization that they are now affiliated with a religious organization, and that, therefore, their pension funds are at risk; or to inform pension fund participants that they have in fact elected to take pension funds out of federal government's safe harbor.

The result of the secrecy is that huge sums of money are available to be plundered with no accountability. Employees deserve, at the very least, to receive notice that their futures are subject to devastation.

Better yet, the exemption is so irrational as to deserve to be held unconstitutional -- or to be repealed by the responsible members of Congress who are willing to say "no" to religious entities when their constituents are hurt.

Abusing the Charitable Deduction

The tax system permits religious institutions to take tax-exempt status, because of the good they do, and to file no tax return. That does not mean, however, that religious institutions are under no tax obligations. Yet, plenty act as though they are above the tax laws.

The rule is that charitable deductions cannot be taken for moneys spent on services, including education. The rule includes tuition paid to parochial and other religious schools. That means that deductible expenses include offerings, but not religious school tuition.

According to the emails I receive, however, there are a significant number of dioceses, parishes, and religious entities that lump school tuition and religious offerings under the same heading, "charitable donation," in their annual tax mailings to their members. In effect, they are encouraging their members to commit tax fraud. If their accounting is as poor as their reporting to their members, they may also be committing tax fraud themselves.

Where is the IRS? It can barely be moved to notice the problem, even when churches' own members complain about the situation. Once again, here, the government acts to protect religious institutions at the expense of individuals.

Public Accountability: Religious Institutions Should Not Operate Above or Beyond the Law

There was a time when America believed that private businesses should be left free to run their organizations, with the sole check being the market. But the Industrial Era made it increasingly clear that the lopsided relationship between employer and employee required regulation that would protect employees from the worst abuses. (The pension issue is just one of many arenas where the government has tried to level the playing field between large employers and their employees.)

One of the enormous inequities in current society is the unequal power between organized religion and individuals - often including their own members. Religious entities are not required to disclose their financial dealings, which means victims, employees, and others must respond to church actions without significant, let alone full, information. Only extraordinary pressure will bring such institutions to the public stage to reluctantly disclose some facts about their finances.

The clergy abuse scandal within the Catholic Church recently led Sean Cardinal O'Malley of the Boston Archdiocese to release financial information. Many praised him for making the finances of the Archdiocese "transparent." In fact, the information left out two hugely important aspects of the Boston Archdiocese's financial health.

First, it was an operating budget report, not wealth disclosure. Although O'Malley indicates that clergy victim settlements were covered in part by the sale of property, he does not begin to disclose the commercial or unused property still owned by the Archdiocese. Reports place the value of such property in the hundreds of millions, probably billions.

The omission is significant because O'Malley uses the operating budget to urge Catholics to resume their giving (which has seriously declined in the child abuse revelations). In addition, he recently argued that the most recent crop of victims could not expect to receive significant settlements, because the Archdiocese was running out of money. He never explained, however, that it was not running out of property not dedicated to religious uses, which can always be sold or mortgaged.

Massachusetts -- which has been ahead of the curve in terms of acknowledging the enormity of the clergy abuse scandal (if not the reforms needed to bring justice to victims) -- considered a bill that would have required churches to make annual accounting of their finances. It did not pass, and would have endured likely endless constitutional litigation if it had. But it was still refreshing to see some elected representatives actually more concerned, for the moment, about the abuses of power by religious institutions, than about catering to their endless requests for legal protection against larger social accountability.

In this era when we are repeatedly told how good religion is, and when we watch its national influence lead to dubious results, it is worth a few moments to hearken back to the Framer of the First Amendment, including the Establishment Clause, James Madison. At the end of his presidency, Madison was quizzed about what worried him most in the United States. He warned of the "danger of silent accumulations & encroachments by Ecclesiastical Bodies," and worried that they "have not sufficiently engaged attention in the U.S." His concern about their opportunities for abuse of power was just one part of his larger view, which undergirds the entire constitutional structure, "that all men having power ought to be distrusted to a certain degree."

Contemporary elected representatives seem utterly incapable of understanding -- let alone implementing -- Madison's sage concerns. Until the power of the government is used to call religious institutions to account, there will be countless victims of their overweening power.

Marci A. Hamilton is the Paul R. Verkuil Chair in Public Law at Benjamin N. Cardozo School of Law, Yeshiva University. An archive of her columns on church/state issues - as well as other topics -- can be found on this site. Her email address is Professor Hamilton's most recent work is God vs. the Gavel: Religion and the Rule of Law (Cambridge University Press 2005).

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