1. Meeting between DFB representatives and clergy Tuesday 23 February 2016 Topics for discussion 1.What is the function of the Diocesan Finance Board (“DFB”) 2.Debt and its implications 3.The financial position of the Diocese at present 4.The decision to freeze stipends in 2016 5.The medical aid changes passed by Synod in 2015 6.Update on audit, tax and funding issues From DFB: Peter Goldhawk and Sidney Place

2. What is the Diocesan Finance Board (DFB) and what is its role?

3. The chain of reporting and accountability Diocesan Finance Board Encourage parishes to meet their obligations to the diocese, prepare financial statements, report regularly to Diocesan Trustees, PBO tax returns to SARS, establish financial regulations, stop parishes incurring debt without prior permission Bishop Dean Diocesan Secretary Bursar and Deputy Bursar(s) Two Diocesan Trustees A representative from each Archdeaconry – competent in finance Deputy Registrar Up to four additional advisors (Bishop appointees) Synod / Diocesan Council (between synods) Diocesan Trustees Delegate everything except immovable property to the Diocesan Finance Board Delegation of non-property issues

4. The “Bottom line” for the DFB DFB exists to oversee and steer the work of the Diocesan Office in matters of finance with the aim of creating a sustainable financial position that supports ministry in a sustainable manner. DFB is the link between the “management” of the Diocese, the clergy and the people. DFB cannot be relegated to the status of a church fête committee. It has to be taken seriously. The consequences of not doing the job properly are dire. Finance issues really do matter!

5. Topics for discussion 1.What is the function of the Diocesan Finance Board (“DFB”) 2.Debt and its implications – an explanation 3.The financial position of the Diocese at present 4.The decision to freeze stipends in 2016 5.The medical aid changes passed by Synod in 2015 6.Update on audit, tax and funding issues

6. Debt and its implications Never borrow to pay running costs / recurring expenses – paying back the borrowed money usually proves to be impossible. Neither a borrower nor a lender be; For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry. (W Shakespeare) Borrowing to acquire a capital asset that will generate money in the future to enable the repayment of the loan is legitimate. Even legitimate borrowing magnifies financial risk – “leverage” or “gearing” is the term used. The more debt, the less the financial and operational freedom. Let’s examine an example of the impact of debt on a church: - Church A has no debt - Church B has debt - They have identical income and operating expenses

7. Balance Sheets A: Debt-free church Assets Cash100 Financed by Own funds100 Income Statement Income Statement – no debt Base case Collections10 DG10 Donations6 Total income26 Operating costs-16 Profit for the year10

8. Balance Sheets A: Debt-free churchB: 50% funded by debt Assets Cash100Cash100 Financed by Loan50 Own funds100Own funds50 100 Income Statement Income Statement – no debtIncome Statement – with debt Base case Collections10Collections10 DG10DG10 Donations6 6 Total income26Total income26 Operating costs-16Operating costs-16 Interest paid-5 Profit for the year10Profit for the year5

9. Balance Sheets A: Debt-free churchB: 50% funded by debt Assets Cash100Cash100 Financed by Loan50 Own funds100Own funds50 100 Income Statement scenarios Income Statements for three scenarios - no debtIncome Statement – with debt Income HalvesBase case Income DoublesBase case Collections51020Collections10 DG51020DG10 Donations3612Donations6 Total income132652Total income26 Operating costs-8-16-32Operating costs-16 Interest paid-5 Profit for the year51020Profit for the year5

10. Balance Sheets A: Debt-free churchB: 50% funded by debt Assets Cash100Cash100 Financed by Loan50 Own funds100Own funds50 100 Income Statement scenarios Income Statements for three scenarios - no debtIncome Statement – with debt Income HalvesBase case Income DoublesBase case Collections51020Collections10 DG51020DG10 Donations3612Donations6 Total income132652Total income26 Operating costs-8-16-32Operating costs-16 Interest paid-5 Profit for the year51020Profit for the year5 With no debt, % change in profit is same as percentage change in income -50%Doubled

11. Balance Sheets A: Debt-free churchB: 50% funded by debt Assets Cash100Cash100 Financed by Loan50 Own funds100Own funds50 100 Income Statement scenarios Income Statements for three scenarios - no debtIncome Statements for three scenarios - with debt Income HalvesBase case Income Doubles Income HalvesBase case Income Doubles Collections51020Collections51020 DG51020DG51020 Donations3612Donations3612 Total income132652Total income132652 Operating costs-8-16-32Operating costs-8-16-32 Interest paid-5 Profit for the year51020Profit for the year0515 -50% Doubled

12. Balance Sheets A: Debt-free churchB: 50% funded by debt Assets Cash100Cash100 Financed by Loan50 Own funds100Own funds50 100 Income Statement scenarios Income Statements for three scenarios - no debtIncome Statements for three scenarios - with debt Income HalvesBase case Income Doubles Income HalvesBase case Income Doubles Collections51020Collections51020 DG51020DG51020 Donations3612Donations3612 Total income132652Total income132652 Operating costs-8-16-32Operating costs-8-16-32 Interest paid-5 Profit for the year51020Profit for the year0515 Debt amplifies the impact of a change in revenue change on the “bottom line” or profit -100%TrebledDoubled-50%

13. Concluding thoughts on debt Borrowing is only cheaper than saving up for something if inflation is higher than the interest rate on savings. Debt results in interest charges – it reduces money available for spending Debt introduces more risk due to bottom line volatility because of leverage Debt eventually has to be repaid (in addition to interest) Debt is not a sustainable option to take care of insufficient income – it actually worsens the situation For these reasons, incurring debt without prior permission is forbidden by the Rules of the Diocese “There is no such thing as a free lunch” – Milton Friedman, Nobel Economics Laureate 1976

14. Diocesan Rules regarding debt Rule C 5.3.1 The functions of the Diocesan Finance Board shall be: … 5) to establish regulations, guidelines and processes to ensure, as far as it can, that: a) no vestry, parish council, cleric, diocesan or parochial officer, board or any other person or body shall incur debt for, or on behalf of the Church … unless acting under power expressly contained in an Article of the Constitution, Canon, Act, Rule or under the written authority of the Diocesan Finance Board; Schedule J, clause 9: No vestry, parish council, cleric, diocesan or parochial officer, board, nor any other person or body shall be entitled to incur any debt for, or on behalf of, the Church, or in any manner so as to bind the Church, unless acting under power expressly contained in any Article of the Constitution or in any Canon, Act or Rule, or under written authority of the Diocesan Trustees or Diocesan Finance Board. Schedule F, clause 3(iv): … the Parish Council shall approve the expenditure for the current month provided that the Parish Council may not approve payments or incur debts for which the necessary funds are not available;

15. Topics for discussion 1.What is the function of the Diocesan Finance Board (“DFB”) 2.Debt and its implications 3.The financial position of the Diocese at present 4.The decision to freeze stipends in 2016 5.The medical aid changes passed by Synod in 2015 6.Update on audit, tax and funding issues

16. How did DFB fare in 2015? Preliminary figures from David Butcher show a bottom line that is R1.3 million worse than reported in November (small surplus hoped for) 2015 R Parish Contributions6,813,479 Additional contributions of R1,000 per month736,357 Cash management and fees 476,358 Other income 1,125,695 Total income 9,151,889 Total Bishop 1,392,998 Diocesan Administration 2,580294 Diocesan Ministry 1,501,111 Post retirement medical and pension augmentation 1,861,097 Training clergy 1,195,566 ACSA - Common Provincial Fund 1,702,371 Total Outreach costs 99,296 Provision for Taxation 84,100 Total expenses 10,416,545 Net deficit in 2015 1,264,657 Income R400k lower – can’t find credit for interest suspension on DFB debt Diocesan ministry costs R367,000 higher (Legal R100k, Audit R80k, Interest R137k, Stipend subsidies R92k) Retired Clergy R294,000 higher Training costs R106k higher

17. Financial position of DFB DFB owed R8.6 million at 31 December 2015 - several causes: Debt has arisen from deficits every year between 2008 and 2015 The Lent 2012 video lost over R800,000 when DFB was already in debt The 90 th Anniversary celebrations and cancelled dinner cost over R210,000 Having to borrow means DFB pays interest of R600,000 p.a. Need to generate annual surpluses of R750,000 p.a. to pay off the debt. Aim to raise capital sums and use bequests to pay down the debt even faster All parishes have to pull their weight – no free lunches on offer! The Trustees need to either enforce 2006 synod resolution to pay for St Joseph’s (R6 million still needed of R10m cost) or sell the property. Crucially – the DFB has NO money to lend to, or subsidise, parishes that are not viable. The money just isn’t there.

18. Half of Diocesan income comes from only six parishes Half of the parishes give almost nothing (There are 75 parishes in the Diocese) Parish no. in order of increasing size of contribution Smallest givers Most generous givers

19. 20 parishes increased their indebtedness by R3.2 million in 2015 Parish Increase in debt during 2015 Debt owed at end of 2015 Diepkloof - St Stephen's 471 026 438 076 Fourways Gardens 304 324 1 645 373 Brixton 303 503 838 450 Halfway Gardens 297 353 736 049 Krugersdorp - St Peter's 278 671 862 162 Kagiso - St Thomas 218 603 551 748 Westonaria - St Mark 193 938 323 804 Yeoville 148 732 87 624 Sophiatown 142 416 410 484 Mayfar - Christ Church 137 691 155 435 Newclare - St Francis 125 960 110 296 Munsieville 101 562 Bekkersdal 87 724 60 029 Discovery - St Laurence 80 385 325 532 Cosmo City 76 216 107 294 Dobsonville 60 964 52 639 Toekomsrus 59 678 107 855 Fochville 51 502 476 467 Moroka 27 666 62 334 Orlando Holy Cross 10 683 141 056 Total 3 178 595 7 594 271

20. Parish Contributions Schedule L: The contributions shall be divided into two types: (a)A parish contribution, which shall represent the amount needed to meet the stipends, the Diocesan portion of the pension contributions and such allowances as Synod may approve, of the clergy of that parish. Such contribution shall be paid by debit order on the 15th of each month and each parish shall ensure that sufficient funds are available to meet the debit order. (b)A parish contribution to the diocese, which shall be an amount volunteered by the parish to contribute to the estimated expenditure of the Diocese for the following year, other than as set out in paragraph (a) above. If the Board is not satisfied that the contribution volunteered by the parish represents a fair proportion of the income of that parish, it shall delegate representatives of the Board to meet with the Churchwardens and Parish Council of that parish to discuss the matter, and attempt to agree a contribution to the satisfaction of both parties. In the event of failure to reach agreement, the matter shall be referred to the Bishop whose decision shall be final, and subject neither to appeal nor review.

21. Parish Contributions for 2016 Meeting on 28 th November 2015 between Rectors, Churchwardens and Treasurers agreed that all parishes should commit in writing by mid January 2016 their contributions based on: - Parishes that gave less than 10% of their income in 2015 – 10% of income - Parishes that gave more than 10% of their income in 2015 – same percentage By 11 February, only 8 parishes had responded. Very disappointing.

22. Topics for discussion 1.What is the function of the Diocesan Finance Board (“DFB”) 2.Debt and its implications 3.The financial position of the Diocese at present 4.The decision to freeze stipends in 2016 5.The medical aid changes passed by Synod in 2015 6.Update on audit, tax and funding issues

23. Why the need to keep stipends unchanged in 2016? Raising stipends by a large margin above the inflation rate causes the defined benefit pension fund to run into a deficit. Contribution rates have already had to rise from 30% of stipends in 2014 to 33% in 2015 and 36% now. 200720102015 Clergy costsR9.6 mR16.2mR25.7m As % of DFB costs68%71%75% The church draws its money from a pool of parishioners spread over 75 parishes. If money given to the pool does not increase, payments from the pool are constrained. High pay increases have seen clergy costs increase over 9 years by 13% p.a. while contributions for other diocesan expenses have risen 7.9% p.a. The result is that paying clergy stipends, benefits and allowances has consumed an ever increasing amount of diocesan resources.

24. Stipends 2016 Set Portion20152016Increase Per yearPer Year2016 Pensionable Stipend - Single or Married - Deacon, Priest or R 149,040 0.0% Licenced Layworker Pension fund Parish ContributionR 49,183R 53,6549.1% - 36% of Stipend (33% in 2015) – will rise to 39% in 2017 Medical Aid for married couple - no childrenR 69,264R 45,480-34.3% Post Retirement Medical AidR 36,000R 66,00083.3% U. I. F. Parish PortionR 1,785 0.0% Group Life BenefitR 960 0.0% Group Personal AccidentR 280 0.0% Total Cost to Parish of set portionR 306,512317,1993.5% Total Medical aid up 5.9% from R105,624 to R111,480 (current and post-retirement) Parish and other allowances may be raised by up to 6% where parishes are not in debt or running at a loss. Inflation in 2015 was 5.2%.

25. Clergy costs squeezing out other spending Clergy costs 2.7x higher in 2015 than in 2007. Other costs 2x. Clergy costs 68% of total in 2007 Clergy costs 75% of total in 2015 R’million

26. Stipends are well ahead of inflation, even if only 2012 – 2015 figures are examined Stipends increased by 10% in each of 2013, 2014 and 2015 Cumulative increase in stipends was 33% (because of compounding) Inflation in 2013 was 5.7%, in 2014 it was 6.1% and in 2015 it was 5.2% Cumulative increase in cost of living 2012 – 2015: 18% Over three years, the real increase in stipends has been 33% -18% = 15% If inflation this year is 6%, the four year rise in cost of living = 25% vs 33% in stipend increases, so stipends remain 8% ahead of inflation. Note that stipend increases before 2012 were all well above inflation too. The clergy are not being punished or penalised.

27. Numerical example of impact of stipend increases running above inflation (Figures are monthly stipends vs monthly spending) Stipend Spending Higher YearAmountIncreaseCostIncreasereal income (a)(b)(a) – (b) 2012R 9 330 2013R 10 26010%R 9 8625.7%R 398 2014R 11 29010%R 10 4646.1%R 826 2015R 12 42010%R 11 0085.2%R 1 412 2016R 12 420nilR 11 6686.0%R 752 Conclusion: Even with no stipend increase in 2016, the buying power available to clergy is R752 per month higher than if inflation-linked increases had been given since the beginning of 2012

28. Post-retirement benefits are generous … and expensive Pension of 3.75% x stipend x years served (so, a pension amounts to a full stipend after 27 years of service) with spouse’s pension if spouse outlives the priest. Guaranteed income for life. (Most company plans: 2.2% x Salary. It takes 45 years service to get full salary) (Most companies now run money-purchase schemes – have dumped the risk of the money running out onto their staff. When the money runs out, the pension stops.) Medical aid and gap cover paid for life. Continues for surviving spouse, provided 16 years service [in the Diocese] (Not offered by secular companies) Both are enormously expensive benefits. Together they add 80% of a stipend to the cost of employment. That percentage is rising year by year to meet the cost of retirement benefits which are escalating much faster than current costs of living.

29. What will it take to get increased remuneration in years to come? To get improved pay, clergy need to show leadership, drive and inspiration so that parishes grow and giving increases. Remember Prof Milton Friedman - “There is no such thing as a free lunch.” The alternative is going to have to be cost reductions through consolidating parishes. Too many are not viable – for a host of reasons. It is likely that both of the above actions will be needed.

30. Topics for discussion 1.What is the function of the Diocesan Finance Board (“DFB”) 2.Debt and its implications 3.The financial position of the Diocese at present 4.The decision to freeze stipends in 2016 5.The medical aid changes passed by Synod in 2015 6.Update on audit, tax and funding issues

31. Funding post-retirement medical aid Synod resolved in May 2015 to restructure medical aid spending Direct less to current contributions, more to post-retirement provisioning, Investments move from cash to inflation+ balanced portfolio, Future increases in contributions for post retirement linked to annual current contribution increases (9.6% for 2016) – both steps inflation- proof the scheme. New regime commenced January 2016 Net result: The rise in the burden of funding retirees has been arrested for all born after 1954. The cost of funding those born before 1954 will continue to be borne out of DFB funds to which all parishes contribute, as before. Each year’s cost will fluctuate depending on the number of retirees in any given year, and the cost will rise in line with medical inflation. Only a few clergy fall into this group, so the looming disaster has been averted.

32. Topics for discussion 1.What is the function of the Diocesan Finance Board (“DFB”) 2.Debt and its implications 3.The financial position of the Diocese at present 4.The decision to freeze stipends in 2016 5.The medical aid changes passed by Synod in 2015 6.Update on audit, tax and funding issues – Peter Goldhawk, Chairman of the Audit Committee of DFB

33. Peter Goldhawk – Chairman of Audit Committee Audit, taxation and funding issues 1.Update on the auditing of 2012 onwards 2.Clergy liable for tax on gifts of all kinds – no exemptions exist 3.Marginal parishes (not just those already in debt)

34. Recapitulation: parishes that increased their indebtedness in 2015 where action is needed Parish Increase in debt during 2015 Debt owed at end of 2015 Diepkloof - St Stephen's 471 026 438 076 Fourways Gardens 304 324 1 645 373 Brixton 303 503 838 450 Halfway Gardens 297 353 736 049 Krugersdorp - St Peter's 278 671 862 162 Kagiso - St Thomas 218 603 551 748 Westonaria - St Mark 193 938 323 804 Yeoville 148 732 87 624 Sophiatown 142 416 410 484 Mayfar - Christ Church 137 691 155 435 Newclare - St Francis 125 960 110 296 Munsieville 101 562 Bekkersdal 87 724 60 029 Discovery - St Laurence 80 385 325 532 Cosmo City 76 216 107 294 Dobsonville 60 964 52 639 Toekomsrus 59 678 107 855 Fochville 51 502 476 467 Moroka 27 666 62 334 Orlando Holy Cross 10 683 141 056 Total 3 178 595 7 594 271

35. Tax: Examples where tax must be paid by clergy 1.Farewell gifts collected by parishioners for a priest who is moving on 2.Farewell gift given by a parish council to a departing clergy person 3.Something (e.g. a computer or car) that a priest is permitted to acquire at less than market value– the discount is taxable. (The fact that its value in the books might be nil or very little is irrelevant– market value is the test.) 4.Easter or Whitsun / Pentecost collections taken by clergy 5.Retirement gifts collected by church entities such as parishes, archdeaconries 6.Welcoming gifts from parishes – example: a particular archdeacon was given R1,000 per parish when he became their archdeacon: fully taxable Principle: Whenever a gift arises because the connection between the giver and the recipient has its origins in the church, the employer of the priest, tax is payable. If in doubt – ASK! Failure to comply with the law puts all clergy and the Diocese at risk. SARS is hungry for money. Playing by the rules is essential Report all gifts to the Diocesan Office which will deal with the PAYE for you. The Interim Diocesan Secretary will place a guideline on the website shortly.

36. The end