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.
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.