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Report of the Finance Committee to the Central Committee

02 September 2002

World Council of Churches
CENTRAL COMMITTEE
Geneva, Switzerland
26 August - 3 September 2002

Report of the Finance Committee
to the Central Committee


REVISED

1. Approval of financial statements of 2000 and 2001


      The Finance Committee reviewed briefly the audited and published financial statements of 2000 and 2001.

      The Finance Committee recommends that the Central Committee approve the 2000 and 2001 financial statements as audited and published.


2. Results to 30 June 2002 and full year projection


      The Finance Committee reviewed the results for the year to 30 June 2002, and the full year projection. At 30 June, the WCC reported a deficit of CHF 2.5 million, being a Programme Fund drawdown of CHF 625,000 and a draw on the General Reserve of CHF 1.9 million. Investment and foreign currency losses totalling CHF 1.9 million were the principal reason for the deficit. In addition, contributions for the rest of the year were now estimated at CHF 1.3 million less than budgeted. On the full year projection, it was noted that it was now planned to reduce the expenditure line Other costs and transfers by CHF 2.7 million from CHF 30.9 million to CHF 28.2 million to the year end. This step would bring the target results back into line with the approved budget, with a full year projection of CHF 0.9 million draw on General Reserves and CHF 4.6 million reduction in Programme Fund balances.
      However, there were no detailed plans elaborated as yet on how the reductions might be achieved. Further, it was reported that not all activities which might complete the year in deficit held Programme Fund balances. If discretionary Programme Fund balances were not identified to cover these deficits, then the charge would revert to the General Reserve.
      The Finance Committee concluded that while the targeted outcome for the year might be achievable, there did indeed remain many uncertainties. The Committee endorsed the requirement to proceed urgently to identify the necessary expenditure reductions.
      In addition, the Finance Committee encouraged leadership to consider taking measures to reduce costs in areas such as the sharing of office space, review of school and university allowances, salary differentials between administrative staff, personal use of airline mileage programmes, modest hotel accommodation for Central Committee and additional monitoring of travel.
      The Finance Committee recommends that the Central Committee endorse the above recommendations.


3. Balance Sheet


      Brief review of the balance sheet at June 30 confirmed that further to both investment losses and an additional draw on the General Fund investments in 2002, lack of coverage of Programme Funds by the investments had increased from CHF 1 million at December 31, 2001 to CHF 3 million at June 30, 2002.
      As at December 31, after netting obligations against those assets which should normally cover them, General Reserves could be seen to be covered by land and buildings only. It was clarified that the buildings are recorded at historic cost less depreciation in the balance sheet. This accounting value is considerably less than the current value, which had been recently estimated by experts, and is disclosed in the note on land and buildings in the Financial Statements 2001 at page 20.


4. Cash flow and Financing


      The Finance Committee reviewed the WCC’s cash flow plan for 2002.
      Given the current situation of undercoverage of Programme Funds, and in order not to worsen that situation, the WCC might no longer draw on the General Fund investments unless there was assurance that an existing Programme Fund balance was being drawn down. This caused the WCC to seek other financing for charges to the General Reserve, and for the payment of the early retirement programme (included in 2001 accounts, but actually payable in 2002). It was proposed in the first instance to draw on endowment investments over which the WCC had discretion. These were estimated at present at CHF 1.75 million.
      If the plan referred to at point 2 aiming to reduce Other costs and transfers by CHF 2.7 million in 2002 were not successfully implemented to its full amount, then estimates indicate there would be a requirement to call on the mortgage loan discussed and approved in principle at the Executive Committee of February 2002. The mortgage loan offers to WCC a credit line of CHF 5.3 million. Based on current assumptions concerning income and other factors, an estimated requirement in the worst case in 2002 is CHF 1.75 million. The Committee was requested to endorse the Executive Committee’s preliminary approval in principle of the credit line of CHF 5.3 million on the building.
      The Finance Committee observed that this financing measure was wise as a precaution, but surely folly as an assumption. Finance from such a credit line had validity only if a documented plan were in place to bring running costs into line with contributions, first setting aside those contributions necessary to repay any amount borrowed and the resultant interest stream.
      The Committee understood that although the credit line was of CHF 5.3 million, estimates based on assumptions did not indicate the need to draw this amount. The intention in obtaining a credit limit of CHF 5.3 million was to ensure a margin for any unforeseen circmstances. While emphasizing its continued confidence in the WCC, the Committee was concerned that the approval of the whole amount of the credit line might precipitate use of a credit which should be viewed strictly as a last resort.
      The Finance Committee of the Central Committee recommends that the Central Committee approve that:
  • negotiations be completed to secure a credit line of up to CHF 5.3 million guaranteed against the property, with a firm recommendation to avoid use of the facility by all means possible;
  • in the event that use of the credit line was made necessary for the WCC to meet its financial commitments, use of the credit line up to an amount of CHF 1.75 million be subject to:
    • the inclusion of the related interest charge in the budget 2003 as approved by the Central Committee;
    • provision for the repayment of the loan as part of the WCC medium term financial planning;
    • in the event that use of the credit over an amount of CHF 1.75 million was made necessary in order for the WCC to meet its financial commitments, this step and the amount concerned be subject to the approval of the Officers of the Central Committee, the Moderator and Vice-Moderator of the Finance Committee;
  • financial commitments in this context be understood to mean only contractually binding obligations of the WCC, as opposed to expenditure with a discretionary character.


5. Additional financing for renovation of the Château de Bossey


      The Finance Committee heard a presentation on the renovation of Bossey, undertaken because of its deteriorating conditions. The Committee reviewed the request for endorsement of the Executive Committee’s approval of an additional credit of CHF 2 million for the renovation of the Château, increasing the total borrowing to CHF 7.7 million. It was explained that the costs of renovation of the Château have increased from the original planned CHF 6 million, following the identification of additional structural work required in the course of the project. The present estimate for total renovation cost is CHF 8.2 million.
      In addition to the financing obtained by loans, Bossey has received a contribution to the renovation of CHF 0.5 million, and staff are continuing fund-raising efforts with foundations, Swiss church members, and individuals with a connection to Bossey. Staff has prepared a detailed five year financial plan showing a breakeven point in 2004 including not only payment of interest but the generation of cash flow sufficient to begin repayment of the loan. This plan does not include any income which might be generated by the fund-raising efforts described. It was stressed that Bossey gives an opportunity to outsiders to become acquainted with the ecumenical movement and for valuable exchanges between students and visitors.
      The Finance Committee of the Central Committee recommends that the Central Committee :


ratify the extension of the construction loan of CHF 2 million for the renovation of the Bossey Ecumenical Institute on the understanding that this loan is self-financing.

6. Financial Framework 2003


      The Finance Committee considered a presentation on the work performed since the Central Committee meeting of 2001 in Potsdam in building a programme and financial plan, known as the “Blue Book”, which focused on 16 Core Programmes as a priority. It was confirmed that this was a programmatic framework plan, and not a budget plan. The initial framework for 2003 anticipated CHF 47 million income and set a ceiling for expenditure of an equal amount. However, a revised framework was presented indicating that total expected income for 2003 was now estimated at CHF 41.7 million.
      The Finance Committee reviewed the amended financial framework for 2003, which included a reduction of CHF 1.4 million in Programme costs and proposed a draw-down of Programme Fund balances of CHF 3.9 million. The Committee amended the framework further, determining that a surplus is to be generated in 2003. The Finance Committee after reflection proposed the following framework for 2003 which was presented to the Programme Committee:


CHF million

Contribution income

38.0

Other income

3.7

Total income

41.7

Programme costs

37.4

Infrastructure costs not allocated to Programmes

3.0

Total expenses, including interest charges on all loans

40.4

Surplus to be credited to General Reserves

1.3



          The permitted draw down on fund balances in 2003 exclusively relates to the committed past fund balances, as defined in the new Policy on Fund Balances, referred to at point 12.
          The implications of this framework in terms of staff reductions were discussed. The Finance Committee believed that the current level of staff is not sustainable, and staff and staff-related costs must be considerably reduced since this is the principal expenditure.
          The Finance Committee stressed the importance of taking the necessary decisions rapidly, in order that costs not trail into 2003. Delay would result in the need to increase the number of reductions in staff in order to meet the Programme and Support cost level agreed for 2003. In addition, the Committee felt strongly that the WCC should avoid a negative impact on staff morale by delaying the process. The Committee therefore requests that the responsible body take final decisions on the revision and restructuring process not later than end October.
          The Finance Committee further considered that the budget cycle be moved earlier, enabling the Central Committee in August 2003 to approve a budget for 2004 and a framework for 2005.
          The Finance Committee of the Central Committee recommends that the Central Committee:
      • approve the 2003 budget framework as presented
      • approve the establishment of a new and more timely budget cycle.

      7. Income Generation

      7.1 Contribution income

          The Finance Committee heard a report on the critical importance of halting the steady decline in WCC income. The report reviewed the different categories of income received by the WCC. The report stated that contribution income consists mainly of membership income and programme income.
          The Finance Committee recommends that the Central Committee :
      • acknowledge
      • the member churches who continue to pay their fair share in the membership contribution in spite of their own possible financially difficult circumstances;
      • the ecumenical partners who for many years have been able and willing to share the financial burden of the WCC.
      • urge the member churches to consult with the ecumenical partner-organisations in their countries to determine what possibilities might exist for maintaining their contribution levels to the WCC if not actually increasing these. This process of consultation, to be prepared and supported by the staff, should be done at the highest church level.

      7.2 Membership campaign

          The Finance Committee heard a report on the membership campaign which has the objectives:
          • of raising membership contributions to CHF 10 million
          • of 100% of churches contributing.
          The steps taken to this point result in 2002 in a greater number of churches contributing but income contributed is actually less than in 2001. In 2001 the membership contributions were CHF 6.3 million with 48% of the churches contributing.
          A decision was taken by the Executive Committee not to subsidize members coming to the Central Committee whose churches had not paid a membership contribution in 2000 and 2001. The campaign was successful for this Central Committee. The policy regarding subsidies had the potential of affecting 51 members from 42 member churches. 36 churches either paid or promised to pay membership since the letter referring to this policy was sent, enabling their members to receive subsidies. Six members are attending without subsidies.
          The Finance Committee of the Central Committee recommends that the Central Committee:
      • approve that the policy of only subsidizing members of churches paying membership be applied to all committees for which WCC pays subsidies.
      • endorse the efforts to this point in the membership compaign and support its active continuation.
      • approve the formation of an ad hoc Committee on an e-mail or circular basis to give guidance to the staff in the membership campaign. The establishment of the ad hoc Committee and its meetings is not to lead to any additional costs to the WCC.

      7.3 Non traditional income
          The Finance Committee endorsed efforts by the staff in searching for non traditional income such as income from foundations, planned giving and on line giving.
          The Finance Committee considered that there would be members of the Central Committee who, with very positive effect, might share their knowledge and experience in fund-raising in the following ways:
      • in identifying foundations in their countries which may be willing to support the WCC, and by providing information and introductions to staff to these foundations where appropriate;
      • in identifying persons within their churches who have knowledge and expertise in the field of planned giving, and in sharing information to help set up a planned giving network.

      In addition the Finance Committee has recommended that the staff:
      • examine the availability of funding from the European Union
      • draft Ethical Guidelines for Contributions for review at the next Finance Committee meeting.

      The Finance Committee of the Central Committee recommends that the Central Committee:
      • encourage members who might have expertise in fund-raising in non-traditional income sources to share their knowledge with staff through contact with the WCC’s department of Income Monitoring and Development.

      7.4 Profile WCC
          The Finance Committee heard a report addressing the issue of the impact of the limited visibility of the WCC in the context of fund-raising from non-traditional sources. The Committee considered that there are appropriate occasions such as Assemblies or Central Committees at which the WCC might attract effective media attention. The Finance Committee recommends that during the next and future Central Committees, time is made available for consultations with secular or spiritual leaders at the highest level to discuss special themes such as the WCC’s Emerging Challenges, in accordance with the overall planning and agenda for these meetings.

      The Finance Committee of the Central Committee recommends that the Central Committee:
      • request that an assessment of this proposal be prepared by appropriate staff including those in Finance and Communications clusters for review at the next Executive Committee.

      8. KPMG Management Report
          Staff shared the management letter prepared by the auditors further to the audit mandate of 2001. The covering note to the letter explained that the observations were raised in the context of a financial audit. There were six issues, several of which bear mention in this report. Firstly, as recognized by WCC, endowment funds should be classified between externally designated and self-designated endowments, with the understanding that self-designated endowments could be used to fund the WCC directly. Secondly, Programme Fund balances are also to be analysed to segregate clearly externally designated funds from those which are self-designated.
          The Finance Committee endorses management’s agreement of the fact that, with the exception of special cases of illness or other pastoral circumstances, early retirement benefits which do not result in savings to WCC shall not be granted.
          The Committee endorses in full management's response to the letter. It also requests that the auditors issue more detailed recommendations in the future.

      9. Appointment of auditors
          The Finance Committee considered the Executive Committee’s recommendation that KPMG be appointed as the auditors for the year 2002.
          The Finance Committee of the Central Committee recommends that the Central Committee:
      • appoint KPMG as auditors for the year 2002;
      • request that audit tenders be sought for the year 2003, the process to be co-ordinated by the Audit Committee of the WCC.

      10. Projects Team and Information Technology
          Staff presented an outline of the principal projects undertaken by the Projects Team over the last 18 months. These projects included Planning, Monitoring and Evaluation, the new income monitoring system, WCC intranet and Ecuspace.net, the new name chosen for the project formerly known as the Ecumenical Information Sharing Platform. The Committee particularly recognized the on-going work in the Planning, Monitoring and Evaluation project and expressed continuing interest in the developments in the Ecuspace.net.
          Staff explained in a presentation how the Computer Information Services team had worked in collaboration with sister organizations to resolve issues around the fair sharing of the costs of information technology. The Committee applauds this effort.

      11. Investment Advisory Group
          The Investment Advisory Group, made up of outside professionals, meets regularly to oversee the investment policy and to monitor the performance of the WCC’s investment portfolios. A report was received detailing the actions taken since the Central Committee in Potsdam in revising the investment guidelines. These included the reduction in shareholdings from over 50% to 30% and the increase of Swiss bond holdings by 20%. The current guidelines require a strategic exposure to the Swiss market of 65% and up to 70%, greatly reducing the former exposures to other markets. The strategic asset allocation is now set at 70% in deposits and bonds and 30% in shares. In addition, the Committee was informed of the current issues being addressed by the Investment Advisory Group. These include the need to identify more closely the long term portion of the General Fund Portfolio in the light of planned Programme Fund drawdowns in both 2002 and 2003. This element has bearing on the future investment guidelines.
          The Finance Committee requested that staff with the assistance of the Investment Advisory Group conduct a study to review the financial implications of restructuring the investment portfolio towards fixed return investment instruments only.
          The Finance Committee also requested that a revision of the Statement of Investment Objectives and Policies approved by the Finance Committee in 1996 be drafted for review at the next Central Committee meeting.

      12. Programme Fund Balance Policy
          The Finance Committee reviewed a draft Fund Balance Policy which identified different categories of fund balances. The categories are firstly Committed Past Balances, where donors have expectations that designated funds be paid out in accordance with activity plans; secondly, Committed Future Balances, which have the character of reserves set aside for future events; and lastly, Discretionary Balances, which are the result of internal designation of funds, these funds therefore being available for general purposes. As described at point 6, the permitted drawdown of fund balances in 2003 will relate to the first category of committed past balances only. The Finance Committee recommended the inclusion in the draft Policy of the initiative to reduce substantially the number of fund balances from the 400 currently held to a manageable number.
          The Finance Committee then approved the proposed policy, subject to inclusion of the recommendations agreed.

      13. Restructuring Reserves
          The Finance Committee reviewed a report concerning the restructuring of reserves, estimated at a total of CHF 17.2 million at December 31, 2001. The purposes of the proposed restructuring are to simplify and clarify the current categories of reserves, replenishing the General Reserve from other categories. The restructuring proposed does not include in its scope any proposed reduction in the overall reserves. It rather concerns the overall review of the purposes of each reserve, their sufficiency and appropriateness in the current circumstances.
          The Finance Committee recommends that the staff complete the necessary work in order to simplify and clarify the reserve categories, emphasizing that the review does not include in its scope any reduction in the overall reserves.

      14. Assembly Fund
          It was reported to the Finance Committee that the funding of the 8th Assembly was CHF 13.3 million. The current balance of the fund for the 9th Assembly is CHF 1.1 million. The Finance Committee urges the Assembly Planning Committee to be conscious of the weakened financial state of WCC. It considered that CHF 13 million would not by any means be available for the next Assembly. Financial consideration should be given to the number of delegates, the level of registration fees, the duration of the Assembly and the appropriateness of the facility for the purpose for which it is to be used. New thinking should be employed in the planning of the Assembly. The Assembly should be self-financing and should preferably not have an adverse affect on regular contributions to the WCC.

          The Finance Committee of the Central Committee recommends that the Central Committee:
      • endorse this recommendation to limit the budget of the Assembly in the light of the current financial situation of the WCC.

      15. Pension Fund
          The Finance Committee reviewed a report concerning an issue under discussion with the Pension Fund. Actuarial analysis of the Pension Fund confirm its continued good standing under Swiss law. However, valuations under international accounting standards at December 31, 2001 indicate that WCC will be required to include in its financial accounts in 2002 the cost of an amortisation of an unfunded liability towards its Pension Fund of approximately CHF 600,000. This requirement may be avoided by an agreement between the Pension Fund and the WCC clearly defining their respective financial responsibilities and commitments. In accordance with the recommendation of the Executive Committee in February 2002, WCC has proposed a draft joint statement to the Pension Fund Board. This statement once agreed by both parties must be clearly communicated to all members of the Pension Fund.
          A Pension Fund Board member present at the meeting commented that acceptance of the statement by the Pension Fund Board would be facilitated if the clause concerning the fixed nature of the WCC’s contribution rate could be revised to permit revision of the rate after a period of a certain number of years.
          The Finance Committee of the Central Committee recommends that the Central Committee:

      approve the continued discussions with the Pension Fund Board concerning the draft letter of agreement presented to the Finance Committee, with a view to reaching a satisfactory outcome to the accounting issues.