NEWS INDEX Archives 2004 December

Settlement of church abuse cases imperils security of clergy and laity pensions

Mark Reutter, Business & Law Editor
217-333-0568

12/21/04

CHAMPAIGN, Ill. — The record $100 million-plus settlement earlier this month by the Roman Catholic Diocese of Orange County in California to victims of sexual abuse by priests raises the question of how the church will pay for this and other claims.

The California case is the latest in a string of high-profile lawsuits that have resulted in Catholic dioceses and orders paying large sums to settle accusations of child molestation by priests, nuns and lay workers. The most publicized settlement involved the Archdiocese of Boston, which agreed last year to pay $85 million to more than 500 people claiming to be victims of sexual abuse by clergy.

While media attention has focused on whether the Boston Archdiocese would sell church property or close parish schools to raise funds for the abuse settlement, a more unsettling prospect involves the long-term security of pension funds for clergy and lay employees.

There are 46,000 U.S. Catholic priests and a substantial number of lay employees whose retirement funds are administrated by church authorities or designated third parties.

“If the retirement funds are not separated or protected in some way, there is the possibility that reparations paid to sexual abuse victims will drain retirement funds, either directly or indirectly,” Timothy Liam Epstein noted in an article in the Elder Law Journal, published by the University of Illinois College of Law.

The trouble, according to Epstein, is that the federal exemption of “church plans” from any kind of pension reporting makes it impossible to determine the financial condition of the plans. Church authorities so far have not explained how abuse settlements have been paid except to say that existing church assets and insurance policies can cover the settlements. The Church does not release financial information.

“In light of the abuse scandals and the accompanying financial difficulties the Catholic Church is experiencing, is the exemption of church groups to the government’s minimum funding requirements for pension plans wise, or does it potentially jeopardize large numbers of people?” asked Epstein, former notes editor of the journal who is now an associate at the law firm O’Hagan, Smith & Amundsen in Chicago.

In his article, Epstein examined the legislative history of the 1974 Employee Retirement Income Security Act (ERISA), which established minimum funding requirements for private company pension plans and the segregation of employee pension funds from a company’s general funds.

While most non-profit and tax-exempt organizations were required to follow ERISA requirements, all “church plans” were exempt. “No reasoning appears in the Congressional Record regarding why churches are exempted from ERISA coverage,” Epstein wrote.

“Churches are not bound to the same notification rules as other non-profits under section 501(c)(3) of the Internal Revenue Code. Churches need not make any proof of the status of their pension plans, as it is presumed unless they file contrary evidence.”

In addition to the traditional reluctance to place regulations on religious groups under First Amendment principles, Congress did not consider church pension plans to be part of the 1970s-era pension crisis that led to the law’s enactment, according to Epstein.

In the Catholic Church, every diocese and order of nuns, brothers, priests, and monks are financially separate and can select their own type of retirement program. In 2002, the U.S. Conference of Catholic Bishops recommended that all dioceses pre-fund and segregate pension plans for priests. This recommendation parallels the requirement for secular pension plans under ERISA.

While a first step, voluntary compliance by dioceses and orders is not adequate given the crisis facing the church, Epstein wrote. “If there is no protection from ERISA, there may be no pension funds to collect for retiring lay workers and clergy,” he warned.