The purpose of this analysis is to encourage the DRVC to use more of its "free cash reserves" to fulfill its social and humanitarian mission. The number of people in need on Long Island continues to grow despite our recovering economy. There are many reasons for this, but the important thing is that it is happening, and it is happening at a time when the DRVC continues to accumulate more "free cash reserves". Such "free cash reserves" are already excessive by any standard of measure. The DRVC should establish a more effective mechanism to balance the human needs on Long Island with the natural tendency to accumulate more reserves on the part of the Diocesan Finance Council whose mission is the safeguarding of assets.

The analysis I have performed of the DRVC's fiscal 2003 financial statements (the latest available) indicates that the DRVC has $214 million of unrestricted net assets and $180.1 million of "free cash reserves" available, respectively. These amounts are equivalent to 4.5 and 3.8 times, respectively, of defined annual operating expenses. This is excessive by any standard. The normal standard in the non-profit industry is to have cash reserves on hand of no more than 6-12 months of operating expenses to protect against emergencies and/or unexpected fundraising shortfalls. The Better Business Bureau Wise Giving Alliance has established "Standards for Charity Accountability". Standard #10 mandates that charities: "Avoid accumulating funds that could be used for current program activities. To meet this standard, the charity's unrestricted net assets available for use should not be more than three times the size of the past year's expenses". As noted above, the DRVC has unrestricted net assets equivalent to 4.5 times defined annual operating expenses, or $70.1 million more than the maximum allowed by the standard. As a result, the DRVC would be denied the BBB "Wise Giving Seal" were it requested from the BBB.

Although the DRVC has "designated" most of the $180.1 of "free cash reserves" for future use, such designations are discretionary and not required under generally accepted accounting principles. They merely indicate a possible use for such reserves in the future. Most of the DRVC "designations" are vague, non-specific, unquantified, general and inconsistent with past DRVC practice. (Note: A detailed discussion of the major components of the "free cash reserves" and their specified designations is contained later in this report).

It should be noted that there is a distinct difference between generally accepted accounting principles ("GAAP") applicable to the liabilities and reserves of for-profit entities and those of non-profit entities. For-profit entities are not permitted to have liabilities and/or reserves in excess of known and reasonably estimable requirements. If they do, the auditors will undoubtedly qualify their opinion if the excess is material. Non-profits, on the other hand, are permitted to establish any amount of reserves they want in a category called "designated unrestricted net assets", no matter how excessive. Even if such excess is material and the related "designations" are illusory, the auditors are bound to accept them if they are formally adopted by management and/or the board. Thus, a non-profit could have reserves one hundred times in excess of those required, and the auditors would not be required to qualify their opinion or otherwise make note of this excess. I fear that DRVC personnel and/or the Finance Council do not recognize this distinction and are waiting for the auditors to tell them when reserves are excessive.

The existence of these excess reserves, whether the DRVC agrees with my calculations and conclusions or not, raises several unanswered questions. All Long Island Catholics are entitled to the answers to these questions: