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South Carolina Episcopalians
2019 Breakaway Convention Guide: Part II
March 13, 2019
Mystery of the Legal Defense Fund Explored
Donations to legal fund may have been paying more than legal bills
If you've ever been a delegate to a Diocesan convention, you know financial reports and approval of budgets are usually the most boring parts. They take only minutes of polite banter, and - whoosh - millions of dollars of new spending is approved.
That was not the case at the 2012 Diocesan Convention. During the budget discussion a naïve delegate noticed that the cost of legal services to the Diocese had skyrocketed in recent years and became curious about where the money was going.
When he stood up and asked the bishop about it, the bishop turned to the Chancellor, who fumbled a bit then stated the obvious: law firms. Since the Diocese was not involved in any lawsuits at the time, the delegate asked for a list of the firms being paid.
Silence ensued. It was as if he'd mooned the convention. Everyone on the dais froze up and looked at each other. That information was not going to be disclosed, he was told. However, the Chancellor bluntly assured him, the bills were proper and in order, and he knew that because he oversaw the payments personally.
For the rest of the convention, the delegate experienced the Anglican equivalent of a Quaker shunning.
That may be about as close as the lay people of the breakaway organization get to a full public accounting of the $3-plus million in legal services the Diocese has paid for in the past ten years.
2.1 What happens to donations to the Legal Defense Fund
Historically, legal bills owed by the Diocese of South Carolina have been paid out of its operating account and listed in the annual budget in a line item labeled "Legal expenses" (#53172). During Bishop Salmon's episcopate, these expenses averaged about $50,000 a year. However, given Bishop Lawrence's ambition to sue the Episcopal Church ten years ago, it was clear more lawyers would be needed and that meant more money to pay them.
Fortunately for the breakaway leadership, the Diocese had already created a little-used “Legal Defense Fund" a few years earlier to cover unanticipated legal expenses beyond those considered usual and customary. It appeared to be a nearly perfect vehicle for donations to support the Lawrence lawsuit. (Critics would mumble that using the Fund to initiate a lawsuit was not consistent with the Fund's purpose since it was more "offense" than "defense".)
The important thing about the Legal Defense Fund is that it is, what accountants refer to as, a "restricted" account. A restricted account is useful in that it can hold accumulated funds from one year to the next, and money put into it can only be spent for the purposes for which it was given. In this case, after 2012, most, if not all, of the donations received by the Fund was intended for legal bills associated with the lawsuit.
Until 2013, the Fund never had a balance of more than $10,600. However, when Lawrence and his supporters filed their blockbuster lawsuit that year, the Fund's balance shot up to $113,988. In 2014 and 2015 respectively, the Fund took in $183,359 and $374,867. In 2016 the Fund received annual donations of $111,789, according to diocesan records.
Reports on donations in 2017 and 2018 are not yet available. Except for that, this part of the story is fairly straightforward at this point.
However, the challenge begins when we look at how these donation have been dispersed.
Diocesan records show that the entire Fund balances at the end of 2013, 2014, and 2015 were taken out of the Fund and passed through to the operating account. That's right, at the end of each of those years, the balance in the Legal Defense Fund was consistently zero. (The last year for which we have any public record of contributions to the Fund was 2016 when only $8,489 was taken out, leaving a year-end balance of $103,300.)
2.2 Restricted Accounts
Actually there is nothing wrong with taking out all the money in a restricted account during the course of a year, as long as it is paying bills that are consistent with the the Fund's purpose and donors' intent.
Going back and looking at 2013, for example, the Lawrence 'diocese' reported spending $286,250 for legal services from the operating account that year. Happily, there was $113,988 in the Legal Defense Fund, and it appears all of it was transferred over used to help cover those bills.
The story for 2014 and 2015 is not so clear. In those years, the amount of money taken out of the Legal Defense Fund was a lot more than the amount of the 'diocese's' annual legal bills.
In 2014, the Fund took in $183,359. At the end of the year, the Fund balance was zeroed out with the entire balance apparently going to the operating account. However, according to its annual audit, the 'diocese' had only spent $152,957 on legal services that year. It is not clear what happened to the difference of $30,402.
The same situation occurred the following year. In 2015, the 'diocese' reported $374,867 in donations to the Legal Defense Fund, and again the entire amount was apparently transferred to the operating account. The troubling part of this narrative is that only $96,633 was reported to have been spent on legal services that year. So, again, it is not clear what happened to the difference of, in this instance, $278,234.
There is probably a good explanation for these transfers somewhere, but they aren't apparent in any of the public accounting or reporting that we can find… and they should be. Since financial reports for 2017 and 2018 are not yet online, we will have to wait to see how this little dance played itself out in those years.
You might find it useful to see these numbers for yourself:
Operating Acct Legal Defense Fund Legal Defense Fund Legal Defense Fund
Legal expenses Opening balance Income Closing balance
2011 $169,263 0 $6,000 $6,000 22012 $198,228 $6,000 $4,600 $10,600
2013 $286,250 $10,600 $103,388 0
2014 $152,957 0 $183,359 0
2015 $ 96,633 0 $374,867 0
2016 $147,024 0 $111,789 $103,300
2017 $298,044 n/a n/a n/a
2018 $969,186 n/a n/a n/a
2019 $788,520 (requested)
2.3 Restricted vs. Operating
The reason these numbers are important is the appearance that donations contributed to the Fund are finding their way into the 'diocesan' operating account and being used to pay current bills for other purposes. That should not be happening.
However, there is also a larger issue here: Excess money being transferred to the operating account from the Legal Defense Fund could be making the financial health of the 'diocese' seem much stronger than it is, and consequently misleading decision-makers in making decisions, like approving an annual budget. It also means there are less designated resources to pay lawyers in future years.
The Lawrence organization is looking at very choppy waters ahead. It does not have the resources to continue to operate at its current level. It cannot sustain having 45% of its annual spending going to lawyers, and racking up half-million dollar deficits with no resources to pay them off.
To make this scenario even more absurd, one of the primary activities of the lawyers appears to be fighting any kind of court-ordered audit of the diocesan finances since 2012.