At age 70, George Fugina was hoping to retire for good this year.

After working for 31 years as head custodian for St. James the Greater Catholic Church and then picking up a part-time custodial job at the Eau Claire YMCA, Fugina was ready to take it easy and live off his pension, savings and Social Security.

But that all changed last weekend when he received a letter informing him that his longtime former employer, the Diocese of La Crosse, plans to terminate its pension plan for lay employees this summer, replacing it with an undetermined one-time payment.

Now Fugina and hundreds of other current and former diocese employees are left wondering how the surprise announcement will affect their standard of living in their so-called golden years.

“It’s heartbreaking. You depend on those pension checks,” Fugina said last week. “I thought I’d be done working soon, but now I guess I’m going to have to stay and keep working.”

In the letter, Bishop William Patrick Callahan informed members of the diocese’s Lay Employees’ Retirement Plan that the plan has been underfunded for years.

“After much analysis, discussions and prayers, it has been determined that it is necessary to terminate the Diocese of La Crosse Lay Employees’ Retirement Plan at this time,” Callahan wrote in the letter dated Feb. 27 and received by many employees last weekend.

The pension plan covered Catholic school teachers, custodians, secretaries, rectory workers and other lay employees throughout the diocese, which serves 19 west-central Wisconsin counties covering an area extending from around Bloomer to the north, Prairie du Chien to the south, Wausau to the east and the Minnesota border to the west. Regis Catholic Schools President Mark Gobler estimated that more than 1,000 people could be affected by the change.

No safeguards

What makes the situation particularly troubling, national experts said, is that pension plans of church-affiliated workers and retirees aren’t protected like corporate pension plans.

Unlike private pension plans, church plans are not required to maintain adequate funding levels or inform members about investments, and, most importantly, they are not covered by the federal pension insurance program that guarantees most private pension plans, according to the Washington, D.C.-based Pension Rights Center, a nonprofit consumer organization.

The exemption for church plans goes back to 1974 when Congress passed landmark laws protecting private pensions, as church leaders didn’t want the federal government looking at the church’s financial statements, said Karen Ferguson, director of the Pension Rights Center.

“The underlying assumption was that churches would financially stand behind the plans they established for their employees,” Ferguson said. “And in most cases they have.”

When that doesn’t happen, she said, “It can be extremely devastating for the employees and retirees who were counting on that money.”

With the lack of regulation, church plans are particularly susceptible to underfunding, said Charles Zech, an economics research professor and founding director of the Center for Church Management at Villanova University near Philadelphia.

“They are only guaranteed to the extent that the money is there,” Zech said.

Payment promised

Callahan’s letter notes that the pension plan was frozen in 2007, meaning no new employees were offered the pension benefit and current members’ accrued benefits didn’t increase after Dec. 31, 2006. In the meantime, he wrote, the diocese continued to bill parishes and allocate funds from the Diocesan Annual Appeal to help make up for the shortfall in the underfunded plan, but the efforts weren’t enough to fully fund it.

All funds in the plan, created in 1974, will be distributed as a one-time lump sum payment to eligible participants based on the ratio of available plan assets divided by total plan liabilities, with the impact varying for each individual, the letter indicates.

“This difficult decision has been made to ensure that all plan participants receive as much benefit as possible,” Callahan wrote.

Monthly payments will continue until the final payout is made, tentatively set for sometime this summer, the letter indicates.

At the time the pension plan was frozen, the diocese replaced it with a 403(b) retirement plan, which allows participants to deposit part of their paychecks into an investment account that accrues tax-free until it is withdrawn during retirement.  Employers also may contribute to workers’ 403(b) accounts. Changing to the 403(b) gave more flexibility and control to employees, the Diocese of La Crosse indicated.

While many church-affiliated organizations have been moving away from pension plans for years, Zech said they typically freeze them and then honor pension commitments for people already in the plan.

“This is the first time I’ve heard of a one-time payout from a diocese to end a pension altogether,” Zech said. “You would hope a faith-based organization would do better than that by their employees. The whole thing just doesn’t seem very pastoral to me. We expect more from our church leaders.”

Zech also warned of potentially harsh tax implications, depending on how the funds are handled, for recipients who receive a large lump sum in one year instead of smaller payments spread out over many years.

Math problem

The big question, of course, is how the lump sum payments will be calculated.

Though diocese officials declined to comment for this story, a follow-up statement released by the diocese the day after the Leader-Telegram reported the plan termination indicates church leaders “anticipate the payouts at plan termination to be in the mid-90% range of the plan’s total actuarially equivalent value of benefits.” However, diocese officials declined to clarify how payments would be determined. 

Despite the diocese trying to put a positive spin on the payments, the experts were skeptical it will prove to be a good deal for recipients.

 That will depend on how long the plan estimates employees, retirees and their beneficiaries will live and what “discount rate” administrators use to determine  the payments, Ferguson said. 

Norman Stein, a law professor at Drexel University in Philadelphia and senior policy adviser for the Pension Rights Center, said the discount rate is essentially the rate of return that plan administrators assume the money would earn over the recipient’s lifetime. Thus, the higher the assumed rate, the lower the lump sum payment necessary to theoretically match the current value of payments employees and retirees would have received over their lifetimes. 

“Small differences in the interest rate can have a dramatic effect on the value,” he said, saying 3 percent might be considered pretty fair while 8 percent would be unrealistically high, especially for older individuals who shouldn’t put their nest egg in high-risk investments that might have the potential for a higher return.

Stein offered the following example to show the difference the rate can make: A person collecting $1,000 per month, calculated with a 4 percent discount rate and a 20-year life expectancy, might receive about $160,000. If those values are changed to 8 percent and 15 years, the total could be less than $70,000.  

To Stein, it seems like diocese leaders are forcing their employees and retirees to pay the consequences of the diocese choosing not to put enough money away to properly fund the pension plan.

“It seems to be immoral for a church to screw former employees who they made a promise to and force them to live out their lives in poverty or financially hurting,” Stein said. “You have other choices. For a church to choose to steal from its employees, and ultimately that’s what this really is, is unfortunate.”

He acknowledged that some people — those who strike it rich investing their lump sum, have a terminal disease or otherwise die before projected in actuarial tables — could be financially better off with the lump sum payment. 

Retired Regis High School teacher Howard Campbell, 69, who taught German and social studies at the Eau Claire private school for 40 years and has continued serving as a substitute teacher for the past three years, said he suspects the payment will cover his needs for less than a decade.

“Anything beyond 78 likely would be a problem,” he predicted.

Uncertain future

All of the uncertainty has affected workers feeling anxious about their financial futures, and that has the potential to harm the regional economy, said Thomas Kemp, chairman of the economics department at UW-Eau Claire.

“If people are uncertain about their future, they’re not likely to spend much today,” Kemp said. “Moreover, if people can’t trust that their pension plans are well-funded, they’ll be sure to argue more strongly for increased current compensation, and that might prove more costly for business in the longer run.”

In addition to the implications for individuals and the economy, Kemp said the diocese’s decision to eliminate pensions “is likely to damage an important social institution (the Catholic Church) when most need them as a stabilizing force in our unstable society. I hope that everybody involved will do what they can to reverse this policy.”  

Already a saver by nature, Fugina said he has further cut back on spending since the announcement. Yet he remains extremely concerned. 

“What’s going to happen to all of us who are affected? How are we going to survive?” he asked.

Likewise, Mary Slobodnik, who retired in 2012 after teaching kindergarten at St. Patrick’s and Immaculate Conception schools in Eau Claire for 34 years, is worried about what will happen when she stops receiving the $423 pension check she gets every month.

“It’s not a whole lot of money, but I use it for getting groceries and paying some bills,” said Slobodnik, 61, of Altoona, who receives Social Security disability payments for a diabetic condition that led to her early retirement.

Slobodnik, a product of Catholic schools herself, said she elected to accept a lower salary than public school teachers because she felt teaching in a Catholic school was her calling, but now she is irked the diocese is taking away her remaining benefit. Underfunding pensions is especially troubling, she said, because she questions some of the spending decisions made by diocese officials and wonders why they couldn’t sell off some unused assets to help fund the plan. 

Fugina, who said he loved working at St. James, also feels betrayed by the diocese.

“They promised they’d take care of us when we retired,” he said. “And they’re breaking their promise.”

The diocese addressed some of these feelings in its statement: “The Diocese of La Crosse acknowledges that some may view the decision to be one denying them a promise, and the Diocese hears and recognizes those feelings. As has been witnessed by both religious organizations and private businesses alike, due to market volatility, many employees have found themselves without the support of the retirement funds that they had planned to receive; the Diocese has made a decision in order to avoid that distress and best preserve all employees’ retirement funds.”

The pension plan members likely won’t learn the full impact of the plan termination until late May, when the diocese promised to deliver more information.

In the meantime, Campbell said, he and other retirees are upset by an aspect of the diocese’s communication beyond the potentially devastating financial implications.

“The one thing that was missing,” he said, “was the diocese saying, ‘We’re sorry.’”

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