How to Avoid the Epidemic Killing Our Churches

by | March 21, 2018

An epidemic of Biblical proportions is significantly impacting churches of today. Currently sweeping across the landscape of Christianity, this epidemic disables and ruins countless churches every year. This deadly disease is debt. The debt epidemic begins innocently enough. It typically begins with someone from the building or finance team passionately misquoting the famous line from Field of Dreams, saying "Build it and they will come." Soon people begin to nod in agreement. The debt epidemic has begun.

The debt epidemic gains momentum when the architect says, "tell me everything you want in your building and don’t worry about the cost." Recently, I visited a church in the midwest. In the beginning stages of this disease, the church's annual budget is less than $300,000. After meeting with the architect, the plans for the new building were presented--a $3 million project. The drawings were beautiful and very enticing. One church member even exclaimed, “there is even a fireplace in the gathering space!” Other early symptoms of the debt epidemic include phrases like, "I'm sure the people in our community will want to help pay for it" or "All of the new people that we attract will pay for it."

"Build it and they will come" has become, "Build it and they will pay for it."

The next phase of the debt disease usually includes the church hiring a firm such as Horizons to help them raise the money to build their Field of Dreams. Often what they really want is a plan to inspire others to pay for their building.  During this phase, the church either becomes deathly ill or finds the right prescription to avoid succumbing to death by debt.

How does a church avoid succumbing to the debt epidemic?

 

Here are some ways to avoid the debt epidemic in your church.

1. Preventive medicine is always the best.

Hire someone like Horizons before you hire the architect. We can help set parameters that will prevent your architect from proposing a project that could result in extraordinary debt. This first step can prevent the disease from taking hold and save your church from contracting the debt disease.

2. Always insist on a pre-campaign feasibility study.

A quality study will include a projection of the dollars your church will likely raise from a capital campaign. Although a quality study will provide the data you need to prevent deadly debt, the results can often be a bitter pill to swallow. Churches typically spend thousands of dollars on building plans and church leaders are excited to see it become a reality. However, as your partners in ministry, Horizons' strategists will honestly tell you if the current plan is beyond your congregation's capacity to fund it. While potentially painful, knowing (rather than guessing) your congregation's willingness and ability to fund your project is a necessary step for preventing deadly debt.

3. Test your plan with key financial leaders before going public.

A capital campaign will invite everyone to participate in making your church's vision a reality, but a few key financial leaders will contribute the majority of funds. (Here's how to identify and grow a few key financial leaders.) Inviting high-capacity donors to weigh in before unveiling your project to the congregation may illicit substantial support.  For example, a church had fallen in love with a project that cost eight times their budget. Initially it seemed they might take on a deadly amount of debt in order to fund it. After showing the project to key financial leaders, one couple became was so excited they decided to give nearly 40% of the project. Death by debt avoided.

 

How much debt is healthy and how much is deadly?

1. The most effective strategy is to conduct no more than two capital campaigns in a row for any one project.

Many pastors, donors, and volunteers experience campaign fatigue following two three-year capital campaigns. In addition often these same church members are involved in the building project, leading to a strain on volunteer resources. I've worked with churches that have had to conduct six and seven campaigns in succession to eliminate their deadly debt. Not only did it exhaust church leaders, but it also prohibited any growth in mission and ministry  until the debt was paid.

2. The pre-campaign feasibility study is an essential tool in right-sizing your project and avoiding deadly debt.

For most churches, it is unwise to take on a project that exceeds two times your feasibility study projection. Of course, this is simply a rule of thumb and may not apply to every situation. Things like high-capacity donors, investment income from endowments, and other factors may play a significant role in determining your church's ability to fund your project. Also consider whether you have resources misaligned to your mission.

3. Debt service should not exceed 10-15% of your annual operating income.

Most churches that carry debt service exceeding 15% of annual income are unable to begin new programs, hire staff, or expand ministry. Death by debt becomes a real possibility.

 

Succumbing to death by debt is not inevitable. There is a cure.

Incurring a healthy level of debt within the guidelines I’ve shared may be an important strategy for achieving the vision God has for your church.  Field of Dreams may be a great movie, but it does not include sound advice for your building or renovation project.

4 Comments

  1. As always Scott is spot on. Miss you my friend!

    Reply
    • Kristine Miller

      Thank you, Paul!

      Reply
  2. Thanks for a great article. I especially appreciated the value placed on the feasibility study.

    Reply
  3. Kristine Miller

    Thank you for your affirmation, Ed. Much appreciated.

    Reply

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Everything you need to inspire generosity.

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Mick Tune was a pastor for eighteen years and has worked as a consultant with churches across the country for more than twenty years. He is a partner with Doug Turner at Culture of Ready (a ministry partner with Horizons Stewardship) and the author of Wildering: Anyone’s Guide to Enjoying the American Wilderness.

Increase Giving: Begin with Powerful Storytelling

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The headlines suggest impending doom for churches:

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“Charities Brace for Giving Plunge in Wake of New Tax Law”
“Charities to Lose Billions in Donations Due to New Tax Law”

This is not the first time that changes in tax laws have resulted in such dire predictions. In 1981, the New York Times published this headline: “New Tax Law is Said to Endanger Billions of Gifts to Private Groups.” Fortunately for the nonprofit sector, that predication was wrong: gifts to charity over the next three years actually increased!

What impact will the new tax law have on charitable giving?

The long-term impact on philanthropy of the Tax Cuts and Jobs Act of 2017 (TCJA) remains unclear.  However, a strategic giving summit, led by Robert Sharpe of the Sharpe Group, highlighted new opportunities for donors made possible by the new law. Also, Sharpe suggested several strategies to grow giving to compensate for changes in the law. Here is an overview of Sharpe’s perspective on the law and the most effective ways to give going forward.

First, the reality. The new law was the most comprehensive revision in the tax code in over 30 years. The changes included a doubling of the standard deduction and a reduction in the mortgage interest and state/local tax deductions. Also, the cap on cash gifts was raised from 50% of Adjusted Gross Income (AGI) to 60%. Limits on deductions for high income donors were suspended until 2026 and home equity interest deductions were eliminated. As a result, it is expected that half of the people who itemized their deductions in 2017 will not itemize in 2018. However, high income donors who will continue to itemize may find expanded opportunities and incentives for larger charitable gifts.

So, how can churches guide donors? What can be done to salvage the tax benefits for those who no longer itemize and promote new opportunities for those who do?

Sharpe suggested three strategies: bunching, boosting and bypassing.

Bunching refers to donors making charitable contributions every other year. The every-other-year strategy enables donors to bunch two years of giving into one allowing them to itemize in the year their gifts were given. As an alternative, donors can contribute to a donor-advised fund (DAF) every other year and give ½ to the church each year. This strategy helps the church’s cash flow but can skew income if the church is not aware of the donor’s intentions. Some of your donors may have done this last December. You should review your 2017/2018 giving, especially among your larger donors, to see if they may be using a bunching strategy already.

Boosting is most applicable to capital campaigns. Some high capacity donors may choose to make asset gifts that boost them to itemizer status for a number of years. Donors choosing this option lock in current market values, bypass capital gains taxes, and save a substantial amount on state and federal taxes. Boosting makes sense for donors who have highly appreciated assets that pay minimal dividends and who want to make a larger gift to a capital campaign.

Bypassing is the third way to take advantage of the changes in the tax law. Donors can enjoy a “deduction equivalent” by making gifts that bypass their income stream. The most common form of bypassing is the IRA rollover provision in the tax code. People age 70 ½ and older who have IRAs are required to take a yearly minimum distribution (RMD) that is taxable as ordinary income. These people are now able to make a yearly gift of up to $100,000 directly from their IRAs to churches and charities. This gift counts as their RMD, avoids the taxes, and reduces their AGI on which many other deductions are based. Although the IRA rollover provision predates the new tax law, its importance has been amplified by recent changes and by the increasing number of Boomers becoming eligible.

Finally, Estate and Gift Tax laws remain essentially unchanged. However, by doubling the exemption amount ($11.18 million per individual and $22.36 million for married couples in 2018) and indexing it for inflation, the TCJA eliminated federal estate taxes for 99.9% of Americans. For some perspective on the scope of this change, the exemption was $600,000 as recently as 2000. As a result, it is likely more discretionary assets will remain in the typical estate. Surveys show that donors with such increased assets probably will split the tax savings between family and charity.

So how should churches respond to these changes? Here are some suggestions:

  1. Educate yourself, your staff, and donors about the changes that impact charitable gifts. The TCJA left the charitable deduction intact while repealing and limiting many others. In fact, some benefits were actually expanded! Many denominational and community foundations have staff whose primary job is providing advice and resources for their constituents. Take advantage of these low-cost (or free) resources. The Sharpe Group has excellent white papers and educational materials, too. “Talk to your financial advisors” should be your mantra in 2018 and 2019!

 

  1. Promote the benefits of gifts of appreciated securities and other non-cash assets, such as IRA rollovers. Because about 8,000 Baby Boomers turn 70 ½ every day, appreciated asset gifts will be increasingly important in funding your ministry. Remember the IRA rollover provision allows eligible donors to enjoy the tax benefits of their gifts regardless of whether they itemize. However, your church will not receive asset gifts unless you make a conscious effort to educate members about these opportunities. Remember to tell donors how these gifts make a substantial difference to your mission and ministry. Colleges and nonprofits are making the case for why they should receive these gifts. Be sure you are doing the same.

 

  1. Inform your donors that the federal estate and gift tax has, for all practicable purposes, been eliminated. Many donors created estate plans based on the old tax laws. Those plans usually included insurance or assets in trusts to pay the necessary taxes. Any bequests to family and charities were made from the remaining assets. The higher estate tax exemption means donors can leave more to charity and increase the amount distributed to family members! Position your church to be the recipient of these “extra savings.” Once again, take advantage of the resources available through denominational and community foundations.

The new tax law does not mean your giving will be negatively impacted. But growing giving requires being informed about the best ways to give.

Too many church leaders are operating under the assumption that the TCJA will have a negative impact on giving. Robert Sharpe reminded us that the “sky has never fallen” except during major economic downturns. It is clear the opportunities made possible by the new law outweigh the threats created by it. Churches need to tell that good news in order to enhance their ability to proclaim THE Good News!

Tom Norwood, D.Min, CFRE is a Senior Vice President with Horizons. He is an ordained Presbyterian minister who holds degrees from Davidson College, Columbia Theological Seminary, and Yale University. Tom is a regular speaker at regional and national fundraising and stewardship conferences.

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