Caritas Christi: Is Catholic Healthcare in Boston Being Sold-off for a Few Silver Coins?

June 28, 2010

A number of readers in recent days have asked us to comment on the acquisition of Caritas Christi by Cerberus Capital Management and have shared insider information to help us.  We do not know if this deal is a good one or a bad one for the Archdiocese and Caritas.  When something sounds too good to be true and when the Boston Globe and Massachusetts legislators all say positive things about something the Catholic Church is doing, it is usually reason to be concerned.  So given the stakes—hundreds of millions of dollars in value for Caritas (which the Archdiocese will evidently never see), along with the prospect that Catholic non-profit/charitable healthcare in Boston will end 3 years from now—we feel compelled to report that a lot of questions should be answered publicly before this becomes a done deal.  The final public hearing is Thursday, July 1, at 6pm in Dorchester.  Below is our Top 10 list.  If and when these 10 questions are answered publicly, priests, laity, and politicians will probably find some surprises, but you can be certain that complete answers will not be forthcoming.

1. What is Cerberus’ internal plan, exit strategy, and timeframe for the Caritas investment?

Cerberus is a private equity firm.  They invest money in undervalued businesses, and then sell the businesses a few years later to generate a return on their investment.  They get in and eventually they get out with what’s called an “exit strategy.”  Period.  Leopards do not change their spots.  They are not another hospital chain that wants to operate Caritas forever as part of their business strategy and focus.  Cerberus has an internal investment plan for Caritas, approved by Cerberus’ general partners, that maps out what they plan to invest, how they expect to see the value of Caritas increase, and what they hope to realize in gains when they exit Caritas after some number of years. What is that plan, strategy, and timeframe?

2. What are the financial goals that Dr. de la Torre and the Caritas management team are incented by Cerberus to achieve over the next 3-5 years, and what are the monetary incentives for the team if they hit them?

When the agreement was announced and questions were asked about the financial goals for Dr. Ralph de la Torre, CEO of Caritas, the response was that these goals were still being worked out.  Certainly, by now those goals are known.  What equity stake, if any, do Dr. de la Torre and the management team have in “new Caritas” and what do they stand to make in a future sale of Caritas by Cerberus?

3. Who actually “owns” Caritas Christi?

According to the published investment agreement, the  Archdiocese of Boston sees not one penny from this transaction—all of the funds invested go to Caritas.  It is as though Caritas is owned by Caritas. A reorganization in 2008 changed the governance structure, but it was not stated at the time that the 2008 reorg changed the ownership structure.  Did the Archdiocese ever “own” Caritas?  If so, what happened to change that, what happened to the value of the assets, and when did it occur?

4. What is the actual book valuation of Caritas, and why does the Archdiocese realize none of that value from this sale?

According to a Catholic finance expert we recently consulted, a look at the 2009 annual report by Caritas available at the State of Massachusetts website shows Caritas has a positive valuation of hundreds of millions of dollars, which the Archdiocese will not see as a result of this transaction.  The report lists assets of $924 million, and debts and liabilities of $664 million.  So when you subtract assets from debts/liabilities, you get a net asset value of $260 million.  In other words, hypothetically speaking, if you shut down the system, liquidated investments, paid off debts, and sold off everything (since effectively that’s what will potentially happen to “Catholic healthcare” as we know it in Boston after 3 years anyway), on paper it would be worth about $260 million after all the bills were paid.  But since Caritas generated profits of $30 million last year and could easily generate profits in excess of $50 million annually for the next 10 years ($500 million in profits over 10 years), the present value of the Caritas healthcare system is many hundreds of millions of dollars—perhaps as much as $500M or more.  Take even $50 million of that to subsidize the shortfall in the Clergy Retirement Fund, and you’ve done something really good.  But, the Archdiocese is getting zero.  It is not clear what the net present value of Caritas is, and what aspect of the present ownership structure removes the Archdiocese from any stake in that value.

5. Is the Caritas deal financially a good deal for the Church, and how does it compare to other similar healthcare purchases?

Since this archdiocese already has some experience under-valuing assets it has sold (e.g. sale of St. Mary Star of the Sea in East Boston for $850,000, which was “flipped” and resold by the buyer for $2.65 million just weeks later), it is reasonable to ask if the Cerberus transaction is a bad deal, a fair deal, or good deal for the Archdiocese and Caritas. There’s a short report by a consulting firm, Navigant, engaged for a long time by Caritas to help with their strategic direction which says they did a lot of homework and concluded in one sentence that it is a“fair” deal, but it gives none of the findings or information to justify that conclusion.  Why haven’t the full findings of the report by Navigant Capital Advisors been released to the public? When will it be released?

6. : How much of the $830 to $850 million investment publicly announced is expected to come from Caritas current assets, internal funds and future operational profits, and how much is from Cerberus’ own funds?

$830-850 million in investment sounds awesome—at least at first. So, is that $830-850 million how much Cerberus is spending out-of-pocket to acquire Caritas?  No, not really.  Cutting through the smoke, it’s unclear what the Archdiocese and Caritas are actually netting from this deal.  We know that Cerberus will provide $430-$450 million as “consideration for the assets and operations of Caritas” which will help fund operations and capital projects, assume pension obligations for current and former employees, and pay down Caritas’ debt.

Our finance expert reminded us that no one is mentioning publicly that Caritas has $295 million in “current assets” today, including cash, accounts receivable, and short term investments.  There’s another $208 million in financial assets whose use is limited.  So, straight away, Cerberus is getting their hands on $503 million in financial assets from Caritas when they walk in the door.  Not too shabby.  Does the $830 million to be spent include any of the $503 million already sitting in the bank which becomes a Cerberus asset after the deal is done?  We do not know, but the answer is probably yes.

In addition, Caritas generated $30 million in profits last year and should easily hit $50 million, especially when they do not have to pay interest on $240 million in long-term debt.  So, over the next 4 years, we can assume there is $200 million in profit to also work from. Add $200 million in profit to $500 million in available assets and you have $700 million to reinvest that is right there in Caritas.  Though Cerberus probably will not liquidate all of Caritas’ financial assets and is indeed bringing some new cash to fund operations and capital improvements, the net is that a good part of  the spending of $830-850 million appears to be available already on Caritas’ books.  The agreement says “From the Closing Date until the fourth anniversary of the Closing Date, Purchaser shall cause the Health Care System to spend or commit to spend no less than $400 million” but that money is not coming from Cerberus—it’s designated as coming from the Caritas healthcare system itself—which means existing assets and/or future operating profits.  We are no Warren Buffet when it comes to finance and could be dead wrong here, but in the end, Cerberus may be bringing only about $130-150 million in new funding, not nearly the $830-850 million touted publicly.  That would be only slightly more than the $100 bond issue previously planned by Caritas for this year.

7. If Cerberus fails to make the promised capital investments over the next four years, why does the Massachusetts Attorney General get to choose where that shortfall is donated?

This is the part that makes the least amount of sense of anything in the whole agreement.  Section 8.8b says, “To the extent that, by such fourth anniversary, Purchaser has failed to cause the Health Care System to spend or commit to spend no less than $400 million as provided in Section 8.8(a), Purchaser shall cause the Health Care System to contribute such shortfall to a charitable foundation designated by the Massachusetts Attorney General.”  In other words, if Cerberus doesn’t spend $200 million on improvements they committed to make to the Caritas Catholic healthcare system as part of the deal, Martha Coakley can decide to give that $200 million to the National Rifle Association or the National Organization of Women, or whomever the heck she pleases?  Who died and left Martha Coakley in that position of responsibility?  Why don’t those committed funds go back to the Archdiocese of Boston?  If Cerberus drops the Catholic identity, $25 million goes to a charity of the Archdiocese’s choice, but if they reneg on a couple hundred million of investment in the system, the Attorney General decides where that shortfall goes?  This makes no sense whatsoever.

8. Who is responsible for maintaining the Catholic identity and adherence to Catholic religions and moral directives?

Of the 7 members of the Board of Trustees of the new entity, 5 are Cerberus people, one is the CEO of the hospital (who stands to benefit financially from the whole transaction), and one is president of a real estate development company.  None has any theological training or background listed in their biographies, and several have public records of contributing to campaigns of pro-abortion politicians.  Based on the transaction documents, these are the people who appoint a committee to work on maintaining the Catholic identity–which sounds a lot like the fox picking the animals who will guard the chicken-coop.  Should there not be at least a few people with unquestioned Catholic theological background and judgment named up-front?

9. Does the Archdiocese acknowledge or deny that the Catholic identity for Caritas will likely disappear after 3 years?

A blog at the Wall Street Journal said, “In Hospital deal, How Much is a Catholic Identity Worth: Just 3%.”  Despite comments by Vicar General Fr. Richard Erikson and Fr. Bryan Hehir saying the stewardship agreement “memorializes” the commitment to maintain the Catholic identity of Caritas Christi and represents a strong commitment to operate the hospitals according to Church religious and moral directives, the exit clause that allows Cerberus to pay $25 million to drop the Catholic identity negates what both officials have said.  So, let us be realistic that the proposed guarantees for maintaining the system’s Catholic identity beyond 3 years are lacking in substance and credibility. It feels like the tale of “The Emperor Has No Clothes.”  Everyone says the emperor looks handsome in his new clothes.  Perhaps it would be better to stop pretending this arrangement is something which it clearly is not.

Readers may agree or disagree with the Catholic Action League on their positions and approaches to various issues, but their message on this one seems to merit repeating, just as a reality check:

This impending transfer of ownership means that the future of 150 years of Catholic health care in Boston will be within the discretionary authority of a non-Catholic, for profit, out of state, capitalist corporation.  It is now clear that Caritas Christi will be rapidly secularized, that such iconic Catholic institutions as Carney Hospital and St. Elizabeth’s Medical Center will no longer defend the culture of life, and Catholic and other pro-life doctors, nurses, and administrators will lose their conscience protections.”

This comes just five years after Catholic Charities withdrew from adoption services in Greater Boston.   Beautiful and historic churches are being closed, the parish based Catholic school system is being effectively downsized into ‘consolidated’, lay-governed regional academies, and now the Catholic hospital system, which dates back to 1863, is about to be abandoned.  A two hundred year legacy of Catholicism in Boston, as reflected in an institutional infrastructure, is being systematically dismantled and improvidently discarded.

10. Given the recent financial prosperity reported by Caritas, why does this transaction need to happen?

In February of 2010, Caritas and the Boston Business Journal reported that Moodys upgraded their long-term bond ratings.

The upgrade reflects the turnaround in financial performance in FY 2009 and our belief that this new level of performance is sustainable.  Moody’s said the hospital group has better cash flow to cover its debt service and experienced an upswing in unrestricted cash and its investment position, $235.3 million compared with $172 million at the end of fiscal 2009.  Moody’s said its analysis takes into consideration a potential $100 million bond issue during fiscal 2010.

This assessment would seem to undermine the “cash poor” rationale for the sellout.  Caritas says they need the capital, but Caritas already had a credible plan to raise additional funds for capital improvements via a bond issue . What gives?

We are not saying if the Caritas sale is the right thing or the wrong thing for the Archdiocese of Boston and the Caritas Christi Healthcare System.  At this precarious time for the needy of the state and for the Archdiocese–with layoffs pending, a $25 million shortfall in the Archdiocese’s pension fund and a $100 million shortfall in the Clergy Retirement Fund–this transaction is getting very little public financial scrutiny.  For an archdiocese that talks a lot about transparency, this does not feel very transparent.  We are simply saying these 10 questions should be asked and answered publicly by the Archdiocese, Caritas, the Attorney General, and Cerberus for the sake of the Catholic Church, Caritas employees, non-profit charitable healthcare in Boston and for all stakeholders.

The final public hearing is Thursday, July in at the Local 103 IBEW Hall in Dorchester at 6pm.  All readers concerned about this transaction should make it a point to attend and speak out. See comments by Benhamin for more information on that hearing and about how to submit your opinions.


Inside the Boston Archdiocese: Part 2

June 25, 2010

Thank you for your positive response to this blog.  With no publicity, we’ve seen visitors already from as far as Rome, Canada, California, Florida, Texas, and many other U.S. states.  We are still awaiting the big news alluded to in our last post, so in the meantime, we will go to the next level in the organization chart.  If you missed our first post on that, you should start here, and then continue on.

Interim Secretary for Institutional Advancement: Kevin Kiley (while search is underway)

Compensation: Not disclosed.  His predecessor, Scot Landry, was paid $250,000/year

Background:   Graduated from Suffolk University in 1987 and has worked for the Archdiocese for all but two years since 1991.   Most recently has been Director of Budget and Planning and oversaw the move and design of Diocesan offices from Brighton to Braintree.  His brother-in-law, Lt. Colonel Paul Hurley was ordained a Boston priest in 1995 and is currently serving as a Chaplain with the 101st Airborne in Afghanistan.

Responsibilities: The Office of Institutional Advancement was previously defined as “a collaborative group of ministries that seek to strengthen the Church’s ability to hand on our faith, grow in holiness and make a profound difference in the world.  The office houses the ministries of The Catholic Foundation.”  With the spinoff of the Catholic Media group, it will probably be redefined very soon primarily as fund-raising once again.

Boston Catholic Insider Comments:  This is a new position for Kevin starting July 1. The search committee for the permanent Secretary is led by multimillionaire power-broker, Jack Connors, Jr., who, along with Chancellor McDonough, was instrumental in ousting the previous Secretary, Scot Landry.  The search committee also includes  Jane Mancini-Puliafico (Vice-Chair and member of the Catholic Foundation Board), Jack McCarthy (Harvard Kennedy School adjunct lecturer, Hauser Center principal, and member of the Archdiocesan Finance Council), Fr. Robert Murray, Fr. Brian Kiely, Fr. Bryan Parrish (newly appointed Assistant Vicar for Administration and Special Assistant to the Vicar General), and Kevin Gill (background unknown).

Secretary for Communications and Public Affairs: Terrence (Terry) Donilon

Compensation: $166,304 (reduced 5% in 2009 to help balance the budget)

Background: former director of public relations for Shaw’s Supermarkets.  Has served in his role for the Archdiocese since April 2005.  Prior to Shaws, he has been a senior VP at Regan Communications and was previously the press secretary to Rhode Island governor Bruce Sundlun. He is a Rhode Island native and a 1984 graduate of Emerson College.  His brother, Michael Donilon, is currently Counselor to Vice President, Joe Biden, was Biden’s traveling advisor during the Obama campaign, and worked on the campaigns of President Bill Clinton, Vice President Al Gore and Sen. John F. Kerry  among others.  Terry has another brother, Thomas Donilon, who is deputy national security adviser to President Obama. Michael and Thomas used their joint political clout and muscle to help derail the 1987 Supreme Court nomination of Robert Bork.

Boston Catholic Insider Comments: Donilon’s role has appeared to mostly be one of reactively issuing comments in response to various public controversies to try and placate the media or appease angry Catholics (both liberal or conservative). The PR firm of Rasky Baerlein has been working with the Archdiocese for a number of years, and is still engaged on a retainer with Donilon.

We will keep covering the rest of the cabinet secretaries and more news as it occurs, so come on back and visit again.


Inside the Archdiocese of Boston

June 23, 2010

Since a layoff of about 10% of the Chancery/Pastoral Center staff is expected within the next few days to a week and with new bishop appointments expected soon, we thought we would outline what the hierarchy of the Archdiocese of Boston looked like before the layoff and reorganization.  People who have worked for the diocese for decades at relatively low to mid-level salaries will likely lose their job (maybe along with retirement benefits too) and many functions will be eliminated. It will not be pretty.  At the same time people who have worked for the diocese for just a couple of years earning six-figure salaries and with big staffs will stay.

Here is our best portrayal of how the diocese is organized but the organizational chart does not necessarily reflect how the diocese actually works and functions and what the power-base is.  Let us know what you think via comments or by contacting us.   Compensation figures are from published sources, but see note below about some 2009-2010 salary cuts to help balance the budget and save money.

High Level Organizational Chart (click on the image to zoom)

Archbishop of Boston: Cardinal Sean P. O’Malley, O.F.M. Cap.

Compensation: $33,800, paid to Capuchin priests and brothers

Boston Catholic Insider Comments: Top of the organizational chart, at least on paper.  Long-time priest-secretary, Fr. Robert Kickham, is seen as not just a chauffeur and MC for liturgies, but right-hand-man and chief-of-staff. Existing commitments to Vatican committees, his own blog posts, and increasing travel during the next year as apostolic visitor to Dublin all give a message that his role in Boston is apparently becoming more ceremonial in nature.

Vicar General: Richard Erikson, Ph.D.

Compensation: $32,400

Background: most recently was lieutenant colonel and staff chaplain in the Air Force.  Former altar boy at St. Luke’s of Belmont, graduated from Watertown High School, Saint Anselm in New Hampshire, and St. John’s Seminary in Brighton. Writes liner notes for albums in his spare time.

Responsibilities: “Taking Cardinal Seán’s vision for the Archdiocese of Boston and making it a reality. In this Archdiocese, the Vicar General is responsible for the oversight of nearly 2 million Catholics, in approximately 290 parishes, across 144 communities. As Moderator of the Curia, Fr. Erikson’s primary duties are to care for and to provide coordination of the personnel and efforts of the central administration of the Archdiocese.”

Boston Catholic Insider Comments: It is not clear to us what Cardinal Sean’s vision for the archdiocese is, and where we would find a written statement of that, so it is also not clear to us how anyone, including the Vicar General, would make it reality. In actuality, it is the Chancellor who coordinates personnel and central administration efforts in the Boston Archdiocese today.  It is also not clear what key initiatives or programs Fr. Erikson has actually driven or led in his time in the role.  Fr. Erikson’s effectiveness as a leader has been questioned by insiders and priests reading this blog.

Secretary for Health and Social Services: Fr. Bryan Hehir

Compensation: paid by Harvard and not disclosed publicly.  Salary in previous job as President of Catholic Charities USA was $96,092.

Background: In addition to his archdiocesan job, Fr. Hehir is Parker Gilbert Montgomery Professor of the Practice of Religion and Public Life at Harvard’s Kennedy School of Government.  He is former president of Catholic Charities USA, former head of Harvard Divinity School, and was on the staff of the U.S. Catholic Bishops conference from 1973-1992. He is a member of the American Academy of Arts and Sciences, the American Philosophical Society, and the Council on Foreign Relations. He serves on the Boards of the Arms Control Association, the Global Development Committee, the Independent Sector, the Boisi Center at Boston College, USC Institute for Catholic Studies.  He also served as advisor/consultant to Human Rights Watch.

Responsibilities: Catholic Charities, Caritas Christi, St. Mary’s Women and Children’s Center, Life Resources, Labor Guild, St. Ann’s Home, Covenant Health Care System, Pro Life Office and Respect Life Education, Catholic Relief Service

Boston Catholic Insider Comments: Seen as one of the most influential advisors to Cardinal Sean O’Malley.  Has close ties to Jack Connors, Jr.  and has been involved in Boston controversies including the honoring of Mayor Menino by Catholic Charities (2005), Catholic Charities  brokering adoptions to gay couples (2005-2006), and the Caritas partnership with Centene Corp (2009).  In the face of criticism by blogs such as BryanHehirExposed in 2010, Cardinal O’Malley reiterated his support for Fr. Hehir in his own blog.

Chancellor: James McDonough

Compensation: $250,000

Background.  Former CEO of Abington Savings Bank.  Search committee that selected him was led by Neil Finnegan, former chair of Citizens Bank and former chair of Catholic Charities and included Ann Carter of Rasky Baerlein, who was a former board member with McDonough at the Abington Savings Bank.

Responsibilities:  financial management and administration of the Archdiocese

Boston Catholic Insider Comments: seen as more powerful and influential over personnel and central administration than the Vicar General. Has been observed consulting extensively with Jack Connors, Neil Finnegan, and Fr. Bryan Hehir on decisions. Along with Jack Connors, was seen by many people as highly influential in decision to move Scot Landry out previous role as Secretary of Institutional Development.

The group above is the main power-base of the Archdiocese for key decision-making, on a formal organization chart.  Not to be overlooked are the influential roles of Jack Connors (head of the Catholic Schools fund-raising campaign, member of the Archdiocesan finance council, and head of the search for the new development secretary), John Kaneb, Chair of the Archdiocesan finance council, and Neal Finnegan (on board of Catholic TV and also on the finance council). So, the organizational chart really looks more like this:

In addition, a Cabinet “steering committee” includes Cardinal O’Malley, Fr. Erikson, Chancellor James McDonough, Fr. Hehir, former development Secretary Scot Landry (now working on Catholic Media), and a guest participant from elsewhere in the cabinet or another office to represent a specific issue being discussed.

Top 5 salaried officials according to archdiocesan disclosures are:
Mary Grassa O’Neill: Secretary for Education: $325,000
Beirne Lovely: General Counsel: $300,000
James McDonough: Chancellor and Secretary for Finance and Administrative Services: $250,000
Scot Landry: Catholic Media: $250,000
James Walsh: Assoc Superintendent of Schools: $185,270
Note: those with salaries above $200K had their salaries reduced by 10% in the 2009-2010 fiscal year to help balance the budget, but then they were raised back up to their previous level for the 2010-2011 fiscal year.

We will go into more details in another post.  For now, you can sound off about these people, the organization, layoffs, or any other issue via comments or by contacting us.


Welcome to Boston Catholic Insider

June 23, 2010

Welcome to Boston Catholic Insider, a new blog that we hope will help people learn more about what is happening inside the Archdiocese of Boston.

Other Boston-area Catholic blogs we’ve enjoyed reading tend to focus primarily on one person or theme or are written by bloggers with mostly their own viewpoints and insights. They have a place and we may borrow some ideas from them.  But, we think there is a place for a blog that can take a broader view of what is happening in the Boston Archdiocese and which actively invites comments and participation (anonymously, if desired) of Boston-area priests, Chancery employees, and parish staff. Please drop us a line via the Contact Us page and let us know any inside news tips  or information you want shared.

We hope you enjoy reading and participating in this blog and look forward to hearing from you.


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