By Andrew Warner
A church leader recently asked me, “how do we create a budget given increasing inflation?” Many people wonder about the effect of inflation on church budgets (and personal budgets too).
Inflation refers to the increasing costs of goods and services in an economy. What once cost $1.00 now costs $1.05. Over the last decade, costs rose a modest 2%. But this last year, especially in the fall, prices rose faster – 6% – and led to concerns about inflation (Learn more about inflation here).
Economists focus on two inflation scenarios: transitory inflation (prices rise and then return to normal) and persistent inflation (prices and wages continue to increase). The Federal Reserve predicts the inflation we experience now will be transitory, with a return to a baseline inflation rate of 2% by 2024 (FED predictions from Dec. 15 available here). Our experience this year may reflect a recalibration from the low inflation of 2010-2020 to a more normal average of 3% annually.
As church leaders observe increasing prices, it can be tempting to wonder about the effect of inflation on the expense side of our budgets. But I want to expand our view to consider the multiple ways inflation might affect a congregation, including income.
What to Watch on Income Side:
Annual Giving (Stewardship): In the past, Federal Reserve action to curb inflation led to increased unemployment. Lost jobs present a more significant challenge than rising prices to the ability of people to give to the church. At the same time, donors on social security will see their benefits rise with inflation; can they step in with increased giving? As an action step, focus on implementing best practices in promoting generosity. Leaders may want to enroll in a Cultivating Generous Congregations Seminar, available here.
Investment Income: Inflation may affect market returns (softening stock prices as bonds become more attractive) and, therefore, both the annual draw of the congregation and the ability of donors to make gifts of appreciated stocks. Review your investment policy and strategy with your investment manager. If you have not done so already, bring stability to your annual draw by implementing a total return policy that draws a fixed percentage of the 12-quarter rolling average of your funds. As an action step, churches should actively promote members to give stock in 2022. Additionally, pay attention to donors who created donor-advised funds as those may be good assets to give in 2022.
Rental Income: Congregations relying on rental income could see volatility in their tenants (for example, a daycare could scale back its building use if fewer parents use the program because of increasing unemployment). Conversely, new tenants might be interested in sharing a church space instead of renting their location. As an action step, be proactive in marketing the church property for rental (note: event rental has higher costs than organizational rental; also, consult local rules on whom you can rent to without affecting property tax status).
General Reminder: Not every donor experiences belt-tightening in an inflationary period. Corporate profits remain strong. Salaries rise for many. As an action step, consider how you ask for increased giving and create opportunities for people to fund special projects and initiatives.
What to Watch on the Expense Side:
Staffing: Staffing costs (both salaries and benefits) typically represent 50% of a congregation’s expenses. The personnel team will want to reflect on crucial questions: Do we need to increase pay to remain competitive? How will benefit costs like insurance change in 2022? Regardless of inflation, a personnel team can always ask, “how does our staffing align with our mission/vision?” and adjust as needed.
Building/Operations: Pressure on these expenses may be unavoidable, but there are several things to do.
First, review contracts:
Second, conduct a Reserve Study: Many congregations balance their budgets by delaying maintenance on their facility. Few congregations track depreciation expenses on their balance sheet, which means these future costs remain hidden. While cost increases in 2022 may make improvements out of reach, the congregation can do a reserve study. Condo associations use reserve studies (and regularly update them) to ensure they are saving enough for future building costs. While a larger congregation may contract for a study, all congregations can also use volunteers to create their own reserve study (inventory exterior and interior building elements, including room square footage, judge remaining useful life, and use a formula to calculate future replacement cost – learn more here). The reserve study is the best way to move from a haphazard fix-what-breaks approach to strategic planning in the care of our buildings. Good planning will be critical if inflation raises repair costs long term.
Programing: This is often the smallest part of a church budget and the most discretionary. Engage church leaders in asking how programming can meet the needs of people outside of the congregation. Given the stress of the pandemic, the movement of people to new jobs & communities, in what new ways does God challenge us to serve our neighbors?
Mission (including OCWM): Many of the nonprofit partners of a congregation feel inflationary pressure too; is the congregation in a position to help? Some foundations responded to the pandemic by increasing their annual payout (draw) in 2020/2021 to meet the increased social needs in their communities. Can non-endowed funds such as memorials become grants to nonprofit partners of the congregation?
General Reminder: Insofar as possible, create a contingency fund: a budgetary expense line for unanticipated costs (such as a boiler repair) and opportunities (such as a new program or mission project).
Overall, when evaluating the impact of inflation on a church budget, I encourage leaders to look beyond the immediacy of any one quarter or even year. You can do this by creating a 5-year advance budget. Look at the income trends you experienced over the last 5 years to project the coming years. Extrapolate a 3% annual increase in expenses annually. Reviewing the 5-year scenario can help leaders identify areas to address for the long-term sustainability and growth of a congregation.