By Tom Scheck

Minnesota Public Radio News

The Rev. Stanley Kozlak served nearly three decades in the Archdiocese of St. Paul and Minneapolis. But then he fathered a child and the archdiocese needed him gone.

Removing Kozlak quietly wouldn’t be cheap, but church leaders knew how to move money discreetly. The archdiocese held two secret accounts, controlled by the archbishop, designed to make problems like Kozlak disappear.

To get him out of active ministry, Archbishop Harry Flynn agreed in 2002 to pay the fallen priest $1,900 a month “disability” for life, plus $800 a month in rent for life, and $980 a month “to replace the social security payment until Father Kozlak reaches age 67 when he would receive his full social security.”

Kozlak’s package was part of a secret financial system that let archdiocese leaders divert millions of dollars away from traditional church work to deal with clergy misconduct.

Internal financial reports show the archdiocese used the stealth accounts repeatedly, paying nearly $11 million from 2002 to 2011 — about 3 percent of overall archdiocese revenues in those years — for costs tied to clergy misconduct under Flynn and his successor, Archbishop John Nienstedt.

The system allowed archdiocese leaders to remove priests who had committed child abuse or other infractions without attracting attention. Lax accounting controls let church leaders cut checks to make problems go away.

The secrecy, however, also left the church vulnerable to embezzlement.

Today, the archdiocese is facing a slew of lawsuits over clergy misconduct that threaten to cripple it financially at a time when schools and churches are closing, donors are aging and there’s concern over two major fundraising campaigns.

The archdiocese says it can weather a financial storm. Local parishes, however, could be hardest hit over time. Pastors are already feeling the financial pushback from Catholics who donated to the church believing their money went to benevolent causes.

Millions, however, went for very different purposes.

Thousands of pages of private, internal archdiocese documents analyzed by MPR News detail a stealth financial system that included payments to persuade priests to leave active ministry, financial support for children fathered by priests and money for legal settlements.

Archdiocese leaders made payment decisions with little consideration of how they might hurt the church’s budget, said Scott Domeier, a former top archdiocese accountant who exploited the secrecy to steal more than $650,000 from the archdiocese.

The clergy misconduct budget was so well concealed that a trained eye wouldn’t notice the spending, Domeier said.

Payments associated with clergy misconduct came from separate, secret accounts, depending on the type of behavior involved. One such account, numbered 1-515, paid costs connected to priests accused of sexually abusing children. Account 1-516, meanwhile, paid costs related to the abuse of adults, or to financial misconduct. Items with these codes included expenses for therapy costs for victims and priests.

Money was spent for legal fees for priests and for settlements for their victims. The documents also show that the archdiocese paid a private investigator $112,000 over 10 years. The archdiocese used private investigators to conduct its own inquiries into abuse allegations.

“Disability” pay on the books became code for improper behavior. A don’t-ask culture kept archdiocese employees from probing deeper.

Church records show Kozlak’s child was born in 2000 while he was pastor at St. Ignatius in Annandale. Internal memos obtained by MPR News show archdiocese leaders tried to persuade Kozlak to retire from ministry in April 2002.

If Kozlak refused to step aside, the Rev. Kevin McDonough wrote in a memo, the archdiocese was prepared to “involuntarily remove him.”

McDonough was vicar general at the time, the archbishop’s top deputy.

Kozlak, 72, declined to discuss his retirement agreement in an interview Tuesday with MPR News. “These are matters that I have dealt with and I have taken care of in my life,” said Kozlak, who still lives in Annandale. “Believe me; I paid a price for it.”

He said that he and church leaders lived up to their “ends of the bargain” regarding his retirement agreement. Kozlak also insisted that the matter was a private issue between him and the archdiocese.

That’s exactly how top church leaders crafted such settlements, said two former top officials inside the chancery. “Everybody knew not to ask questions,” Domeier said, referring to the payment system. “Because what was behind those requests for payments never got into our files, and that was on purpose.”

The archdiocese declined an interview request but issued a statement saying that Thomas Mertens, brought on board as chief financial officer in December 2012, had started implementing procedures for greater transparency.

“Mertens made recommendations regarding best practices, including measures to improve transparency regarding financial data of the archdiocesan central corporation,” the statement said.

Church leaders didn’t provide specifics except to say they’ll release full, audited financial statements for fiscal year 2013 in February.

Keeping cases quiet

Domeier and Jennifer Haselberger, chancellor for canonical affairs at the archdiocese through April of last year, said the chancery worked to keep the controversies of priests secret.

One such case — the Rev. Corey Belden — offers a stark yet vivid example of how money was used to fix problems.

Court records show roughly $30,000 disappeared from the account of an elderly woman named Marian Macaulay. Belden, a parish priest today serving at the Church of St. Anne in Hamel, Minn., oversaw those funds as her conservator.

Haselberger said Nienstedt agreed to repay Macaulay’s estate after investigators started examining Belden’s involvement with her funds.

Church leaders decided to repay the estate to avoid further scrutiny, Haselberger said. She called it an “extraordinary act.”

“It’s well outside of the scope of what would happen on a regular basis, and there’s a lot of questions about the ethics of using church funds for something like that,” she said.

Court records show the money was paid back, and Belden was dismissed as Macaulay’s conservator. Macaulay’s family, however, still isn’t happy with what happened.

Macaulay’s niece, Laura Rahn, said Belden’s parishioners — “People who sit in the pews weekly and give their hard-earned money that they’re tithing …” — and other Catholics should know how the archdiocese handled the situation.

Macaulay’s sister — Nina Macaulay-Miller, who died in 2010 — wrote a letter to Hennepin County Probate Court in 2009 requesting Belden be prosecuted. “This unethical behavior and thievery is beyond all decency,” she wrote. “I hope the court does not go easy on him because he is or was a parish priest.”

Visited at his church in Hamel on Tuesday, Belden declined to comment for this story. The archdiocese issued this statement:

“Father Belden successfully completed treatment for a gambling addiction, and is making restitution to the archdiocese for the funds loaned on his behalf. No other incidents of financial mismanagement or misconduct have been reported. He remains a priest in good standing.”

Secrecy and stealing

Domeier said the secrecy surrounding church accounts made stealing from them easier.

He pleaded guilty to taking more than $650,000 from the archdiocese between 2005 and 2011 to pay for personal expenses. He used the money to buy appliances and a car and to pay his children’s tuition at the University of St. Thomas.

In some cases, he cited “priest support” to explain the removal of funds.

Now serving a three-year prison sentence at the Faribault Correctional Facility, Domeier said he never thought he’d be prosecuted — especially after seeing how church leaders quietly handled clergy misconduct.

He said he lost his moral compass after dealing with problem priests about their payouts.

“I was their financial primary contact if there were issues with their payments,” he said. “I would have to listen to their complaints about why they didn’t get their money on a certain day and they deserved it.”

Domeier said he took direction about the payments from McDonough.

McDonough served as vicar general under Archbishop John Roach and his successor, Flynn. Domeier said Flynn, Nienstedt and other top church officials also knew of the payments. McDonough did not return a call for comment.

Domeier said other employees were suspicious but didn’t ask questions.

“There were definitely pieces of the funds that came in that were being spent on things that were really held quiet,” Domeier said.

Experts who study financial controls say archdiocese leaders should have discovered Domeier’s stealing right away.

“It’s difficult to tell whether the archdiocese simply lacked controls or whether the controls in place were not being enforced,” said Charles Zech, director of Villanova University’s Center for Church Management and Business Ethics. “Either way, it shouldn’t have happened.”

Zech’s 2007 study of Catholic dioceses concluded 85 percent of American dioceses had funds stolen between 2001 and 2006.

Religious leaders often fail to follow proper financial controls, like centralizing checks in one location or requiring two signatures on checks for more than $1,000, Zech said.

The U.S. Catholic Conference of Bishops in 1995 called for church leaders around the U.S. to put tougher financial controls in place, Zech said. He said the embezzlement in Minnesota was “hard for you to imagine … given all of the warnings that we have seen in other dioceses with the same types of problem.”

Domeier was caught in December 2011, after concerns surfaced that he had accepted airline tickets from a vendor and used the organization’s credit card for personal gain.

Archdiocese officials quickly hired the accounting firm Ernst & Young to conduct a review of all of Domeier’s financial activity involving amounts greater than $5,000.

The accountants, however, started making inquiries about other questionable payments.

Haselberger said archdiocesan attorney Andrew Eisenzimmer told her those questions were outside the scope of the review and said to refer all of the auditors’ inquiries to him.

Eisenzimmer told MPR News this week he didn’t constrain the accountants’ work. “That was entirely up to Ernst & Young in doing their review,” he said.

Eisenzimmer wouldn’t discuss the payments to Kozlak or the restitution to Macaulay’s estate on behalf of Belden.

The financial review allowed the archdiocese to see how much Domeier had taken from the church. It was also Haselberger’s first glimpse at how much the archdiocese was paying to priests who had sexual contact with children and adults. The expenditures were typically classified as disability payments, given in addition to a pension at retirement.

“I only uncovered those payments after the audit and when Ernst and Young came and asked me about them,” Haselberger said. “You would think those would be things that were visible in their clergy files, but they weren’t.”

The discovery prompted Haselberger to write a detailed memo to Nienstedt explaining the payments and expressing concern that they could be used against the archdiocese in a potential lawsuit.

“There is little doubt of the scandal that would result should the fact of these payments become public,” she wrote to Nienstedt.

Several experts in charity governance say they’re puzzled why the auditors didn’t do a full review of the archdiocese’s books after learning of Domeier’s theft.

“The minute someone tells me you don’t need to look here, that’s the first place that I want to look,” said Jack Siegel, a Chicago-based tax attorney who teaches charity governance.

Proper financial controls should be a basic step for any nonprofit, he added.

“Why didn’t they have better internal controls in place?” asked Siegel, who’s raised concerns about church finances for nearly a decade.

It’s unknown what financial controls Mertens and the archdiocese have put in place as a result of Domeier’s activity. Churches don’t have to file any paperwork with government regulators or answer to shareholders or directors.

There is a finance council that gives Nienstedt financial advice, but he alone is allowed to make spending decisions.

Haselberger said she drafted three memos outlining steps to strengthen the internal financial controls in the chancery before she resigned in early April. It isn’t certain whether church leaders adopted her guidelines, which would have created policies regarding conflicts of interest, fraud and whistleblower protections.

‘Blue memo’ Mondays

More scrutiny of the books and broader internal discussions of spending might have caught Domeier’s theft earlier.

Finance council members were concerned about embezzlement and auditor independence, raising the issue on at least six occasions between September 2009 and May 2010.

Nienstedt’s management style, however, made it difficult for staff to talk openly or question decisions.

The 66-year-old archbishop rarely interacted or spoke with employees. He even requested that staff not approach him.

“I remember being in a staff meeting at one point where the archbishop told people, ‘Don’t talk to me,’” Haselberger recalled.

“What he said is don’t. If you see me in the halls don’t stop me and ask a question about something you’re working on. If you do that, I will say whatever it takes to get you to end the conversation, to get you to go away,” she said. The archbishop preferred to receive communication through memos instead.

Haselberger said she appreciated Nienstedt telling senior church leaders how to deal with him, but she said the culture of memos often led to miscommunication. She said it created an atmosphere where chancery employees had to engage in “dueling memos” to win his approval.

Nienstedt is known among staff for working late nights and weekends. His weekend hours, though, made for rough Mondays throughout the chancery, as employees read memos on the archbishop’s distinctive blue paper.

“It was almost like ‘Blue Memo Monday’ because over the weekend, he would dictate a bunch of stuff and people would get their blue memos on Monday, which was derogatory stuff in your area that he came across,” Domeier said.

He recalled one memo from the archbishop expressing concern that the archdiocese was wasting money by leaving the lights on in the parking garage over the weekend.

The need to communicate by memo slowed work at the chancery. Employees feared to act on anything before they received Nienstedt’s approval, Domeier recalled.

Reports from inside the chancery also show staff were dedicated to their jobs but didn’t always have the skills needed to manage an organization with $40 million in total revenue in 2012.

Computer consultant Lewis Zeidner was hired to advise the archdiocese on fixing problems with a software system the archdiocese had recently bought.

Zeidner described a hectic work atmosphere where employees struggled to keep up, according to reports sent to the Rev. Peter Laird, Nienstedt’s key adviser.

“Although virtually everyone interviewed was hard working, committed to the mission of the organization and socially pleasant, there was a significant lack of experience in driving organizational change or standardizing core systems and processes,” Zeidner wrote in documents obtained by MPR News.

Archdiocese staff, he added, “seem to be swimming as fast as they can while in a chronic state of near drowning.”

A healthy balance sheet

The Twin Cities archdiocese has refused for years to release detailed financial information.

Financial statements, typically kept private but obtained by MPR News, show operating revenue between $35 million and $40 million for five years ending in 2011.

Its balance sheet is healthy, showing assets growing from $54 million to $61.5 million since the market downturn in 2008. Cash levels have jumped since 2007, from $2.6 million to $12.8 million in 2011.

The full, audited financial statement for fiscal year 2013 that church leaders plan to release in February may be critical to reassuring parishioners that the archdiocese is being transparent about how it spends their donations.

Sasha Aslanian, Madeleine Baran, Mike Cronin, Meg Martin, Eric Ringham, Paul Tosto, Bill Wareham and Laura Yuen contributed to this report.