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.
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."
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.
Rev. Kevin McDonough
Archbishop Harry Flynn
Archbishop John Nienstedt
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.
• Full coverage: Betrayed by Silence | An MPR News investigation
There is a finance council that gives Nienstedt financial advice, but he alone is allowed to make spending decisions.
Haselberger says 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.
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."
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.
While concerns about money and trust loom at the archdiocese, navigating the anger may fall to leaders of the local parishes.
"I'm always worried about money," said the Rev. Mike Byron of St. Pascal Baylon Church in St. Paul. "I don't know if I have much more reason to be worried this year than most, but I don't know."
Byron says he's reminding his parishioners that his church relies on the archdiocese for support to keep the parish and the school running. "We can't just cut ourselves off and pretend to be some sort of autonomous financial center. We shouldn't do that anyway, but we literally can't."
The financial relationship between the 188 parishes and the Twin Cities archdiocese is complicated. Each parish is a separate corporation under state law, operating independently of the archdiocese. But close ties remain.
Nienstedt controls who serves at each parish. He and his top deputy also serve on each parish board of directors. Those boards have the power to make spending decisions for the parishes.
Parishes in the Twin Cities archdiocese hold roughly $1.7 billion in assets, with the bulk of that tied up in property, an MPR News analysis of internal parish financial records shows.
Those records also show that giving at individual parishes has remained flat at a time when the number of donors, the number of parishioners and the number of Catholic school students are declining.
As much as 9 percent of each parish donation goes to the archdiocese to pay for general operations at the chancery. Those parish assessments are the largest portion of the chancery's general operating budget, generating $13.5 million in fiscal 2012.
That means any drop in church donations affects the bottom line of the archdiocese as well as of the local parish.
A review of several local church bulletins over the past few months shows collections falling short of budget targets.
Blessed Sacrament in St. Paul and All Saints in Lakeville are among those reporting shortfalls.
Church leaders at St. Joan of Arc in Minneapolis reported parish contributions were off by $31,968 compared to the previous year. The December bulletin blamed the downturn on the clergy sex abuse scandal and what St. Joan of Arc leaders called the "political actions of the archdiocese."
Many Catholics are still seething over the position Nienstedt and other church leaders took on a proposed constitutional amendment to ban same-sex marriage in 2012. Nienstedt was an outspoken supporter of the ban.
• From the archives: Catholic church a powerful force behind marriage amendment
In 2010, Nienstedt started to put the church's influence and about $1 million of archdiocese money behind the effort.
Church leaders sent a DVD supporting the ban to Twin Cities Catholics, contributed money to the overall political campaign and encouraged parish priests to speak about the issue from the pulpit.
Voters, however, rejected the marriage-ban amendment. The Legislature legalized same-sex marriage six months later.
• From the archives: Eighteen months to history: How the Minnesota marriage amendment was defeated -- money, passion, allies
Chad Gillard from St. Anthony Village says he stopped giving to The Church of St. Cecilia in St. Paul during the 2012 campaign.
He said he started donating again in 2013, but restricted his giving after an MPR News investigation revealed the cover-up of priests accused of sexually abusing children. "It's affected our family in a way that we just kind of lost trust in the way that the church is run," he added.
Because it's difficult to restrict contributions to a parish, Gillard said, he and others have started putting money into the parish doughnut fund, dedicated to hospitality services after Mass.
"It makes us feel better that we are able to have a little bit of control in a situation where we have none," he said.
Donor unhappiness comes at a critical time for the archdiocese and individual parishes.
Church leaders were set to move forward with a $160 million capital campaign. The Rev. Michael Tegeder says priests were told in September that the campaign is aimed at helping struggling churches, bolstering a priest pension fund that could run dry in 15 years and assisting Catholic schools.
The campaign was to begin in July, but the clergy scandal prompted leaders to delay it. The church's last capital campaign came in 2000.
Margaret Slawin, associate director of the archdiocese fundraising office, told priests at a private meeting in December that her office was working on an approach to the campaign that will attract support despite the problems.
As many as 25 parishes need some financial help soon, she said, according to recordings of the meeting obtained by MPR News. Most of those churches are in debt to the archdiocese. Church officials have told priests that 40 of the 188 parishes in the archdiocese owe $21 million to the chancery.
One of those is St. Pascal Baylon. Byron, its pastor, provided no specifics but said his church owes hundreds of thousands of dollars to the archdiocese and also has a large mortgage after building a new church a decade ago.
Byron expects the parish to be paying off debt for the next 25 years, and he offered that estimate before the clergy scandal surfaced.
Recent national studies suggest Catholics shift their giving away from an archdiocese after a clergy sex abuse scandal but will direct their money to other Catholic organizations like the local parish, Catholic Charities and other Catholic causes.
In fact, in the Twin Cities, an organization called the Catholic Community Foundation is flourishing.
The organization says on its website that it supports the spiritual, educational and social needs of the Twin Cities Catholic community. It reports assets of $223 million and says it gives millions in donor-directed grant money every year to Catholic schools, parishes and the archdiocese. It calls itself the largest Catholic Community Foundation in the nation.
Roach created the foundation in 1992, when Catholics were worried that their donations could be used to pay for expenses related to clergy sex abuse. That was two years after the Twin Cities archdiocese faced the biggest jury verdict in the nation for clergy sex abuse at the time. The $3.5 million award was later reduced by a judge.
Catholic Community Foundation CEO Anne Miller says her organization was created to be independent of the archdiocese and assures donors that their money is spent as directed. (Nienstedt is a nonvoting member of the board.)
The foundation's independence may benefit the archdiocese in coming years with the threat of additional lawsuits over priest abuse.
A 2013 law reopened the window for suits by sex abuse victims older than age 24. They now have until May 2016 to sue the church for past abuse. The legal exposure for the archdiocese could create even greater financial pressure on the chancery and the parishes.
As their predecessors did in 1992, church leaders may be moving to protect future assets.
The archdiocese says it recently created an independent nonprofit to collect and distribute money given to the Catholic Services Appeal, which has historically funded key archdiocese programs. The archdiocese typically managed and directed that money.
Dioceses across the country have worked to protect assets from potential victims' lawsuits. That's the case at the Archdiocese of Milwaukee, one of 10 dioceses across the country that have filed for bankruptcy as a result of lawsuits stemming from clergy sex abuse.
Whyte Hirschboeck Dudek, the bankruptcy attorneys who represented the Milwaukee archdiocese, met privately with Twin Cities church leaders last spring.
Victims' attorney Jeff Anderson says he's watching how the archdiocese is managing its money.
"Now that they're being held to account," said Anderson, "it would concern us down the road ... if they claim that they no longer have the ability to pay for their misdeeds of the past."
The coming Catholic Services Appeal campaign, an annual effort, may deliver important clues about how Catholics feel toward the archdiocese leadership.
Support among the region's 825,000 Catholics is vital to the churches and the archdiocese. Will those parishioners use the fundraising campaign to send a message?
Publicly, archdiocese leaders say they're confident they can meet their fundraising target of $9.3 million, or roughly 20 percent of last year's operating budget.
Privately, they're worried that after months of disclosures over clergy sex abuse and new concerns about hidden payouts and questionable business practices, the region's Catholics will hold back their generosity.
"We're facing significant headwinds," Greg Pulles, director of development and stewardship for the archdiocese, told priests at a recent private meeting, according to recordings of the meeting obtained by MPR News.
Pulles assured priests that the Catholic Services Appeal will focus on popular programs like Catholic Charities and parishes — not on the archdiocese.
"In picking those, we have deleted anything that has any semblance of money going to the core archdiocesan administrative functions," Pulles told priests at the meeting.
He offered a pep talk and encouraged the priests to aim their own fundraising efforts directly at parishioners.
"Because guess what?" he told them. "They may be mad at the archdiocese, but almost to a person, none of them expresses any anger at you. We need to leverage that."
• Full coverage: Betrayed by Silence | An MPR News investigation
Tom Scheck covers politics, government and investigations for MPR News.