BOSTON — Criticism of the Boston Archdiocese’s lay pension system escalated last week, first as a former chancellor called for an independent takeover, and then as mediation with an order of nuns suing the archdiocese failed.

The Daughters of St. Paul filed suit in December against Boston Cardinal Sean O’Malley and the pension plan trustees. They had tried unsuccessfully for six years to withdraw the pension money of 44 of their lay employees from the archdiocesan fund.

The sisters are an international order with about 135 members in the United States. They run a multimedia publishing house, Pauline Books and Media, as part of their mission.

The Daughters had planned to establish a single retirement system that the order would run itself for all U.S. employees. They will now pursue the case before the Massachusetts Supreme Judicial Court, said their attorney Michael McLaughlin.

The nuns want the court to order the cardinal and other trustees to give them a full accounting of their portion of the fund, or to rule that they were technically never part of the pension trust and reimburse their contributions plus returns. The Daughters believe they are owed $1.371 million, based on their estimate of the 2007 value of the assets.

Their lawsuit, which was first reported March 9 by the Boston Catholic Insider blog, alleges that pension trustees never kept separate records for each contributing employer. They have been unable to reach an agreement with the archdiocese to extricate their workers’ money.

However, Carol Gustavson, director of benefit trusts and plan administrator for the archdiocese, countered that the figures the Daughters sought were available. She told The Boston Globe March 21, “The pension plan would deny that there has been any lack of information or the withholding of any information requested.’’

A March 29 mediation session was held, but McLaughlin said “absolutely no progress” was made.

‘Toothpaste Will Not Go Back’

Meanwhile, the retired archdiocesan chancellor, David Smith, charged in a March 28 press conference that the archdiocesan lay retirement system is riddled with problems and that “money promised for pensions has been withheld or diverted elsewhere.” 

Smith, who was the financial manager of the archdiocese from 2001 to 2006, also reported he has asked the Internal Revenue Service to rule on the tax status of the plan, which includes retirement funds for 10,000 employees of the archdiocese and other Catholic entities.

He called for the Massachusetts Secretary of the Commonwealth William Galvin and Attorney General Martha Coakley “to protect the public interest by taking control of the Archdiocese of Boston’s lay pension plan away from the Church and placing it in the hands of a truly independent third-party trustee.”

The archdiocese has reported that the plan, which was fully funded in 2007, was only 83% funded last year. Its pension plan for lay employees is being frozen and a 401(k)-style plan is being introduced.

Vested past and current employees have recently been given a one-time option to cash out early by taking a lump-sum benefit reduced to what the archdiocese says would be 83% of accrued benefits, but which Smith says is actually about 63%.

The former chancellor called the offer “deceptive” and further raised questions about assets from parishes closed due to reconfiguration and about the shifting of funds between corporations.

He said in a later interview that he asked for the IRS probe because there is a “serious risk” the plan could lose its tax-deferred status. “That would be a disaster for everyone,” Smith said.

Communications Secretary Terrence Donilon responded that “the archdiocese and plan trustees deny unequivocally his claims.”

Donilon said the fact that the plan is underfunded “will not cause loss of qualified tax status” and that he did not have a copy of Smith’s letter to the IRS so he was unable to comment on it.

Coakley’s office did not return a request for comment.

Brian McNiff, communications director for Galvin, replied that “Securities Division officials have met with Mr. Smith several times at his request and are continuing to review the materials he has presented.”

Smith said March 30 that he hopes the payout plan will be halted “until a private letter ruling could be obtained from the IRS.”

“I know that the archdiocese claims it has done its tax homework,” he said, but “if these actions are not a tax problem, a delay of six months in making lump sum payouts would have no impact on anyone. If these actions are a tax problem and payouts begin, the toothpaste will not go back in the tube.”

Hospital Sale

After the critical publicity, Cardinal O’Malley on April 1 offered anyone who has already elected to cash out of the plan a chance to reverse that decision. He did not give specifics, but in a Boston Pilot article he reaffirmed his “commitment to meeting the obligations of the lay pension fund.”

“As long as I have breath in me, I will do everything in my power to care for the thousands of people who have given their lives in the service of the Church,” he said. “If I did not care passionately about pension obligations, I would never have transferred our Catholic hospitals to Cerberus.”

The cardinal was referring to the 2010 sale of Caritas Christi Health Care system to an affiliate of Cerberus Capital Management, which agreed to cover unfunded liability in the six Caritas hospitals’ employee pension funds.

Both the former chancellor and the Daughters of St. Paul have raised questions concerning the effect of that sale on the archdiocesan lay employee fund. Smith questioned whether funds “were shifted from one trust to another to facilitate the sale of Caritas.” And in their lawsuit, the nuns ask the court to review the transaction, maintaining the sale may have had “a direct detrimental impact” on their stake in the fund.

Register correspondent Gail Besse writes from Boston.