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2006 Finance Committee Report
During the spring meeting of Council, the Finance
Committee Chair reported that the Society’s financial condition remains
strong through sound management and investment practices and continued
success of the journals program.
2005 Budget
The Society employs a consolidated operating budget to
manage overall operations. The consolidated budget is comprised of the
individual budgets for the various cost centers; these include Publications,
Membership and Meetings, Education, Public Affairs, Communications,
Marketing, and the Executive, Information Technology, and Business Offices.
For 2005, the year ended with income of $17.5 million (including $1.2
million allocated from the Society’s reserves*) and direct expenses of $14.5
million, plus general and administrative (G&A) costs of $2.0 million, for
total expenses of $16.5 million. G&A costs (the sum of Executive,
Information Technology, and Business Office expenses) are allocated to other
Society offices based on each office’s share of total salary expenses. The
Committee reported to Council that the Society ended the 2005 year with a
net surplus of $995,000 (that is, $17.5 income - $16.5 expenses), which was
$611,000 over the $384,000 budgeted surplus. Recall that this surplus
reflects revenue of $1.2 million added from reserves, such that the surplus
can be interpreted as needing only $200,000 from reserves to balance the
budget. The surplus was accomplished mostly through lower than budgeted
expenses associated with maintaining journal editor offices. In part this
was caused by tardy submission of editor expense reports that failed to
materialize by December 31, 2005, and it is possible that some of these
tardy expenses that should have been paid in 2005 will now come due in 2006
and will have to be charged against the 2006 budget. The Publications office
has taken steps to have editors submit their expenses in a timelier manner
going forward.
The Finance Committee reported that, barring any
significant changes, expenses are projected to grow slightly faster than
revenue over the next three years. Using a linear extrapolation model,
surpluses of $298,000 and $142,000 are projected for 2007 and 2008
respectively. According to the analysis, expenses will exceed revenue in
2009, when a small $37,000 deficit is projected. However, it is expected
that the Society will make adjustments to its revenue and expenses in the
next three years in order to avoid the 2008 projected deficit, just as it
has when similar predictions were made in recent years. In essence, these
projections suggest that the budget process is properly in touch with recent
history of the revenue and expense streams of the society.
The Journals Program, by a 1995 Council mandate, is
structured to generate a return of 10% annually. In 2005 the return was 18%
($2,252,000 net revenue/$12,373,368 total expenses). The Journals Program
was able to exceed a 10% return in 2005 by not exceeding its expense budget
while generating more revenue than budgeted. This was mostly from page
charges, color figure fees, royalties and reprints.
2006 Budget
The Council earlier approved a 2006 budget of
$18,265,100 in expenses. With revenue budgeted at $18,411,423 (including the
4% investment allocation of $1,273,323 and projected net revenue from
Publications of $1,227,500), the budget shows a surplus of $146,323. This
2006 budget is very similar overall to that of 2005. The publications
component again comprises around 80% of total income. The Journals Program
is budgeted to generate a return of 9%.
Through the first four months of 2006, both revenue and
expenses are slightly under budget and the result is a net deficit of
approximately $200,000. This is in essence a timing or seasonal imbalance
between actual and budgeted revenue and expenses, and the Society is
expected to meet budget by year end.
Journal Subscription Pricing
The Journals Program, which generates about 80% of the
Society’s revenues, is asked each year to budget for a margin of 10%. In
order to meet this mandate, 2007 subscription prices would have to be
increased by 8.7%. The Publications Committee recommended, and the Finance
Committee and Council both agreed, that 2007 subscription prices should be
raised by only 8% so as to minimally discourage loss of subscriptions. And
that as a result, the Society would accept less than a 10% margin in 2007
for the journals program. Limiting the increase in pricing to 8% is
calculated to provide a 9% margin. Note that there will be an exception for
Physiology, and Physiological Genomics, whose 2007 rates will be increased
by 10% to help offset the higher costs incurred by those journals. A
comparison of 2007 and 2006 domestic institutional prices is shown in the
table below, reflecting the above percentage changes:
Long Term Investments
In the early 1990s, the reserves, on which the Society
depends for approximately 7% of its operating revenue, almost doubled due to
favorable market conditions. However, the down market of 2000-2002 caused
the Society’s reserves to decrease from $30 million at December 31, 1999, to
$26 million at December 31, 2002. Beginning with the 2003 market
turnaround, the Society’s reserves balance has grown from $26 million at
December 31, 2002, to $33 million at December 31, 2005. As directed by
Council, the Society uses up to 4% of the value of its investments annually
as operating income. Only that amount required to offset the cash needed to
support the Society’s programs is withdrawn and the remainder continues in
actively managed investment accounts.
At its spring meeting, the Finance Committee reviewed
the performance of the Society’s investment managers. The Society’s
long-term investments are administered by four managers under the direction
of our investment consultant, Smith Barney. As of December 31, 2005, the
accounts had the following market values: APS Reserves $32,977,349, APS
Endowment Fund $3,299,634, Giles F. Filley Memorial Fund $810,316,
Rife/Guyton Fund $622,447, Caroline tum Suden Fund $573,350, IUPS Fund
$367,064, Perkins Memorial Fund $337,333, Shih-Chun Wang Fund $153,901, and
the Lazaro Mandel Fund $141,778. The return on the managed accounts was
4.56% for the year ended December 31, 2005. The market value of the managed
accounts at December 31, 2005 was $39,283,172. At May 31, 2006, the managed
accounts had a negative year-to-date return of 1.06%. We urge Council to be
patient with these new data as these monies are in long term investments and
should not be reallocated on a frequent basis in response to short term
trends. We have done exceptionally well compared to standards over the past
10 years, and have confidence in our management system that our long term
strategies are sound.
2005 Audit
The Finance Committee received the annual audit from
Grant Thornton, LLP. Grant Thornton audited the Society’s financial
statements in accordance with general accepted auditing standards. Grant
Thornton rendered an unqualified opinion that the Society’s statements
presented fairly, in all material respects, the financial position of the
Society at December 31, 2005 and 2004. In addition, due to the amount of
Federal support received (in excess of $100,000) an audit of the Society is
required in accordance with Office of Management and Budget (OMB) Circular
A-133 Audits of States, Local Governments, and Non-Profit Organizations.
The A-133 audit includes certain tests in accordance with Government
Auditing Standards. Grant Thornton’s tests disclosed no instances of
noncompliance or other matters that are required to be reported under
Government Auditing Standards, and the audit report noted no material
internal control weaknesses. Thus, the audit revealed no accounting
concerns.
Society Revenue Diversification
While current and projected financial conditions remain
strong, there is a need for the Society to diversify its sources of
revenue. As mentioned above, 80% of total revenue is provided by the
Publications program. As part of its strategic plan, the Society has
adopted a strategy to “Explore ways to diversify APS revenue sources…” and
accordingly the Finance Committee was asked to develop a revenue
diversification plan. During the spring Council meeting, the Finance
Committee recommended that Council be the central body coordinating revenue
generation ideas from the committees and units, and also be the prioritizing
body for implementing these ideas when developed. Council agreed with the
Committee’s recommendation and also agreed to call for revenue generating
ideas from all APS committees and units.
The finance committee has discussed ideas that Council
may wish to explore further for revenue diversification. Following is a list
of possibilities. None have been fleshed out, not all have been discussed
with all members of the committee.
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More aggressively pursue corporate support for
(components of) APS meetings. Offering integrated programs with clinical
material may be one attractive direction, workshops on modern techniques
and postgraduate courses with fees attached are others.
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Use the internet to broadcast educational programs
for a fee.
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Develop a comprehensive equipment and reagents
catalog for members sponsored by industry.
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Consider hiring a development officer.
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Determine with professional advice what fraction of
our reserves could be used for investments that might produce a better
rate of return, possibly including real estate options.
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Explore whether industry has a need for
physiological instructional programs we could offer for a fee.
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Develop a public popular physiological science
magazine to sell. This would also raise awareness of the discipline.
Summary
Current and projected financial conditions are strong
and the Society continues to enjoy a large pool of reserves. While future
projections remain positive, it continues to be important for the APS to
diversify its sources of revenue so as not to be so dependent on one
program—publications—for its operations.
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