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2008 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.

2007 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, Science Policy, Communications, Marketing, and the Executive, Information Technology, and Business Offices. 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.

For 2007, the year ended with income of $19.49 million and direct expenses of $18.03 million. The Society ended the 2007 year with a net surplus of approximately $2 million.  There were several revenue and expense categories which were either over or under budget. Revenue categories that were over budget included journal-related income from page charges ($700,000 over budget) and color fees ($324,000 over budget). Conversely, grant income was $268,000 under budget. The largest revenue category, income from journal subscriptions, was on budget. Expenses associated with printing the journals were under budget by $433,000, and costs associated with maintaining journal editors’ offices were under budget by $432,000. In sum, approximately $1million of the surplus is attributable to increased publications revenues and $0.9 million to reduced publication expenses.

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 $336,000, $185,000, and $14,000 are projected for 2009, 2010, and 2011, respectively. The Society’s journals program is its primary source of income, accounting for approximately 80% of all revenue. The journals program is structured to generate a return of 10% annually which is used to support other society programs.  In 2007 the return was 26% ($3,306,145 net revenue/$12,505,803 total expenses). This high return was a result of Publications revenue items that were over budget, and Publications expense items that were under budget.

2008 Budget

The Council has approved a 2008 budget of $18,578,000 in expenses. With revenue budgeted at $19,137,500 (including the 4% investment allocation of $1,380,500 and projected net revenue from Publications of $2,247,500), the budget shows a surplus of $559,500, a modest surplus for a revenue budget of almost $20 million. The publications component again comprises around 80% of total income. The journals program is budgeted to generate a return of 17%.

Through the first four months of 2008, both revenue and expenses are under budget and the result is a net surplus of approximately $99,000.  This is, in essence, a seasonal imbalance between actual and budgeted revenue and expenses, and the Society is expected to be close to 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, the Publications Committee recommended, and the Finance Committee and Council both agreed, that 2009 subscription prices should be raised by 2.5%. While the subscription pricing model showed a need to increase prices only 1.2% in 2009, due to the uncertainty of certain market factors, the Publications and Finance Committees recommended, and the Council approved, an increase of 2.5%. A comparison of 2009 and 2008 domestic institutional prices is shown in the table below, reflecting the above percentage changes:

Long Term Investments

Our long term investments consist of both unrestricted reserves (about $36 million at the end of 2007) and restricted funds (about $8 million at the end of 2007). They are managed as a single investment pool referred to below as the managed accounts. However, it is only the unrestricted reserves from which 4% is drawn each year for the operating budget.

In the early 1990’s, 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 more than $36 million at December 31, 2007.  As directed by Council, the Society uses up to 4% of the value of its reserves 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 six managers under the direction of the Society’s investment consultant, Paul Powers of Smith Barney.  Four of these managers handle about 2/3 of the total funds in equities portfolios. Two other managers handle the remaining 1/3 in fixed income instruments. As of December 31, 2007, the accounts had the following market values: APS Reserves $36,172,496, APS Endowment Fund $4,628,553, Giles F. Filley Memorial Fund $830,660, Rife/Guyton Fund $673,658, Caroline tum Suden Fund $588,116, IUPS Fund $434,398, Perkins Memorial Fund $363,504, Shih-Chun Wang Fund $166,683 and the Lazaro Mandel Fund $144,157.  The return on the managed accounts was 5.82% for the year ended December 31, 2007. It should be noted that this figure is a net value after using reserves to supplement the 2007 budget and paying investment management fees. The market value of the managed accounts at December 31, 2007 was $44,002,225.

There was a discussion at the spring Finance Committee meeting regarding the Society’s investment policy. Powers suggested the Committee consider changing two sections of the policy. The first change would be to modify the asset allocation portion of the policy which currently requires an asset mix of a “maximum 75% equities, minimum 5% cash, and remainder fixed income…” The suggested change would remove the minimum 5% cash requirement in order to provide more flexibility for the investment managers to take advantage of buy opportunities. The second change involves the current policy’s stated goal of achieving “an absolute annual rate of return of: (1) at least 5 percent above the rate of inflation over a market cycle (three to five years), after payment of brokerage and management fees.” Powers believes this is an unrealistic long term goal over time simply due to the fluctuations in the market.

2007 Audit

The Society’s annual audit was once again conducted Grant Thornton, LLP, and a copy of this audit was given to the Finance Committee in the spring. 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, 2007 and 2006.  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.

Summary

The APS continues to do extremely well financially. The results for 2007 showed an unexpected surplus of slightly less than $2 million primarily as a result of higher than expected revenues and lower than expected expenses in the journals program.