The Society's financial condition remains strong through sound management and investment practices. The Society's income has been growing slowly, but expenses are growing at a faster rate than revenue. The three-year Financial Forecast is showing a steady trend from $563,000 in Net Revenue in 2001, to a projected $379,000 Net Expenses in 2007. This is a significant improvement from a year ago, when the annual deficit was projected to be approximately $1 million in 2006. Contributing to the improvement was a concerted effort by the Society to hold down expenses in 2003 without cutting programs. The Society finished the year with net revenue of $311,373, $518,670 over a budgeted deficit of $207,297. This was accomplished despite that fact that the Society had to absorb a bad debt of approximately $280,000 due to the bankruptcy of RoweCom, one of its largest subscription agents. The 2004 budget, approved by Council at its spring meeting, is projecting net revenue of $312,662, very close to the actual amount for 2003.
As directed by Council, the Society uses up to four percent of the value of its investments annually as operating income. Only that amount required to offset the cost of Society programs, other than the Journals Program, is withdrawn and the remainder continues in actively managed investment accounts. The Journals Program, by a 1995 Council mandate, is expected to generate a return of 10% annually. In the early 1990's, the reserves, which the Society depends on for approximately seven and one half percent 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. With the 2003 market turnaround, the Society's reserves returned to its December 31, 1999 value of $30 million.
White Paper on the Financial State of the Society
The Finance Committee was asked by Council to develop a white paper to be used as a planning document for the next APS strategic planning meeting. The white paper written by the committee is designed to give a "view from 35,000 feet" of the Society's financial history, its current financial status, and several challenges facing the Society.
Society Budget
The chair reviewed the 2003 budget versus actual income and expenses and presented the modified 2004 budget based on the 2003 results, as reviewed and approved by the Finance Committee at its spring meeting. 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, Marketing, and the Executive, Information Technology, and Business Offices. For 2003, the year ended with income of $16,333,646 (including $1,242,933 allocated from the Society's reserves) and direct expenses of $14,361,754, plus general and administrative (G&A) costs of $1,660,519, for total expenses of $16,022,273. 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. Including the $1,242,933 investment allocation, total operating revenue exceeded total operating expenses, resulting in net revenue of $311,373.
The Council approved a 2004 budget of $16,984,550. After applying the entire investment allocation of $1,245,065 and the net revenue from Publications of $1,287,844, the budget shows net revenue of $312,662.
Journal Subscription Pricing
Council reviewed the Publications and Finance Committees' recommendations for 2005 journal subscription prices. It should be pointed out that journal publication is the major source of revenue for the Society and is key to its financial well-being. In 1995, the Council recommended that the journals' prices be set so as to generate a margin of approximately 10% to help defray the costs of the various Society programs. The Finance Committee agrees with the Publications Committee who recommended that 2005 subscription prices be raised by an overall rate of five percent, with the exception of Physiology (formerly NIPS), and Physiological Genomics, whose 2005 rates will be increased 10% to help offset the higher costs incurred by those journals. A comparison of 2005 and 2004 domestic institutional prices is shown in the table below.
Society Reserves
At its spring meeting, the Finance Committee reviewed the performance of the Society's investment managers. The investments are administered by four managers under the direction of our investment consultant, Smith Barney. As of December 31, 2003, the accounts had the following market values: APS Reserves $30,157,277, APS General Endowment Fund $3,086,485, Giles F. Filley Memorial Fund $802,104, Rife/Guyton Fund $566,428, Caroline tum Suden Fund $557,418, Perkins Memorial Fund $312,417, IUPS Fund $308,302, Shih-Chun Wang Fund $143,802, and the Lazaro Mandel Fund $140,549. The return on the managed accounts was 19.17% for the year ended December 31, 2003. The market value of the managed accounts at December 31, 2003 was $36,074,782.
Due to variable performance in the four managed accounts, each manager held between 24% and 26% of all invested assets. Based on a recommendation from the Finance Committee that was approved by Council, the accounts were rebalanced so that each of the four fund managers will be allocated approximately 25% of all assets as of March 31 in accordance with the Society's investment strategy.
2003 Audit
The Finance Committee received the annual audit performed by Grant Thornton, LLP. In the opinion of the auditors, based on generally accepted accounting principles, the financial statements that follow present fairly the financial position of the Society as of December 31, 2003. No problems were found by the auditors.
Fundraising Guidelines for Distinguished Lectureships
At the spring Council meeting, there was a discussion of the lack of income from APS meetings, especially EB. Council requested that the Finance Committee make a recommendation as to how much funding should be requested to sponsor a distinguished lectureship. The Committee is currently reviewing guidelines that will provide incentive to the sections for raising money in support of distinguished lectureships at EB. The Committee will present its recommendation to Council for consideration in the fall.
Peter D. Wagner, Chair