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.