October 1995 Bulletin

From the Treasurer

The American Academy of Orthopaedic Surgeons completed another successful financial year on April 30, 1995, due in large part to sound financial planning by the Board of Directors and the Academy's Finance committee. Included in the subsequent pages (Statement of Assets, Liabilities, and Fund Balance and Statement of Revenues, Expenses, and Changes in Fund Balance) is a report of the Academy's assets, liabilities, fund balance, revenues, and expenses for the two years ended April 30, 1995 and 1994.

Fiscal Responsibility

In my report to Fellows in the October 1994 Bulletin, I outlined the Academy's new financial strategies as well as $2.8 million in financial changes that the Board of Directors approved in February 1994. The financial changes were developed by the Task Force on Fiscal Responsibility in light of forecasted operating deficits for 1995 through 1997.

The Task Force closely examined the Academy's revenue sources and expense areas and developed a series of recommendations which were designed to enhance current revenue sources and reduce expenses. The result of this analysis was an increase in revenue sources of $500,000 and expense reductions of $900,000. Following this analysis, the Task Force determined that additional income was necessary and recommended a $100 increase in Fellow dues effective May 1, 1994.

During FY 1995, these financial changes were implemented by the Board of Directors, Board of Councilors, COMSS, committees, and staff. The Board of Directors eliminated a Board meeting and workshop, the Board of Councilors and COMSS modified meeting dates to take advantage of discounted airfares, and committees transacted business by conference calls in addition to holding all meetings at the headquarters in Rosemont, Ill. Through the combined efforts of each of these groups, the Academy implemented more than $2.2 million of these changes in FY 1995, and by the end of FY 1996, the total will be $2.65 million.

These fiscal actions were not only prudent, but necessary, for without them the Academy would have experienced a significant operating loss for FY 1995. Everyone is to be commended for their willingness to redirect our valuable financial resources to strategic priorities. In particular, the Board of Directors is to be congratulated for their foresight and courage to take these corrective measures.

Statement of Assets, Liabilities and Fund Balance

The Academy's assets grew to $42.6 million by the end of the year on April 30, 1995, an increase of more than $1.6 million from April 30, 1994. The Academy's investment portfolio represents the largest asset category at $22.8 million or 54 percent of the total assets. Ownership of facilities in Rosemont, Ill. and Washington D. C. is recorded at $15.4 million and classified as land, building, and equipment. Together, these two asset categories account for 90 percent of the Academy's total assets. Remaining assets consist of cash, accounts receivable, inventories, prepaid expenses, and deferred product costs.

The Academy's liabilities on April 30, 1995, decrease $1.2 million due to lower accounts payable and lower deferred revenues. Fund balance, the Academy's net worth, increased from $27.8 million to $30.6 million at April 30, 1995.

Investments

The Academy's Finance committee continues to closely monitor the Academy's investment portfolio. Although a stagnate investment market resulted in a lower than normal investment return of 3.1 percent in FY 1994, a rebounding market during the first few months of calendar year 1995, resulted in a 9.2 percent return for FY 1995.

Over 80 percent of Academy's investment portfolio is invested in stocks and bonds. The remaining 20 percent is invested in international markets and emerging companies with capitalization between $100 million and $500 million. The Academy's investment policies were modified during the past year to permit limited holdings in international and emerging company funds in the hopes that the Academy may realize higher investment returns.

Statements of Revenue, Expenses and Changes in Fund Balance

A comparison of revenues and expenses for the last two years is a reflection of the February 1994, recommendations from the Task Force on Fiscal Responsibility.

For the year ended April 30, 1995, the Academy had revenues in excess of expenses before investment activities of almost $1.2 million. Investment activities generated an additional $1.6 million in revenue resulting in total net income of $2.8 million. The increase in net income of $2.6 million between FY 1994 and FY 1995 is the result of the increase in dues, reduction in operating expenses and gain on investments.

Total expenses from program and member service activities and supporting services actually decreased by $160,000 to $26.7 million.

Fiscal Year 1996 Budget

In May 1995, the Board of Directors approved an expense budget of $32.7 million for fiscal year 1996. The FY 1996 budget is an increase of 13 percent from FY 1995 expenses.

Increases in orthopaedic education are attributable to the number of new interesting products: OKU 5; OKUs on the Hip and Knee, Trauma and Hand; three new monographs; four new symposium books; and an exciting new orthopaedic coding data based CD-ROM program.

The chart on the right (Statement of Revenues, Expenses, and Changes in Fund Balance) indicates spending on orthopaedic education during the past five years has accounted for 53 percent to 55 percent of the Academy's expense budget and during FY 1996 is expected to represent 55 percent of all expenses. Orthopaedic education includes orthopaedic surgeons, allied health providers, and international education efforts.

Although health policy initiatives have been numerous the past few years, spending increased from 14 percent to 16 percent in FY 1994, and since has remained relatively flat. Health policy initiatives include patient advocacy, public information, quality assurance and interprofessional liaisons.

Spending on research initiatives has received a significant priority from the Board of Directors during the past five years. Research expenses increased from less than 2 percent of the Academy's budget in FY 1992 to almost 6 percent in FY 1996. New initiatives include outcome instrument development, projects to develop outcomes data bases and community-based cost effectiveness studies.

Organizational spending, including the cost of maintaining the membership process, orthopaedic unity, and general and administrative expenses, has declined rapidly from a high of 30 percent in FY 1992 to 22 percent of Academy expenses in FY 1996. Management contracts for orthopaedic sub-specialties were re-negotiated this past year so they better reflect the actual costs of the services the Academy provides.

Despite the decline in organizational expenses, the Finance committee and Academy staff continue to search for ways to cut costs and enhance revenues.

Summary

The fiscal responsibility measures have allowed the Academy to remain in a strong financial position while re-directing financial resources to projects necessary to meet the demands of health care reform and changes to Academy Fellows.

Sincerely,

James H. Herndon, MD
Treasurer

Graphs are available for:

1995 Revenues and Expenses

Strategic Initiatives as a % of Total


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