Frederick M. Azar, MD, is treasurer of the American Academy of Orthopaedic Surgeons.

AAOS Now

Published 11/1/2009
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Frederick M. Azar, MD, MBA

Treasurer’s Report — November 2009

The bylaws of the AAOS direct the Finance Committee to “manage, supervise and control the financial affairs” of the organization. The members of the AAOS Finance Committee in 2009 include me as the treasurer and chair of the committee; E. Anthony Rankin, MD, the immediate past president; and John J. Callaghan, MD, the first vice president. Other participants in Finance Committee meetings include Joseph D. Zuckerman, MD; Daniel J. Berry, MD; Karen L. Hackett, FACHE, CAE, the AAOS chief executive officer; and Rich Stewart, the AAOS chief financial officer. All members of the Board of Directors are invited to participate in Finance Committee meetings either in person or via teleconference.

2008 was a remarkable year!
The economic downturn in 2008 affected every sector of the U.S. economy—and the impact on the AAOS was felt in several ways. Total net assets (basically, the net worth of our organization) decreased $19.2 million, from $74.9 million at the end of 2007 to $55.7 million at the end of 2008. Operating income for 2008 was $525,000, and our long-term investment portfolio lost $17.5 million in market value.

Combined balance sheet
Total assets of $77.6 million at year-end 2008 represented a decrease of $16.9 million from year-end 2007 and resulted from the operating income less the investment losses for the year. Liabilities increased $2,305,000, mainly due to year-end timing issues related to the deferral of future income from activities such as the Annual Meeting.

Combined statement of operations
Total operating revenue for 2008 was $56.6 million, which is a $4.6 million increase over 2007. The increase was mainly attributed to increased Annual Meeting course registrations for the 75th Anniversary meeting in San Francisco, very strong product sales, increased CME course revenue, and contribution revenue recognition, primarily from the Orthopaedic Political Action Committee.

Total operating expenses increased from $51.2 million in 2007 to $56.1 million in 2008, primarily due to additional costs associated with the Annual Meeting and product sales, as well as increased spending for advocacy initiatives.

2008 audit
For the third year, Blackman Kallick Bartelstein, LLP, served as our auditors, and we experienced a very smooth and successful audit. Once again, AAOS received a “clean” audit opinion that the financial statements were presented fairly in all material aspects. There were no serious concerns and no management comments.

2009 projected results
We are projecting the 2009 operating income to be $2.3 million better than budget, due in part to better-than-anticipated results from the Annual Meeting in Las Vegas. Additionally, efforts to improve operational performance resulted in less spending and decreased operating expenses in several areas. We anticipate that 2009 will be the fifth year in a row that we have had positive results from operations, due to the many improvements made in our financial management practices.

This report also includes the August 2009 financial dashboard, which is a monthly “snapshot” of the organization’s financial situation (Fig. 1). The dashboard is available to any AAOS member upon request.

2010 budget
The Finance Committee presented the 2010 budget to the Board at its September meeting, and it was approved. Under the AAOS Strategic Plan, the Board is required to “adopt an annual balanced budget,” such that anticipated expenditures in 2010 should not exceed or be less than our anticipated revenue.

The 2010 Budget anticipates operating revenues of $57.3 million and operating expenses of $58.7 million. To help balance the budget and support operations, the Board (in 2007) approved using a maximum of 5 percent of investment earnings. We anticipate using only 3.5 percent (approximately $1.5 million) from investment earnings in 2010, leaving a net income of $6,237. Over time, we hope to eliminate any reliance on investment returns for operations.

Investments
As you know, 2008 was a very volatile year for investments. The economic downturn had a significant impact on both personal and organization portfolios, and the AAOS did not escape unscathed. Over the course of the year, the long-term portfolio lost $16.5 million (34 percent). The Education Endowment, which was established in 2007 to support orthopaedic medical education, was also down by $907,000. The Advocacy Endowment, which was established in 2008, had modest gains of $44,000, in part because the funds were initially invested in a money market fund.

In 2009, we are seeing some recovery of the funds, although we don’t expect to recoup all of the losses this year. As market conditions improve, we are beginning to move funds from the Advocacy Endowment money market back into the stock market. Currently, we have moved $2 million into equities and $1.5 million into fixed income securities; the balance (approximately $1.5 million) remains in the money market. No timetable has been set for reinvesting the balance of the money market funds, but we will do so as market conditions allow.

The long-term portfolio gained $6.6 million (19.9 percent) during the first 8 months of 2009. Both endowments have increased as well this year, although at a slower pace, with the Education Endowment up $354,000 (8.5 percent) and the Advocacy Endowment up $139,000 (2.8 percent).

Fiduciary responsibilities
Your Board of Directors takes its fiduciary responsibilities in protecting the financial integrity of the AAOS seriously. To assist in that endeavor in 2009, the Finance Committee and staff took the following actions:

  • Enhanced and updated the AAOS Financial Primer. This primer provides Board members with information about AAOS financial policies and practices, as well as information on financial reporting and investments.
  • Revised and updated the AAOS monthly financial dashboard, which provides at-a-glance year-to-date financial results and trends.
  • Held two Webinars—one on using and understanding the AAOS monthly financial dashboard and the second on operating cash and cash reserves practices. A third webinar focusing on long-term and endowment investments will be held before the end of this year.
  • Revised the Long-Term (5-Year) Financial Plan to encompass the years 2010 through 2014. This plan helps the Board understand the longer-term implications of today’s financial decisions and helps control spending.
  • Operationalized the work started by the AAOS Board Project Team on Revenue Enhancement as a means to help minimize our reliance on member dues and funding from the orthopaedic industry.

Big shoes to fill
This is my first year as treasurer and I follow in the giant footsteps of my predecessors, especially those of William L. Healy, MD, and Edward A. Toriello, MD. This year has been challenging as we continue to deal with a struggling economy and slow recovery in our investment portfolios. But it has also been extremely enjoyable working with my colleagues on the Board, who are so dedicated to this organization and, more importantly, to our patients and to orthopaedics, and with the Academy’s talented executive and financial staff. I especially would like to thank Rich Stewart, the Academy’s chief financial officer, for his assistance and support.

I promise that we will maintain our financial diligence to ensure that we continue to bring you the programs, products, and services that you have asked for and deserve and that make the AAOS the gold standard for medical associations.

Thank you for giving me the opportunity to serve. If I can be of assistance to any Fellow or member of the Academy, please contact me through the Academy offices.