Published 12/1/2010
Frederick M. Azar, MD

Treasurer’s Report: 2009–2011

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

2009 was a year of recovery
The AAOS was not immune to the effects of the economic downturn that started in 2008 and affected every sector of the U.S. economy. Although the economy continued its downward trend in early 2009, it gradually started to reverse course. The impact on our Academy was felt in several ways.

Total net assets (basically, the net worth of our organization) increased $14 million, from $55.7 million at the end of 2008 to $69.7 million at the end of 2009. Operating income for 2009 was $1.6 million, and our long-term investment portfolio gained $10.9 million in market value.

Combined balance sheet
Total assets of $90.6 million at year-end 2009 represented an increase of $13 million from year-end 2008 and resulted primarily from the operating income plus the investment gains for the year. Liabilities decreased $895,000, mainly due to year-end timing issues related to the Annual Meeting.

Combined statement of operations
Total operating revenue for 2009 was $55.8 million, which is an $808,000 decrease from 2008. The decrease was mainly attributed to the winding down of the 75th Anniversary celebration, which was entirely funded from outside contributions.

Total operating expenses also decreased—from $56.1 million in 2008 to $54.2 million in 2008, primarily due to a concerted effort by volunteer leaders and staff to reduce costs in a sluggish economy.

2009 audit
Blackman Kallick Bartelstein, LLP, continued to serve as our outside financial auditors, and we experienced a very smooth and successful audit. Once again, AAOS received a clean audit opinion, which means that the financial statements were presented fairly in all material aspects, and no serious concerns or management comments were expressed.

2010 projected results
We are projecting the 2010 operating income to be $2.5 million better than budget, due in part to better-than-anticipated results from the Annual Meeting in New Orleans. Additionally, efforts to improve operational performance resulted in less spending and lower operating expenses in several areas. We anticipate that 2010 will be the sixth year in a row that we have had positive results from operations, as a result of the many improvements made in our financial management practices.

This report also includes the October 2010 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.

2011 budget
The Finance Committee presented the 2011 budget to the Board at its September 2010 meeting, and it was approved with an overall gain of about $1 million, or less than 2 percent of operating revenue.

The 2011 Budget anticipates operating revenues of $58.5 million and operating expenses of $58.8 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 percent (approximately $1.25 million) from investment earnings in 2011, leaving a net income of just under $1 million. The market upheaval of 2008 demonstrated the potential problems with relying on investment returns to support operation expenses and, over time, it is our goal to end this practice.

As you know, 2009 was another volatile year for investments, but this time in a positive direction. The economic recovery that started midyear led to an overall gain of $9.7 million for the year, recapturing much of the $16.5 million loss we incurred in 2008.

The Education Restricted Fund, which was established in 2007 to support orthopaedic medical education, was up $575,000 for the year; however, it is still $300,000 lower than its initial $5 million investment.

The Advocacy Restricted Fund, which was created in 2008, had modest gains of $368,000 as we cautiously moved back into the market with this fund. Its year-end balance was $5.4 million.

In 2010, we are continuing to experience extreme volatility—seeing gains one month and then seeing those gains and more lost the next. Both of our investment managers (Wells Capital and Morgan Stanley) predict that the market’s volatility will continue for the next several months, but they also indicate that due to strong market fundamentals, we should continue to see an overall gain for 2010 in the 8 percent to 10 percent range, and overall positive results should continue in 2011.

Through October 2010, the long-term portfolio is up 7.7 percent for the year (or about $3.3 million), with the Education Restricted fund up 9.1 percent ($430,000) and the Advocacy Restricted Fund up 8.2 percent ($445,000). We continue to closely monitor our investment performance so that we can continue to take action when needed.

Fiduciary responsibilities and transparency
Your Board of Directors takes its fiduciary responsibilities in protecting the financial integrity of the AAOS seriously. To assist in that endeavor in 2010, 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, financial reporting, and investments.
  • Revised and updated the AAOS monthly financial dashboard, which provides year-to-date financial results and trends at a glance in a convenient one-page format.
  • Held four Webinars on top financial issues facing AAOS, such as current and projected financial results, the financial impact of the Academy’s relationships with orthopaedic industry, and dues, which is our largest source of revenue. In addition, we presented an overall tutorial of AAOS finances for new Board members.
  • Strengthened our business plan audit process, which is designed to ensure that we exercise due diligence in spending AAOS resources, and to improve the quality and appropriateness of the business plans required for all new or expanded activities.
  • Revised the Long-Term (5-year) Financial Plan to encompass the years 2011 through 2015. This plan helps the Board understand the longer-term implications of today’s financial decisions and helps control spending.
  • Continued to operationalize the recommendations of the AAOS Board Project Team on Revenue Enhancement to help minimize our reliance on member dues and funding from orthopaedic industry.

In 2010, we also started to provide key financial information to the leaders of the various councils/cabinets and committees on a regular basis. Because the financial stewardship of the AAOS rests with all volunteers and not just the Board, these leaders must be aware of the impact of their activities on AAOS. Their reactions have been both positive and encouraging.

In addition, the AAOS Leadership Review Group (LRG)—consisting of Dr. Berry as chair and Drs. Tongue, Zuckerman, and myself—continued to review the key programs of the AAOS to ensure that programs and projects reflect our changing priorities. Over the last 2 years, 19 activities have been reduced or eliminated, saving more than $1 million annually. The LRG is now expanding its scope of work and will begin reviewing select programs on a quarterly basis, enabling us to consider beneficial changes in a more timely manner.

These actions, coupled with other cost savings and revenue enhancements, have helped the AAOS avoid a dues increase for fellows since 2003, even as it introduced several new programs such as the Professional Compliance Program, Clinical Practice Guidelines, Orthopaedic Research Funding, and Technology Overviews that have resulted in more than $13.6 million in additional spending through 2011. In the future, however, we will need to consider all avenues of funding.

Challenges ahead
The AAOS is currently involved in several legal actions related to the Professional Compliance Program and will likely see more litigation in the near future. However, the Board is committed to vigorously defending this program as well as to starting new programs, such as quality initiatives, which are vital to our future. To pay for these programs, the Board is committed to reducing spending where appropriate (such as through the actions of the Leadership Review Group noted above) and raising revenue where possible.

Even with these steps, our Long-Range Plan for 2011–2015 indicates a deteriorating financial condition. We promise, though, 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.

As I complete my second year as Treasurer, I continue to be amazed at the tireless efforts of the volunteers and staff on our behalf, especially in these challenging times. The long-awaited economic recovery continues, but its pace feels excruciatingly slow at times and challenges remain. I also continue to find great joy in working with my colleagues on the Board and with the Academy’s talented executive and financial staff, particularly CFO Rich Stewart and Controller Tina Slager. All of them bring an extraordinary commitment to our organization and—more importantly—to us and our patients.

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.