2010—a very good year financially In late 2009, the economy finally began to show signs of improvement after a very serious downturn that began in 2008. This upswing continued throughout 2010. Total net assets (basically, the net worth of our organization) increased $10.3 million, from $69.7 million at the end of 2009 to $79.9 million at the end of 2010. Operating income for 2010 was $2.7 million (compared to $1.6 million in 2009), and our long-term investment portfolio gained $7.2 million in market value. Liabilities increased $841,000, mainly due to year-end timing issues related to the Annual Meeting.


Published 12/1/2011
Frederick M. Azar, MD

Treasurer’s Report—December 2011

The bylaws of the AAOS direct the Finance Committee to “manage, supervise and control the financial affairs” of the organization. As your treasurer, I serve as chair of the Finance Committee; John J. Callaghan, MD, immediate past president, and John R. Tongue, MD, first vice-president, are members of the committee, with Andrew N. Pollak, MD, treasurer-elect, as an ex-officio member. Other participants in Finance Committee meetings include Daniel J. Berry, MD, AAOS president; Joshua J. Jacobs, MD, second vice-president; Karen L. Hackett, FACHE, CAE, chief executive officer; Richard J. Stewart, chief financial officer; and Tina D. Slager, controller. All members of the Board of Directors are invited to participate in Finance Committee meetings either in person or via teleconference.

Frederick M. Azar, MD


Combined statement of operations
Total operating revenue for 2010 was $56.0 million, which is a $200,000 increase over 2009. The increase was mainly attributed to the continuing growth in contributions to the Orthopaedic Political Action Committee (PAC).

Although operating revenue was up slightly, total operating expenses decreased from $54.2 million in 2009 to $53.3 million in 2010, primarily due to a slightly longer time in filling staff vacancies, particularly in advocacy and research.

2010 audit
Blackman Kallick, 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 that the financial statements were presented fairly in all material aspects. There were no serious concerns or management comments.

2011 projected results
We are projecting the 2011 operating income to be $2.5 million better than budget, due in part to better-than-anticipated results from the Annual Meeting in San Diego and lower-than-expected healthcare utilization (at least to date). These positives were slightly offset by rising litigation expenses for the Professional Compliance Program and lower sales than anticipated for the 10th edition of Orthopaedic Knowledge Update. We anticipate that 2011 will be the ninth 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 October 2011 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.

2012 budget
The Finance Committee presented the 2012 budget to the Board at its September 2011 meeting, and it was approved. The budget shows that we expect a positive bottom line of about $13,000 at the end of 2012.
The 2012 budget anticipates operating revenues of $59.2 million and operating expenses of $60.3 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 $1.1 million, and the same percentage as 2011) from investment earnings in 2012, leaving a break-even bottom line. The market upheaval of 2008 demonstrated the potential risk that comes with relying on investment returns for operations, and, over time, it is our goal to end this practice.

As you know, 2010 was another volatile year for investments, but this time in a positive direction. The economic recovery that started in 2009 led to an overall gain of $7.2 million in 2010. Adding the 2010 gain to the $10.1 million investment gain in 2009 more than recaptured 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 $511,000 for the year, resulting in a balance at year-end of $5.25 million. The Advocacy Restricted Fund, which was created in 2008, gained $605,000 for the year, ending with a year-end balance of $6 million.

At its February 2011 meeting and after much study by the Finance Committee, the Board approved significant changes to our investment accounts. The long-term investment account previously included two separate funds. The Permanent Fund (also known as the “rainy-day fund”) was designed to allow the AAOS to remain operational for up to 6 months should it face a scenario in which it had no revenue coming in. The Project Fund was designed to provide a financial resource to fund major new activities.

Changes instituted by the Board in February 2011 increased the target balance of the Permanent Fund from an amount representing 6 months of operating revenue to an amount representing 9 months of operating revenue. Recent incidents such as Hurricane Katrina and the market crash of 2008–2009 influenced the Board’s decision in regard to this fund. The Project Fund was eliminated. Over time, certain restrictions had been placed on the use of the proceeds from this fund that made it difficult to put the fund to good use. The money that had been in this fund has been initially transferred to a new fund intended to support AAOS’s pursuit of a new headquarters building. The Board will decide in December if we relocate or stay where we are.

In addition, the Board approved the transfer of the investment assets of the Education Fund and the Advocacy Fund to the newly created Academy Restricted Fund and Association Restricted Fund, respectively. Up to 5 percent annually from each of these funds would then be available to fund certain Academy activities (eg, research and Council funds for education and research) and Association activities (eg, the Professional Compliance Program and Council or Cabinet funds for advocacy and communications). The reason for this change was to open up the use of the earnings from these two funds to all AAOS activities, instead of only education- and advocacy-related activities.

In 2011, we are continuing to experience extreme market volatility. Gains that are made in one month can easily be lost the next. Both of our investment managers (Wells Capital and Morgan Stanley) predict that the market’s volatility will continue for the foreseeable future, but they also indicate that due to market fundamentals, we should see an overall moderate gain for 2011 of about 5 percent to 6 percent. Through October, however, the long-term portfolio is down 1.9 percent for the year (or about $939,000), with the new Academy Fund up 2.4 percent and the Association Fund up 1.8 percent. In 2010, all of our investment gains occurred during the last quarter of the year, so a modest gain is possible. We continue to closely monitor our investment performance so that we can continue to take action when needed.

One final comment on investments is appropriate. As noted above, Wells Capital has been our long-term account investment manager since June 2006. It is good practice to periodically examine our investment managers through a Request for Proposal process. Therefore, we went out for bid for these services earlier this year and will announce our decision in December.

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 2011, 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 year-to-date financial results and trends at a glance in a convenient one-page format.
  • Held four Webinars to provide education for our volunteers on various aspects of AAOS finances. For example, an overall tutorial of AAOS finances for new Board members was presented, as was a program titled “AAOS Finances for Committee Chairs.” A webinar that provided an overview of the AAOS’s commercial and employee insurance coverage—a critical key to the financial well-being of the AAOS and an important factor in attracting and maintaining staff—was also held.
  • Revised the Long-Term (5-year) Financial Plan to encompass the years 2012–2016. 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 as a means to help minimize our reliance on member dues and funding from orthopaedic industry.
  • Provided key financial information not only to the Board but also to the leaders of the various councils, cabinets, and committees on a regular basis in an effort to improve budget transparency. Because the financial stewardship of the AAOS rests with all volunteers and not just the Board, it is important that these leaders be kept abreast of the impact of their activities as a whole. Reaction from these volunteer leaders has been very positive, and the Board recognizes and greatly appreciates all of their hard work and positive contribution to the AAOS.

The Board also continues to lead by example as it critically examines its spending at every Board meeting. The Board has been under budget for the last 6 years and should be significantly under budget for this year as well.

In addition, the AAOS Leadership Review Group (LRG), under the leadership of Dr. Tongue, who is joined by Drs. Jacobs, Callaghan, Pollak, and me, continued to review the key programs of the AAOS. There is a continual need to prune ineffective or outdated programs and projects to fund high-priority activities. Over the last 3 years, these efforts have reduced or eliminated 23 activities, saving more than $1.4 million annually.

The LRG has also begun expanding its scope of work by reviewing select programs on a quarterly basis, which will allow us to consider beneficial changes in a timelier manner. These savings, coupled with other efforts to reduce costs and enhance revenue, have enabled the AAOS to add more than a dozen major new programs—such as the Professional Compliance Program, Guidelines/Performance Measures, Orthopaedic Research Funding, and Technology Overviews—since the time of the last dues increase in 2003. Combined spending on these relatively new activities now exceeds $14.3 million.

This additional spending, combined with the effects of general inflation, which alone would justify a $150 increase in dues, makes a dues increase inevitable at some point in the future. However, the Board has worked extremely hard in looking at all avenues of funding and spending control before taking this step, and it will continue to do so.

Challenges ahead
We continue to be involved in several legal actions related to the Professional Compliance Program, and it is likely that we will see more litigation in the near future. Your Board remains committed to vigorously defending this program as well as to starting new programs, such as Quality and Technology Initiatives, which are vital to our future. To do so, the Board is committed to reducing spending where appropriate and raising revenue where possible. However, even with these steps our Long-Range Plan for 2012–2016 indicates a deteriorating financial condition. We promise, though, that we will maintain our financial diligence to ensure that we can 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 last year as Treasurer, I want to thank you for having given me the opportunity to serve in this role. I’d also like to extend my thanks to Dr. Berry, AAOS president, and my fellow Board members who work tirelessly on behalf of all of us, especially in these challenging times, and to the Academy’s talented executive and financial staff. I would especially like to thank Rich Stewart and Tina Slager for all of their hard work and the many behind-the-scenes contributions they make on behalf of the AAOS. They have truly made me look good more than once during the last 3 years.

Dr. Pollak will take over as Treasurer next February, and I am sure that he will provide the direction and oversight needed to improve our financial processes and performance.

If I can be of assistance to any Fellow or member of the Academy, please contact me through the Academy offices.

Frederick M. Azar, MD, is the current treasurer of the AAOS. He reports no conflicts of interest.