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; Daniel J. Berry, MD, immediate past president, and Joshua J. Jacobs, MD, first vice-president, are the other voting members of the committee. Other participants in Finance Committee meetings include John R. Tongue, MD, AAOS president; Frederick M. Azar, MD, second vice-president; Karen L. Hackett, FACHE, CAE, chief executive officer; Richard J. Stewart, chief operating officer/chief financial officer; and Tina D. Slager, director of finance. All members of the Board of Directors are invited to participate in all Finance Committee meetings either in person or via teleconference.

Total net assets (basically, the net worth of our organization) increased $2.3 million, from $79.9 million at the end of 2010 to $82.2 million at the end of 2011. Operating income for 2011 was $2.7 million (no change from 2010), and our long-term investment portfolio lost $1.5 million in market value. Liabilities increased $908,000, mainly due to year-end timing issues related to the Annual Meeting.

Combined statement of operations
Total operating revenue for 2011 was $59 million, which was $3 million more than in 2010. The increase was mainly attributed to the Annual Meeting in San Diego, sales of examination products, and advertising in the Journal of the AAOS.

Although operating revenue was up, total operating expenses also increased by $3 million from $53.3 million in 2010 to $56.3 million in 2011, primarily due to higher Annual Meeting and product expenses.

2011 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.

2012 projected results
We are currently projecting the 2012 operating income to be $1.7 million better than budget, due in part to better-than-anticipated results from the Annual Meeting in San Francisco, staff turnovers, lower travel costs for the Board of Directors, and lower professional compliance litigation expenses due to insurance coverage. These positives will be slightly offset by higher utilization of the staff health insurance program and less online advertising revenue. We anticipate that 2012 will be the tenth year in a row that we have had positive results from operations, due to the many improvements made in our financial management practices.

Investments
As you know, 2011 was another volatile year for investments. While we had an overall gain of $7.2 million in 2010, we ended 2011 with a loss of $1.5 million. At the end of 2010 we had more than recaptured the $16.5 million loss we incurred in 2008 with a cumulative gain of $17.3 million, but by the end of 2011 that cumulative gain dropped to $15.8 million. 2012 is proving to be a good year for investments, at least up until now. However, we anticipate that this market volatility may continue for the foreseeable future.

The Academy Fund, which was established in 2007 to support orthopaedic medical education and broadened in 2011 to encompass other Academy activities, was up $115,000 for the year, resulting in a balance at year-end of $5.37 million. The Association Fund, which was created in 2008 to help fund our advocacy efforts and expanded in 2011 to support the Professional Compliance program and other Association activities, gained $78,000 for the year, ending with a year-end balance of $6.1 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 2011 increased the target balance of the Permanent Fund to an amount representing 9 months of operating revenue. Incidents such as Hurricane Katrina in 2005 and the market crash of 2008–2009 influenced the Board’s decision. The Project Fund was eliminated and the money transferred to a new fund intended to support a new headquarters building, which the Board confirmed at the end of July.

In late 2011 the Finance Committee decided to change our long-term portfolio investment manager from Wells Capital to Goldman Sachs. That transfer was made in February 2012. Goldman’s performance has been slightly below the blended benchmark for our investments and we continue to monitor this situation very closely. In spite of this, as of September 2012, the long-term portfolio has increased $5.2 million from the end of 2011—a gain of 12.44 percent.

Financial transparency
To help protect the financial transparency of AAOS, the Finance Committee and staff took the following actions this year:

• 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. (The dashboard is available to any AAOS member upon request.)
• Held three Webinars to educate volunteers on various aspects of AAOS finances. Webinar topics included an overall tutorial of AAOS finances for new Board members, a presentation of dues history and related information, and a review of revenue enhancement initiatives.
• Revised the Long-Term (5-year) Financial Plan to encompass the years 2013–2017. This plan helps the Board understand the longer-term implications of today’s financial decisions and helps control spending.
• 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.

Fiduciary responsibilities
Your Board of Directors takes its fiduciary responsibilities seriously. It continues to lead by example as it critically examines its spending at every Board meeting. The Board has been under budget for the last 7 years and should be significantly under budget for this year as well. The Board also reinstituted a Board Project Team on Revenue Enhancement to review the previous project team’s recommendations and investigate new ideas to continually enhance revenue as well as reduce expenses.

The AAOS Leadership Review Group, under the leadership of Dr. Jacobs, who is joined by Drs. Azar, Berry, and me, continued to review the key programs of the AAOS. There is a continual need to prune ineffective or outdated programs and projects so that the AAOS can fund higher-priority activities. Over the past 4 years, these efforts have reduced or eliminated 27 activities, saving more than $1.4 million annually.

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/Appropriate Use Criteria, Orthopaedic Research Funding, and Technology Overviews—since the last dues increase in 2003. Combined spending on these relatively new activities now exceeds $16.2 million (Table 1).

However, we have reached a point where there are few if any opportunities for non-dues revenue enhancement and there are no longer any projects to trim without substantially cutting into the meat of mission-critical programs and activities that members want and need. Hence, as noted in Dr. Tongue’s “Across the President’s Desk” column (See “Taking the Measure of Your Dues.”), the Board has approved a $150 increase in fellow dues effective next year—the first increase in 10 years. Even with this increase, the Board will continue to work extremely hard in looking at all avenues of funding and spending control to ensure that your Academy is financially strong but prudent in its spending.

As a result of the process of pruning outdated programs and adding new programs, the value AAOS members receive for their dues dollars has never been higher. Nonetheless, even with the planned dues increase, the total annual dues paid by fellows is lower than the dues level implemented in 2003 after adjusting for inflation.

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 funding 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.

Even with these steps, however, our Long-Range Plan for 2013–2017 indicates a deteriorating financial condition. We promise 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.

Conclusion
As I complete my first 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. Tongue and my fellow Board members who work tirelessly on behalf of all of us, especially in these challenging times. I offer a special thanks to the Academy’s talented executive and financial staff, particularly Rich Stewart and Tina Slager for their monumental efforts in managing the AAOS’ finances on a day-to-day basis.

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

Andrew N. Pollak, MD, is the current treasurer of the AAOS.