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 R. Tongue, MD, immediate past president, and Frederick M. Azar, MD, first vice-president, are the other voting members of the committee. Other participants in Finance Committee meetings include Joshua J. Jacobs, MD, AAOS president; David T. Teuscher, 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.

2012—A very good year financially
After showing signs of stress in 2011, the economy improved in 2012, and the long-term investment portfolio more than recovered the losses experienced at the end of 2011.

Total net assets (basically, the net worth of our organization) increased $8.5 million, from $82.2 million at the end of 2011 to $90.7 million at the end of 2012. Of this increase, operating income for 2012 contributed $1.5 million (2.5 percent of our annual operating budget), and the long-term investment portfolio contributed the remaining $7.1 million—the lion’s share of the profitability.

Liabilities increased slightly ($142,000), mainly due to year-end timing issues related to the Annual Meeting. Overall this means that the net worth of the AAOS is climbing rapidly, but mostly due to market gains, which are subject to becoming losses when market conditions are less favorable, as in 2008.

Combined statement of operations
Total operating revenue for 2012 was $59.7 million, which was $700,000 more than in 2011. The growth was mainly attributed to increased contributions for the Political Action Committee (PAC) but this was offset by rising expenses.

While operating revenue was up modestly, total operating expenses increased by $1.9 million—from $56.3 million in 2011 to $58.2 million in 2012, primarily due to higher Annual Meeting, course education, and PAC expenses, as noted above.

The 2012 combined financial results include the American Joint Replacement Registry (AJRR), which was established as a supporting organization of the AAOS. This year, the bylaws of the AJRR were amended to make it an independent organization so financial results from the AAOS and the AJRR will not be combined in 2013, and the 2012 results will be restated for comparability. Giving up control in the AJRR—but not involvement in its future—was done to eliminate any adverse impact on the AAOS that may result as the AJRR continues to grow.

2012 audit
A change in auditors to CliftonLarsonAllen, LLP, was made for the 2012 audit, which proved to be a smooth transition with a successful audit. Once again, the 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. It is always reassuring to get such a report from an outside auditor. Getting reports like that 2 years in succession from two separate and unrelated auditing firms is even more reassuring.

2013 projected results
The 2013 operating income is currently projected to be $1.0 million worse than budget, due to the $1.7 million contribution (net of fundraising) to the Orthopaedic Learning Center (OLC) for the laboratory in the new headquarters building (more on that later). Partial offsets include better-than-anticipated results from the Annual Meeting in Chicago, staff turnover, lower travel costs for the Board of Directors, and lower utilization of the staff health insurance program (because the AAOS is self-insured).

However, the gain on investments is anticipated to be nearly $5 million better than budget, which would result in overall results $4 million better than budget. We therefore anticipate that 2013 will be the 11th year in a row that the AAOS has had positive results. I believe that a large portion of the credit for this outstanding history of financial performance rests with our organization’s staff, who work tirelessly to achieve value for the members’ dues, and to the hundreds of volunteers who contribute their time and expertise.

Investments
As you know, 2012 was another volatile year for investments, but this time in a positive way. While 2011 ended with an investment portfolio loss of $1.5 million, overall gains in 2012 totaled $7.1 million. It appears that 2013 will be another good year for investments, at least thus far. However, market volatility is anticipated to 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 $489,000 for the year, resulting in a year-end balance of $5.9 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 $688,000 for the year, ending with a year-end balance of $6.8 million.

Both these funds are managed by Morgan Stanley, which had outperformed its blended benchmark since their inception and until 2013. Although 2013 has been an off year for these funds thus far relative to benchmarks, recent changes made by the investment committee in both of these accounts should lead to better performance in the future.

In late 2011, the Finance Committee decided to change the long-term portfolio investment manager from Wells Capital to Goldman Sachs. That transfer was made in February 2012. Goldman’s performance since inception has been slightly below the blended benchmark for our investments but the gap is closing. As of September 2013, the long-term portfolio had increased $4.3 million from the end of 2012—a gain of 10.63 percent. We continue to monitor this situation very closely.

New headquarters building
I would be remiss if I didn’t say a few words about the progress in constructing our new headquarters building. We closed on the land for this building in late July and began construction in early August. This new edifice, located two blocks south of the current headquarters building in Rosemont, Ill., will be home to a state-of-the-art OLC and 25 other orthopaedic organizations.

Joining the AAOS as equity partners in this building are the American Association of Hip & Knee Surgeons, the American Orthopaedic Society for Sports Medicine, the Arthroscopy Association of North America, and the OLC. The building and furnishings will cost approximately $50 million, which will be funded through contributions from the equity partners and through debt.

This exciting project is moving quickly along; plans are to move in during the first quarter of 2015. However, the size of the project requires close ongoing scrutiny by staff and the Board, and is a focus of every Finance Committee and Board meeting.

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

• Issued 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 two webinars to educate volunteers on various aspects of AAOS finances. Webinar topics included an overall tutorial of AAOS finances for new Board members and a presentation of the annual budget, rolling forecast, and long-range planning processes.
• Made quarterly updates to the 18-month rolling forecast introduced in 2012 and designed to improve forecasting capabilities. Rolling forecasting will enable us to focus budgeting processes on looking forward rather than looking back. Each update shows progress toward obtaining more reliable information in a timely manner.
• Revised the Long-Term (5-year) Financial Plan to encompass the years 2014–2018. 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 8 years and should be significantly under budget for this year as well.

The AAOS Leadership Review Group, under the leadership of Dr. Azar, who is joined by Drs. Teuscher, Tongue, and me, reviews key programs with the help of staff on an ongoing basis. 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 5 years, these efforts have reduced or eliminated 32 activities, saving more than $1.7 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/Performance Measures, Orthopaedic Research Funding, and Technology Overviews. Combined spending on these relatively new activities now exceeds $17.1 million.

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 2014–2018 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 second 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. Jacobs 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.