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; Joshua J. Jacobs, MD, immediate past president, and David T. Teuscher, MD, first vice-president, are the other voting members of the committee. Other participants in Finance Committee meetings include Frederick M. Azar, MD, AAOS president; Gerald R. Williams Jr, MD, second vice-president; Ken Yamaguchi, MD, MBA, treasurer-elect; 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.

2013—A very good year financially
The economy continued the improvement that began in 2012, and the long-term investment portfolio continued to increase in value, gaining $6.7 million during the year.

Total net assets (basically, the net worth of our organization) increased $20 million, from $90.7 million at the end of 2012 to $110.7 million at the end of 2013. Net assets now include Ortho Properties LLC (OPLLC), which was established to finance, construct, and operate the new headquarters building. OPLLC is a joint venture between AAOS (which owns about 70 percent) and our equity partners—the American Association of Hip and Knee Surgeons (AAHKS), the American Orthopaedic Society of Sports Medicine (AOSSM), the Arthroscopy Association of North American (AANA), and the Orthopaedic Learning Center (OLC) (more on this later).

Liabilities increased $3.5 million, 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. These gains could become losses when market conditions are less favorable, as they were in 2008.

Combined statement of operations
Total operating revenue for 2013 was $61.2 million, which was $2.6 million more than in 2012. The growth was mainly attributed to increased revenue from member dues and the Annual Meeting.

Although operating revenue was up, total operating expenses increased by $2.8 million—from $57.1 million in 2012 to $59.9 million in 2013, primarily due to the Academy’s contribution to the OLC to construct the skills lab in the new headquarters building.

The 2013 combined financial results no longer include the American Joint Replacement Registry (AJRR), which was initially established as a supporting organization of the AAOS. In 2013, when the bylaws of the AJRR were amended to make it an independent organization, we separated the financial results of the two organizations and then restated the 2012 results of the AAOS to allow for better comparability. Giving up control in the AJRR—but not involvement in its future—was done to eliminate any adverse impact on the AAOS from the future growth of the AJRR.

2013 audit
CliftonLarsonAllen, LLP, continued to serve as our outside financial auditors, and we experienced a very smooth and 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.

2014 projected results
The 2014 operating income (loss) is currently projected to be on budget by year-end. What is remarkable about this is that we are spending about $2.3 million more this year as we accelerated the schedule for the move-in to the new building from the first quarter of 2015 to December of 2014. Although this faster schedule will save us money in total, it does shift spending from 2015 to 2014. This additional cost in 2014 is being offset by the success of the fundraising efforts for the new building and another successful Annual Meeting.

Investments
As you know, 2013 was another volatile year for investments, but in a positive way. Overall gains for AAOS investments in 2012 totaled $7.1 million and 2013 continued the positive trend with gains of $8.4 million. As of this writing, market volatility this October has resulted in virtually no gains for 2014, but we will have to wait to see how the year ends.

The Academy Fund, which was established in 2007 to support orthopaedic medical education and broadened in 2011 to encompass other Academy activities, was up $732,000 in 2013, resulting in a year-end balance of $6.6 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 $946,000 for the year, ending with a year-end balance of $7.7 million.

Both these funds are managed by Morgan Stanley and, overall, have outperformed their respective blended benchmarks from the time of their inception through September 2014.

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 below the blended benchmark for our investments. As of September 2014, the long-term portfolio had increased $1.2 million from the end of 2013—a gain of 2.53 percent. We continue to monitor this situation very closely.

New headquarters building
Last year, I reported that we had broken ground our new headquarters building. This new building, 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.

As previously noted, joining the AAOS as equity partners in this building are AAHKS, AOSSM, AANA, and the OLC. The building and furnishings will cost approximately $50 million, which will be funded through contributions from the equity partners, fundraising, and debt.

This exciting project is moving along quickly and we plan on moving into the building this month. This is quite astonishing given the fact that this past winter was among the coldest and snowiest on record for Chicago. Although we remain on budget, 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 maintain and improve 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 financial and investment trends.
• 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 2015–2019. 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 contributions to the AAOS.

Fiduciary responsibilities
Your Board of Directors takes its fiduciary responsibilities seriously. The Board continues to lead by example and critically examines its spending at every meeting. The Board has been under budget for the last 9 years and should be significantly under budget for this year as well.

The AAOS Leadership Review Group, chaired by Dr. Teuscher, who is joined by Drs. Williams, Jacobs, Yamaguchi, 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 6 years, these efforts have reduced or eliminated 36 activities, resulting in savings of more than $2.0 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 over time —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 $19 million.

Challenges ahead
We continue to be involved in several legal actions related to the Professional Compliance Program, and although we have received recent favorable court decisions, 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 2015–2019 suggests that maintaining the financial health of the organization will represent an ongoing challenge for the Finance Committee and Board of Directors for the foreseeable future. We promise that we will maintain our 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 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. Azar 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. This past year they have not only provided expert financial management, they have also directed and managed the finances of construction of our new headquarters facility in Rosemont. Accomplishing one of those tasks would have been a full-time responsibility for the staff, let alone both at the same time.

Dr. Yamaguchi will be succeeding me as Treasurer, and I am sure that he will be bringing new insight to the position that will benefit all of us. I feel very comfortable that I am leaving the position with the organization’s finances in good current condition and even better hands.

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.