Frederick M. Azar, MD


Published 12/1/2015
Frederick M. Azar, MD

Treasurer's Report—December 2015

The bylaws of the AAOS direct the Finance Committee to "manage, supervise, and control the financial affairs" of the organization. With the resignation of Ken Yamaguchi, MD, MBA, as AAOS treasurer, the AAOS Board of Directors elected me to serve as your treasurer and chair of the Finance Committee until March 6, 2016. On behalf of the Board, I want to thank Dr. Yamaguchi for his service as treasurer and his continuing commitment to AAOS.

I have previously served as AAOS treasurer (2009–2012) and am continuing my role as past president on the AAOS Board of Directors. Gerald R. Williams Jr, MD, first vice-president, is the other voting member of the committee. Other participants in Finance Committee meetings include David D. Teuscher, MD, AAOS president; William J. Maloney, 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.

2014—A mixed year financially
The economy continued the improvement that began in 2012, and the long-term investment portfolio continued to increase in value, gaining $3.0 million during the year.

Total net assets (basically, the net worth of our organization) increased by $16.9 million, from $110.7 million at the end of 2013 to $127.6 million at the end of 2014. Net assets now include OrthoProperties 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 Arthroscopy Association of North America (AANA), the American Orthopaedic Society of Sports Medicine (AOSSM), the American Association of Hip and Knee Surgeons (AAHKS), and the Orthopaedic Learning Center (OLC).

Liabilities increased $1.5 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 2014 was $63.6 million, which was $2.4 million more than in 2013. The growth was mainly attributed to increased revenue from member dues and the Capital Campaign for the new headquarters building.

Although operating revenue was up, total operating expenses increased by $4.6 million—from $59.9 million in 2013 to $64.5 million in 2014, primarily due to expenses related to the move to the new headquarters building.

After 11 consecutive years of positive results, operating results in 2014 were unprofitable by $774,000 (Fig. 1). This was solely attributable to an early move to the new building, as we initially anticipated moving in early 2015, but we were able to move in December 2014.

2014 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. No serious concerns or management comments were noted. It is always reassuring to get such a report from an outside auditor.

2015 projected results
The 2015 operating income (loss) is currently projected to be below budget by $242,000 by year-end. This is mainly due to lagging product sales, as print publications are falling out of favor with customers. We are beginning to convert our content to a digital format and expect to be ready to sell this new format toward the end of 2016.

As you know, 2014 was another volatile year for investments, but in a positive way. Overall gains for AAOS investments in 2013 totaled $8.4 million and 2014 continued the positive trend with gains of $3.0 million. As of this writing, market volatility during 2015 has resulted in investment losses, but we will have to wait to see how the year ends. Thus far, October has been more positive and year-to-date, the market has recouped all of its losses. Whether this positive move will continue through year-end is anyone's guess, but we do expect the volatility to continue.

The Academy Fund, which was established in 2007 to support orthopaedic medical education and broadened in 2011 to encompass other Academy activities, was up $533,000 in 2014, resulting in a year-end balance of $7.1 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 $476,000 for the year, ending with a year-end balance of $8.2 million. As of this writing in late October, both of these funds are at breakeven for 2015.

Both these funds are managed by Morgan Stanley and, overall, have outperformed their respective blended benchmarks from the time of their inception through late October 2015.

In 2011, the Finance Committee voted to change the long-term portfolio investment manager from Wells Capital to Goldman Sachs after going through an extensive Request for Proposal (RFP) process. That transfer was made in February 2012. In 2014, the portfolio grew by $2.0 million, resulting in a year-end balance of $49.3 million. Goldman's performance since inception has been below the blended benchmark for our investments, but has improved in 2015. We recently went through another RFP process and considered other investment managers for the long-term portfolio but the decision was made to retain Goldman Sachs for another 3 years.

New headquarters building
Last year, we reported that we had broken ground for our new headquarters building. I am pleased to report that we were able to move in last December. This new building, located two blocks south of the previous headquarters building in Rosemont, Ill., is 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 AANA, AOSSM, AAHKS, and the OLC. The building and furnishings have cost approximately $54.3 million, which will be funded through debt (45 percent), contributions from the equity partners (38 percent), and fundraising (17 percent).

This exciting project came in earlier than initially thought and on budget. This is quite remarkable given the fact that the winter of 2014 was among the coldest and snowiest on record for Chicago. Although we have been in the building for about a year, the size of this project still requires close scrutiny by staff and the Board, and continues to be 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 commercial and employee insurance. Additional webinars on the 2016 budget and on membership are planned.
  • 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 2016–2020. 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 10 years and should be significantly under budget for this year as well.

The AAOS Leadership Review Group, chaired by Dr. Williams, who is joined by Dr. Maloney 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 7 years, these efforts have reduced or eliminated 41 activities, resulting in savings of more than $2.5 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, and Orthopaedic Research Funding. 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 2016–2020 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.

As I complete this year as treasurer, I want to thank you for your support. I would also like to extend my thanks to Dr. Teuscher 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's 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 and 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.

You will elect a new treasurer to succeed me next March and I am sure that whoever is elected will bring 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 excellent 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.

Frederick M. Azar, MD, is the current treasurer and past president of the AAOS.