Posted May 28, 2005 02:21 pm CDT
The ABA had a balanced budget for the fiscal year ending Aug. 31, 2004 (FY 2003-04). This was a major achievement for Executive Director Bob Stein and the entire staff, particularly considering that actual revenues were $4.6 million less than the amounts projected in the budget for the year.
The association also presents a very strong balance sheet as of Aug. 31, 2004, with $117 million in audited net consolidated assets, including $38 million in cash. Of the total assets, $45 million is held by sections in their reserve accounts.
Overall, the ABA is a $175 million a year operation. Of that amount, however, only $92 million is in “General Revenue” distributed by the Board of Governors. The balance comes from $40 million in section funds, $13 million in amounts raised by other association entities for their own use and $30 million in grants.
“Eventful” is probably the least dramatic word possible to describe finances at the ABA during the past three years. A few subjects were highly publicized, at least within the ABA. In December 2002, we learned of a multimillion dollar overrun on the Technology Initiative that had been budgeted at $12.1 million. After vendor concessions were obtained, the overrun was fixed at $7.4 million. The economic impact is an annual $740,000 of increased depreciation cost over 10 years.
Then, in the spring of 2003, Justice Howard Dana and Les Jacobs, both members of the Board Finance Committee, discovered that the cost of the ABA’s employee pension plan was about to increase to five times prior years’ levels. The problem was addressed by a combined committee of Board members and staff that recommended retention of the ABA’s defined benefit plan, with adjustments in the mechanism for calculating the amount of the pension benefit. This recommendation, which was adopted by the Board, had the effect of reducing the pension cost to the association while leaving the risk of investment returns and interest rates on the ABA.
The volunteer leadership concluded that both of these matters were known and should have been reported to the Board and to the executive director much earlier. There has since been a complete turnover in the senior financial staff. The new financial staff has a far more forthcoming approach as to the information that should be provided to the volunteers.
The association is under much more stringent financial constraints than it was only a few years ago. The Board and management have intervened to reduce General Revenue expenditures substantially from the levels that were projected as recently as 2002. By taking very aggressive action, we have managed to retain the current dues cycle at its planned three years and to increase the Permanent Reserve by 13 percent. These actions have created stress, but I am confident that maintaining the financial strength of the organization has been well worth the burden.
In 2001, management provided an analysis showing that, if the ABA continued on its then current pace of growth, General Revenue expenditures would total $517 million over the five year period from FY 2001 02 through FY 2005 06. That would have created a $53 million shortfall. The Board agreed to reduce expenditures by $26 million over that same five years, and a dues increase was adopted in February 2002 to cover the remaining $27 million.
Subsequently, we detected that revenues would be significantly less than the amounts on which the dues increase was based. A primary element in this over projection of revenue was investment income, which had been very high in the late 1990s and the first half of 2000 but significantly declined thereafter. Thus, while General Revenue had been projected in 2002 at $491 million for the five years (an annual average of $98.5 million), it turns out that actual General Revenue for that same five years will be $454 million (an annual average of $90.8 million).
This has required the ABA to reduce expenses by another $37 million over the five years to cover the amount by which revenues fell below the earlier projections. Fortunately, we identified revenue shortfalls beginning in 2002 and instituted cost reductions immediately. Had we waited to take action, the ABA would have had to impose a dues increase well before the three year dues cycle had run its course. The reduction of expenditures continued in each of the five years, as revenue shortfalls became evident. The significance of all this is illustrated by noting that in early 2002, at the time the dues increase was
adopted, management projected General Revenues of $109 million for FY 2005 06. Now, in the spring of 2005, management is working with a projected total General Revenue budget for FY 2005 06 of $91 million.
The reduction in revenues is only a part of the story. There has also been a significant change in the distribution of available funds. Over that same five year period of FY 2001 02 through FY 2005 06, four categories of expense –pension cost, health care cost, rent and depreciation–have gone from 21 percent to 29 percent of General Revenue expenditures. Translating that into dollars, the Board has $6 million less of discretionary amounts to allocate in FY 2005 06 than it had in FY 2001 02.
Everyone acknowledges that financial strength and stability are prerequisites for the ABA to do its work. But that concept often seems an abstraction in the face of immediate pressures to do more things or to continue funding for existing programs. So, there are recurring demands to spend down the reserve “just for this critical need that must be funded now.” Experience shows, however, that these urgent needs arise every year, and that the prior year’s requirement fades in relation to a new one being presented in the current year. Accordingly, without restraint, invasion of reserves becomes the norm and quickly amounts to “eating the seed corn.”
Fortunately, in good part due to a series of resolute Finance Committee chairs–Bill Robinson, Laurel Bellows and Bill Allen–the Board has not invaded reserves during the past three years, despite great pressure to do so. Instead, the ABA’s Permanent Reserve has grown from $28.5 million at the end of FY 2001 02 to $36.4 million as of Feb. 28, 2004. While this level of reserve at 37 percent of annual net General Revenue expenses remains well below the 50 percent target set by the Board, the growth in the reserve is a remarkable outcome given the financial challenges faced by the association over the past four years.
The dues increase adopted by the House of Delegates in February 2002 was designed to cover the three year period of FY 2003 04 through FY 2005 06. By imposing severe cost constraints, we will make it through the three years and will not have to accelerate the next dues increase. Stretching the dues cycle beyond its planned three year span, however, will be much more difficult.
In the summer of 2004, I initiated a review of revenue and expenses to evaluate the possibility that we could extend the current dues cycle to a fourth year (FY 2006 07). To give us the best shot at extending the dues cycle, the projections assumed that future years’ expenditures would remain constant at FY 2003 04 levels of actual costs, allowing for increases only in selected areas that were largely uncontrollable.
The results of this effort are summarized in the line graph below. [Chart in print version of the magazine.]
Obviously, we could affect the outcome by adjusting the revenue (red) line upward or bringing the expense (blue) line down. Neither, however, provides a clear path forward. As to revenue, we have just gone through a very difficult era in which the association operated on optimistic projections of revenue. Although that approach allowed more forgiving budgets at the beginning of the year, a great deal of scrambling was required during the year to bring expenses down to the revenues that were actually achieved. That was not a healthy way to run the association. The current projections contain revenue amounts that the Financial Services senior staff and I believe are realistic. Efforts are under way to enhance nondues revenue, but the beneficial results of those efforts may not be experienced for several years.
At the same time, it is very difficult to lower the expense trajectory (blue line) without making significant structural changes in the organization. Analysis shows that the major cost increases are in only a few items. For example, the projected $2 million expense increase from FY 2005 06 to FY 2006 07 is explained by increases in salary, health care and rent. Since the ABA’s rent obligation is fixed by lease, the only place to effect substantial savings is in personnel costs, which constitute nearly 60 percent of total expenditures.
The debate on the Pension Plan last year gave the Board a taste for the reaction that can be anticipated to any effort to address personnel costs. But those of us who are entrusted with positions of leadership should be willing to deal with the criticisms that come with taking on the hard issues. Examination shows, however, that the staff people either provide the critical association infrastructure or support admired programs. Under our present procedures, it is very difficult to choose among those services and programs because there is no metric to compare the value of one activity against another. In my judgment, past actions to make blanket percentage cuts in staff have been quite harmful to the organization.
It is clear to me that the ABA must be restructured to consolidate entities and to shift activities to sections. The Program Committee of the Board has made some strides in taking this on substantively, but it is a long and arduous process. We will need to monitor carefully new initiatives, particularly those with a long funding tail, to prevent exacerbating the current situation.
Everyone recognizes that a dues increase, while raising more funds, will likely have an adverse effect on membership retention. Last year, the ABA obtained an overall gain in membership because of an increase in classes requiring lower dues. But the association lost members in its highest dues paying classes, in my judgment primarily attributable to the dues increase that went into effect last year. As a result, dues revenue was $2 million less than projected. The assessment of any future dues increase will include a realistic attrition factor.
This is all preliminary at this point because the Board has not yet assessed the contours of a dues increase, if we are to have one. This subject will be evaluated over the next several months and will be discussed more thoroughly at the Board meeting in June and at the House of Delegates in August at the ABA Annual Meeting.
The American Bar Association has made a great deal of progress in the last four years, notwithstanding all the problems we faced. We developed new reporting formats that give the Board, for the first time, an insight into the financial intricacies of the ABA. Largely through the good work of Chief Financial Officer Janet Gibbs and Controller Kay Geary, the ABA now is able to reconcile the reports that are received by the Board to the numbers that are attested to by the ABA’s outside auditors–again something that we did not have before. Most significantly, we have a new era in the ABA, where meaningful information (not just undifferentiated data) is provided to the Board that allows it to make policy decisions. The challenge will be for the Board members going forward to use that information to make the hard decisions that lie ahead.
I believe that the treasurer serves a unique function in the American Bar Association by providing the long term financial perspective to assure that the good works of the ABA can be sustained in the future. This makes the treasurer responsible for consistent adherence to basic principles of fiscal prudence. That credo is then passed along to the treasurers that follow. So, while we are not necessarily aware of the specific issues that our predecessors dealt with, we have assurance that they made responsible decisions to preserve the long term health of the association.
Whatever success I have had in fulfilling this assignment is largely attributable to many others, whom we cannot name due to space restrictions. But I seek your indulgence to mention a few. Bob Stein has combined being an extremely effective leader with unfailing personal kindness. Treasurer elect Bill Robinson–who will be a very strong treasurer of the ABA–has been my confidant and valued adviser, and in truth he has been my mentor while graciously portraying the reverse to everyone else. My partners at Rogers Joseph O’Donnell & Phillips have generously given me the time to do this work. I give my greatest thanks to Phyllis, my wife of 47 years, who–when I first told her that I was considering running for treasurer–indicated her enthusiasm by responding: “Would they elect a recently divorced person?” She has nonetheless supported me through the good and difficult times in the last four years, while she earned the universal affection and admiration of the entire ABA family.
It has been a great honor for me to serve as the treasurer of the American Bar Association.