ABA Treasurer's Report for Fiscal Year 2021
Each year, the treasurer provides a report on the association’s finances that is printed here in the ABA Journal. In these reports, I will seek to provide helpful information about the association’s financial health as well as current and relevant trends.
In my second Journal report as treasurer, I will cover the association’s fiscal year 2021 audited results, finances through the first eight months of fiscal year 2022 (unaudited), an update on the association’s pension liability and progress made on the fiscal year 2023 budget.
Fiscal year 2021 consolidated results
The fiscal year-end 2021 financial statement audit was successful. We received a clean (unqualified) opinion from our auditor, Grant Thornton. See the ABA financial statements and audit report at ABAJournal.com/audit_report_2021.
Fiscal year 2021 was challenging due to the lingering impacts of the COVID-19 pandemic, but our association did an excellent job managing expenses to mitigate revenue shortfalls.
In spring 2020, when the fiscal year 2021 budget was produced, we knew that the pandemic would impact financial results, and we reduced revenue accordingly for what we knew at the time. Despite our attempt to rightsize for fiscal year 2021, you can see in the table to the right that total operating revenue for fiscal year 2021 was $180.1 million, or $12.9 million short of budget. Although grant revenue continued to increase—by almost $14 million more than budget and $4 million more than prior year—it was not enough to overcome the prolonged effects of the pandemic, as the largest component of the $12.9 million total revenue shortfall was meetings-related. The continued effects of the pandemic meant the association was unable to conduct many of the in-person meetings it had anticipated.
Thankfully, our association was able to mitigate completely the revenue shortfall to budget from the pandemic, as total operating expenses were $29.5 million lower than budget. Having fewer in-person meetings also meant fewer meetings-and-travel expenses for the association. Staff also did an excellent job of finding other efficiencies, such as saving significant money on printing and postage by performing more work digitally.
As a result of all operating activity, we ended the year with a consolidated operating surplus of $5.3 million, which was $16.5 million better than the $11.3 million budgeted operating deficit.
Below the operating line, the association benefited from incredibly strong financial markets, with an unprecedented $56.1 million of investment gains. Our association also used $14.7 million of investments to support operations and incurred $1.4 million of nonoperating net expenses. The strong financial markets also benefited our pension plan, as we recognized a $21.4 million pension gain after determination of the association’s pension liability by the association’s independent actuaries; a more in-depth discussion of the association’s pension obligation will be provided later in this report. As a result of the activity above, the association’s net assets increased by $66.7 million through the 12 months ending Aug. 31, 2021.
Fiscal year 2022 results through April 30
Fiscal year 2022 has continued to provide revenue challenges as the effects of the pandemic have lingered, particularly in the area of in-person meetings. However, there are reasons for optimism. The table below shows that while consolidated operating revenue through April 30 is $7.6 million lower than budget, it is $14.5 million higher than prior year to date. The positive grant revenue trends we have seen over the past several years have continued, as grant revenue is $2.4 million higher than budget and $8.3 million higher than prior year to date, demonstrating the great value of our good works both domestically and internationally. Although fiscal year to date meeting fee revenue is $5.7 million lower than budget, the month of April saw the highest amount of meetings revenue since March 2019, almost a year before the pandemic began, a hopeful sign for the future.
Although consolidated total revenue has fallen short of budget through April, our association has continued to do a commendable job managing expenses, as total expenses are $14.5 million lower than budget.
As of April 30, 2022, the association’s consolidated net operating deficit of $3.2 million is $6.9 million better than the budgeted deficit of $10.1 million and almost flat from prior year.
The association has a modest $3.2 million operating deficit, but its $38.9 million decrease in net assets is greatly impacted by the considerable financial market volatility this year, which has resulted in the $27.5 million of investment losses seen in the table above, eliminating part of the investment gains we enjoyed in fiscal year 2021. These losses illustrate the importance of the association’s past prudence in safeguarding our investments, as despite these unfavorable recent results, the association still has a healthy long-term investment balance of $275.5 million as of April 30, 2022. Through April 30 of fiscal year 2022, the association has used $7.5 million of investments to support operations and has $0.7 million of nonoperating net expenses. Thankfully—and fortuitously—association financial services staff timed the sale of general operations investments that support association activities so they were sold before Jan. 31, when the markets were still near or setting record highs.
Financial position as of April 30
Despite the recent substantial decline in financial markets and its significant impact on our investment portfolio, our financial position remains very strong, as we have total assets of $315.4 million and liabilities totaling $131.6 million, resulting in total net assets of $183.7 million. Of the $183.7 million of total net assets, $125.9 million are unrestricted sections, divisions and forums net assets. The remaining $57.8 million are general operations/Fund for Justice and Education net assets (of which $16.1 million are restricted). Below is our association’s balance sheet. Pension liability update
The association’s pension liability continues to improve. The pension liability is calculated by our actuaries once per year. This calculated balance is as of the end of the fiscal year, or Aug. 31, 2021. During fiscal year 2021, our net pension liability decreased by $18.5 million.
The pension plan is a separate legal entity that has its own assets consisting of high-quality liquid investments. The pension liability is determined as the difference between the pension’s assets and the plan’s obligation, or the amount owed to current and future retirees in retirement benefits. During the fiscal year, both components of the liability improved as follows:
The pension assets grew by $12.0 million to $158.1 million because of strong financial market returns.
The pension obligation declined by $6.5 million to $167.8 million. The decline was due to the fact that the plan paid $11 million in benefits and because interest rates increased modestly through Aug. 31, 2021, more than offsetting the increase in accrued amounts owed to plan participants. Since then, interest rates have increased significantly. If rates stay at this higher level, the pension obligation will fall further and reduce the pension liability even more.
The association has been successful in managing this significant obligation. In fiscal year 2016, the pension liability was $95 million. As of Aug. 31, 2021, it is less than $10 million, an $85 million improvement. We accomplished this through $80 million of low-cost loans used to fund the pension and several transactions that reduced the number of individuals in the pension plan. Of the $80 million of loans, $50.5 million has been repaid as of April 30, leaving a remaining balance of $29.5 million.
Fiscal year 2023 budget
As of this writing, staff has completed initial input of our association’s preliminary fiscal year 2023 budget. Preliminary consolidated budgeted revenue is about $207 million, an increase of more than $9 million from the final fiscal year 2022 budget.
As discussed earlier in this report, grant revenue is up $8.3 million over last year for the eight-month period ending April 30, 2022. Looking forward to next year, we expect this growth trend to continue as the grants’ full-year total budget of $86.4 million reflects a total increase of over $13 million from the fiscal year 2022 budget. This increased grants activity also benefits the association’s general operations in that it allows the association to recover more of its overhead costs from grants. The fact that unrelated third parties want to fund our work convincingly demonstrates its value. We should all take pride in the tremendous work our association performs for the betterment of our world.
Although grant activity is expected to increase significantly, general operations revenue is expected to decrease by about $4 million from the fiscal year 2022 budget. Most of the decrease is from using less investment income in operations, but both dues and meetings-related revenue are also expected to slightly decline from the fiscal year 2022 budget, emphasizing the need to attract new members and improve retention of existing members.
To compensate for this decreased revenue and achieve the required general operations balanced budget of revenue and expenses that support our core activities, expense savings were found in several areas: the increased overhead expense recoveries from grants mentioned earlier; shared staff and other efficiencies identified by senior staff; and a reduction in general operations contributions to sections, divisions and forums.
On an aggregate basis, budgets for sections, divisions and forums have remained stable year over year.
The budget is preliminary, as much can occur in the time remaining of fiscal year 2022. We are encouraged by the diligent efforts of staff and our member leaders to find efficiencies in their areas while not materially disrupting efforts to acquire, engage and retain members. We look forward to a successful fiscal year 2023 and beyond. Thank you for the opportunity to serve as your treasurer.