November Board Meeting Focus: ACVIM Financial Management November 14-17, 2013 Dear Board Members, Regardless of the financial structure that we design for the ACVIM, the Board of Regents is the body that has a legal (fiduciary) responsibility for the College’s finances. Board members of non-profit organizations are expected to: review and approve all financial plans; monitor the organization’s financial health; confirm that management has instituted appropriate financial controls; make sure an independent audit of financial results is conducted on a regular basis; confirm that management has filed IRS 990s on time and makes them publically available; identify key financial risks and manage them; and ensure that applicable legal policies are in place and are enforced. If this responsibility is not met, Board members can be held legally accountable. More important, the better we manage the finances of the organization, the more financial opportunity we will have to fulfill the ACVIM’s mission. While our finances are important, making money is not the focus of the ACVIM. We have a number of pressing strategic goals and initiatives that require our attention and energy. At this board meeting, we should be ready to move through the financial discussion efficiently with the goal of making definitive decisions (during the meeting). We also have several important proposals to consider, and we should aim to reach conclusions about how we want to proceed with each of these before the meeting ends. At the end of the summer, I circulated a proposal to facilitate our work on these issues. I received feedback from a few of you that was incorporated into a final document. The plan was then discussed with Leah (IAC chair) and Deb (FC chair) in September. The document included the following seven general questions for us to consider at the November Board meeting. Finance related Questions 1. Does our current method of financial management ensure good oversight of the college’s resources, consistency in management philosophy, and competent participation and understanding of our financial status? 2. Are our financial reserves adequate and if not, how should the amount and management of that money be modified? 3. How should we decide to use the money the ACVIM has available? 4. What should be the process of evaluating and funding future budget requests that require more a significant investment on the part of the ACVIM? Investment related Questions 5. Do we have the Investment Advisory group that best fits the needs of our College? 6. Do we receive adequate information and communication from our financial advisor? 7. What is an appropriate balance of risk versus growth in our investment portfolio? The first four of the questions apply to our financial management, so Deb formed a subcommittee with some of the Finance Committee members (Deb, Joe and Allen) to discuss these questions and provide their perspectives. Their recommendations and opinions are included in this document. The remaining three questions relate to management of investments. Leah has discussed some of this information with the IAC and we can look forward to hearing the Committee’s input at the Board meeting. We have also invited both UBS and a second investment company, Syntrinsic, to provide 30-minute presentations. ACTION: IN PREPARATION FOR THE NOVEMBER BOARD MEETING, PLEASE LOOK AT THIS INFORMATION AND CONSIDER THE QUESTIONS THAT WE WILL BE DISCUSSING/ANSWERING. We will have a great deal to cover and it will help if everyone has had a chance to examine the information included in this document before the November Board meeting.
2 I claim minimal knowledge of finances and investment. The information that I have gathered here has mainly come from websites, and we all know how much we love the websites that teach our clients all they need to know about their pet’s health. I have mainly provided general concepts and am providing this information just to get our discussions started. There is nothing set in stone and, as we discuss this information, everyone’s ideas are welcome. I also will be counting on people like Roberta, Allen, Joe, and others to help fill in the blanks as we move through this process. I hope that all of you will come into this meeting knowing that we can set a strong financial platform for accomplishing the real business of the ACVIM, which is to enhance animal and human health by advancing veterinary internal medicine through training, education, and discovery. There are five sections in the following document: one for each of the “financial” questions and a final section regarding our investments. The information relating to each section is arranged in this order. 1. The general question/topic to be discussed 2. Background material 3. The Finance Subcommittee’s perspective and comments 4. Specific questions: what we will consider and potentially answer. These are in bold red Thanks in advance for taking the time to look at this document and I will see you very soon in Denver.
SECTION 1 DOES OUR CURRENT METHOD OF FINANCIAL MANAGEMENT ENSURE GOOD OVERSIGHT OF THE COLLEGE’S RESOURCES, CONSISTENCY IN MANAGEMENT PHILOSOPHY, AND COMPETENT PARTICIPATION AND UNDERSTANDING OF OUR FINANCIAL STATUS? BACKGROUND MATERIAL Currently the ACVIM’s finances are managed primarily by the CEO and staff accountant, the Finance Committee (FC), and the Investment Advisory Committee (IAC), with final approval by the Board of Regents (BOR). The IAC provides recommendations to the FC and that committee provides recommendations to the BOR. The following are descriptions of the CEO/Staff and Committee responsibilities: According to our by-laws, the Executive Director is a non-voting member of the BOR, serving as Secretary/Treasurer & Corporation Secretary. Specific responsibilities of the CEO/CFO and staff include: prepare annual budget, prepare and present all financial statements to the Financial Committee, monitor all accounts including investments, pay all expenditures ranging from payroll to costs associated with the Forum, collect and account for all income including membership fees, exam registration fees and Forum related fees, conduct a yearly audit and execute all financial activities in accordance with the law. COMMITTEES For Reference: ACVIM Finance Committee as described in the By-Laws: Members: The Finance Committee consists of the Chair of the Board, the President, the President-Elect, and the VicePresident. The Executive Director is a non-voting member of the BOR, serving as Secretary/Treasurer and Corporation Secretary. Duty of the FC: The annual operating budget for the College and for each specialty group will be prepared by the Finance Committee under the direction of the President of the College and with the assistance of the Executive Director and the Specialty Presidents. The budget shall be approved by the Board of Regents at the mid-year Board meeting. ACVIM Finance Committee as described in the Charter from 2011 Overall Roles and Responsibilities The finance committee is responsible for recommending financial policies, goals, and budgets that support the mission, values, and strategic goals of the ACVIM to the Board of Regents. The committee also reviews the organization’s financial performance against its goals and proposes major transactions and programs to the Board of Regents. Committee Composition In total, the committee will have 9 voting members, as outlined below. The following committee members will serve ex-officio as voting members: ACVIM President – serves as committee chairperson ACVIM President-elect ACVIM Chairperson ACVIM Vice president Immediate past ACVIM chairperson ACVIM Foundation President Two specialty presidents will also serve on the Finance Committee, each with a 2-year term. Terms should be staggered so that both specialty presidents will not rotate off simultaneously. The two-year term should begin as the specialty president begins his/her second year in office, and be completed at the end of the third year in office. If more than a single specialty president is to begin the second year in office simultaneously, one of these will be chosen to serve, in consultation with the ACVIM President, based on those individuals knowledge of finance and willingness to serve. This rotation will prevent any one specialty college from having its president continuously serve on the finance committee. In addition, the final member of the committee shall be a volunteer with a background in finance appointed by the President. This member need not be a diplomate of the ACVIM, and is not considered a member of the ACVIM BOR. This member, who will be eligible to cast committee votes, will be re-appointed annually or replaced. The ACVIM board liaison will serve as an exofficio but non-voting member of the finance committee.
4 The CEO of the ACVIM will report to, but will not be a member of, the Finance committee. The CEO will work with the Finance committee to develop and implement budgets and is expected to attend all meetings of the Finance committee The CEO may assign other staff members to help achieve the goals of the finance committee, but these staff will not be expected to attend committee meetings unless specifically requested to do so. Committee Meetings The committee meets at least twice a year at the ACVIM Forum and at the “mid-year” BOR meeting. Additionally, telephone conference calls are to be held at least twice yearly, between the in-person meetings. Other meetings/call may be held when deemed necessary by the committee chairperson (i.e., the ACVIM President). Members of the Finance committee are expected to attend each committee meeting, in person or via telephone or videoconference. The Finance committee may invite other individuals, such as members of management, auditors or other technical experts to attend meetings and provide pertinent information, as necessary. The presence or video/teleconference participation of a majority of voting committee members shall constitute quorum. The Finance committee may act only on the affirmative vote of a majority of the votes cast or by unanimous consent. Minutes of these meetings shall be recorded and presented to the BOR at the next scheduled meeting following the finance committee meeting. Responsibilities The Finance committee’s specific responsibilities include: Review of all financial reports provided by staff to allow informed performance of duties and responsibilities. Recommendation of policies that maintain and improve the financial health and integrity of the organization. This includes review of fees such as Forum registration, examination, certification, etc., review of reimbursement policies for volunteers and staff, as well as review of staff salaries, bonus, and benefits. Review and recommendation of a long-range financial plan for the organization. Recommendation of an annual operating budget and annual capital budget consistent with the long-range financial plan and financial policies. (A budget for the upcoming fiscal year should be drafted in July, reviewed by the finance committee by mid-August and available for review by the full voting BOR by September 1.) Review and recommendation of capital expenditures and unbudgeted operating expenditures that exceed management’s spending authority ($10,000). Expenditures of >$10,000 which fall within the approved budget will not require review. Review of the financial aspects of proposed new ventures, programs and services, as well as proposals to discontinue programs or services, and making action recommendations to the board. Requiring and monitoring of corrective actions to bring the organization into compliance with its budget and other financial targets. Review of outcome of requested audits and financial reviews. Review of tax documents including form 990 Review of proposals for the issuance of debt and make recommendations concerning these proposals to the BOR. Review of ACVIM Foundation budget as ACVIM BOR must ultimately approve Monitoring of the financial performance of the organization against approved budgets and benchmarks. Specifically, review compliance with ACVIM budget guidelines, and suggest ways to address those areas out of compliance. Reports: The committee will receive and review the following reports: Quarterly, and annual financial statements and account balances (monthly statements and balances on request) Reserve funds, money markets, and investment reports Liabilities (e.g., credit card debt, accrued vacation, overdue accounts receivable) Tax forms including the 990 forms Key financial ratios Key operating benchmarks (e.g., membership dues statistics, certification and exam statistics) Budget to actual expenditures on a quarterly basis Income grouped as Forum related or non-Forum related (cost centers summary) Results of any financial reviews or audits “Reserve Funds” totals, defined as all unrestricted, liquid assets of the ACVIM. Total Reserves”, defined as the “Reserve funds” plus the equity that the College has in its real estate and equipment. Performance compared to budget guidelines
5 Investment Advisory Committee Description: There is no mention of the IAC in the current by-laws. Membership (6 members): Committee Chair- Past Chair of the ACVIM Board of Regents; 2 Diplomates with knowledge of investments; External Financial Advisor; Finance Committee Chair and ACVIM President; Chief Executive Officer Charge: The Board of Regents of the American College of Veterinary Internal Medicine is charged with the fiduciary responsibility of managing the investments of the College and Foundation for the purpose of providing needed current income and increasing the principal amount of the funds. The investment responsibility for the funds is that of the Board of Regents, which has delegated that responsibility and authority to its Finance Committee that takes into consideration recommendations from the Investment Advisory Committee. The Investment Advisory Committee presently believes it can discharge that responsibility by: Hiring competent outsider-investment counsel. Setting investment guidelines and monitoring counsel’s compliance with them. Reviewing purchases to ascertain that these securities have appropriate qualities and an acceptable risk. Striving to assure continuity of income and investment and an appropriate amount of appreciation. Discharging investment counsel when its relationship or investment results are no longer satisfactory. INVESTMENT PERFORMANCE AND BENCHMARKS We believe that it is reasonable to expect long-term fixed income performance (net of fees) to be in excess of Barclays US Aggregate, and equity performance to achieve returns in excess (net of fees) of Standard and Poor’s Index of 500 Common Stocks, on an annualized basis over moving three- and five-year time periods. PORTFOLIO MIX We expect our investment fund to have a long-term positive cash flow and accordingly, subject to market conditions, it is our policy, to have the investment committee establish a meaningful relationship between equity and fixed-income investments. We have established the following asset allocation guidelines for our investment fund: Asset Class Total Equities International Equities Fixed Income Cash and Equivalents
Minimum 40% 0% 30% 0%
Target 45% 5-10% 40% 5%
Maximum 70% 20% 60% 20%
GENERAL It is expected that the Investment Advisory Committee, Finance Committee and Board of Regents will not be obligated to any investment counselor(s) for more than a one-year period. Investment counselor (s) shall report to the ACVIM Chief Executive Officer and the Chair of the Investment Advisory Committee as follows: Monthly - transactions and current holdings report. Quarterly - portfolio valuation report showing cost, beginning and ending market value of all holdings, comparative returns for the funds and their respective benchmarks, fees, income, industry diversification and percentage of the portfolio accounted for by each holding. Annually - Investment manager will report to committee on portfolio performance, economic outlook, investment strategy, organizational changes, portfolio risk, and future return estimates. This meeting will take place at the November mid-year board meeting. The Investment Advisory Committee will periodically report to the Finance Committee and Board of Regents, but at least on a semi-annual basis, at the November mid-year board meeting and the annual Forum meeting, to assess the impact of the following topics on the preservation of the real value of the College and Foundation invested assets. 1. Investment Policies 4. General health of the financial markets & economy 2. Spending Policies 5. Recommendations for change, as needed. 3. Investment Managers’ performance
EXAMPLES OF FINANCIAL STRUCTURE FROM SIMILAR ORGANIZATIONS ACVS
https://www.acvs.org/sites/default/files/files/Diplomates/Reference-Policy/ACVS-Constitution-and-Bylaws.pdf Treasurer Committees Appointed by BOR; non-voting member with some CFO responsibilities; 3 year term, unlimited consecutive terms None The TREASURER shall be an appointed, non-voting member of the Board of Regents and shall be the custodian of all the monies and financial records of the College. The Treasurer shall oversee keeping full and accurate books of account, containing a record of all monies received and expended, which books shall be the property of the College and open to the inspection of the authorized officials at all reasonable times and places. The Treasurer shall report to the Board of Regents the names of all members in arrears. The term of office is three years. This officer shall be subject to the terms of the Protocol for the Treasurer as adopted by the Board of Regents. VECCS http://www.veccs.org/index.php?option=com_content&view=article&id=73&Itemid=275 Treasurer Committees Elected by Members; voting board member; 3 year term, no consecutive The Finance Committee shall consist of three (3) members terms and the Financial Advisor may be an ex-officio member of the Committee. The Treasurer shall serve as Chairperson, The elected officers of the Society shall include President, Presidentand the Past-President will be a member. The remaining Elect, Recording Secretary, and Treasurer. The Treasurer shall provide member shall be appointed by the Chair with the approval oversight and coordinate all financial affairs of the Society. The of the President. This Committee shall prepare an annual Treasurer will present a report of the financial status of the Society at each Annual Business Meeting of the Society and at such other times as budget for the Society and make recommendations on fiscal matters to the Board of Directors required by the Board of Directors.
https://www.avma.org/About/Governance/Documents/avma_bylaws.pdf Treasurer Elected by the Executive Board; Voting member with CFO responsibilities 1 year term with 6 consecutive terms The Treasurer shall be the principal accounting and financial officer of the Association and shall have charge of and be responsible for the maintenance of adequate books of account for the Association; shall have charge and custody of all funds and securities of the Association, and be responsible therefore, and for the receipt and disbursement thereof; shall deposit all funds and securities of the Association in such banks, trust companies, or other depositories as shall be selected in accordance with the provisions of these Bylaws. The Treasurer shall be invited to attend and participate in all regular and special meetings of the Executive Board. The duties of the Treasurer may be assigned by the Executive Board in whole or in part to either the Executive Vice President or Assistant Executive Vice President. Only voting members who have been voting members of the Association for a period of at least five (5) continuous years immediately prior to their election shall be eligible to hold the office of Treasurer, Executive Vice President, or Assistant Executive Vice President. With the exception of the Vice President, officers shall serve a one (1) year term in office, or until such time as their successors are duly elected, qualified, and take office. The Treasurer may serve up to six (6) consecutive terms. The Vice President shall serve a single two (2)-year term. The Treasurer, Executive Vice President, and Assistant Executive Vice President shall be elected by the Executive Board. Society for Theriogenology http://www.therio.org/?page=SFTByLaws Treasurer Elected by members; Voting Board member; 1 year term with unlimited consecutive terms
Committees No Specific Committee. Financial oversight is the responsibility for the Executive Board who has the authority to delegate parts of financial management and oversight to individuals and agents
The Secretary-Treasurer shall be elected by the Board and serve for a period of one year. The Secretary-Treasurer may be reelected to successive terms to promote consistency in managing fiscal affairs. The Secretary-Treasurer shall keep the records of the proceedings of this Society. He/she shall receive all applications for membership and shall present such applications to the Board for approval at the earliest moment. He/she shall cause to be drafted all official correspondence authorized by the Board or any member thereof. All or part of the responsibilities of the Secretary-Treasurer may be transferred to the Executive Director; however, he/she will provide oversight of fiscal affairs and periodically review business and financial practices. He/she shall, at each annual meeting, give a detailed account of receipts and disbursements; such statement must be duly audited by the Board or a representative of the Board, and signed by the President.
7 TREASURER OPTIONS FOR NON-PROFITS What Treasurers Do and Don’t Do for the organization (references for this information are sited below) A treasurer oversees the financial activities within the organization. In this capacity, s/he is responsible for reviewing the activities of the Chief Financial Officer and serves as a liaison between the financial staff and the members of the Board. This role is especially important when the Board membership is not required to have a financial background and there are few mechanisms in place to educate Board members in this responsibility. To be effective in this role, the Treasurer must not only have the understanding of nonprofit finances. S/he must also possess the communication skills to assist Board members in their evaluation and understanding of the organizations finances. In most cases, the Treasurer also serves as the chair of the Finance and Investment committees, but not the Audit committee. In some cases, the Treasurer also serves as the Chief Financial Officer (CFO). Under these circumstances, the Treasurer/CFO is usually a member of the organization’s paid staff. The Treasurer/CFO is directly responsible for bank account maintenance, budget and financial report development, development of financial policy, tax reporting, and verifying that all of the finances of the organization are handled in accordance with the law. The Treasurer/CFO can also be the chairperson of the Finance, Investment Committees but not the Audit committee. Regardless of how the job of Treasurer is defined, the Board of Regent members remain the fiduciary body that is responsible for the health of the ACVIM finances. We should consider if a Treasurer can help us improve our understanding of the finances of the ACVIM. However, having a Treasurer does not relieve the BOR of its fiduciary responsibility. Perhaps we also need to consider what mechanisms we should have in place to better prepare (orient) the Board on this and other functions so that we have the knowledge to the job well. FINANCE SUBCOMMITTEE PERSPECTIVE AND COMMENTS There was general agreement of the members of the ad hoc committee that a consistent, knowledgeable voice should become part of the finance committee’s structure. Over the years, we have often been blessed with a member of the BOR Executive Committee who has a keen interest in or understanding of higher-level finances – and this has benefited the College by having this person to help guide the process – along with the expertise of our CEO, Roberta, and more recently, our outside member/accountant, Jason Deshayes. It is the opinion of this group that a Treasurer should be added as a long term addition to this committee, a diplomate that has financial background, and is appointed by the President and/or elected by the BOR, serving for 3-5 years, with re-appointment possible. The exact role of the treasurer would need to be further discussed, but could range from someone working closely with the office staff to take care of financial details all the way to functioning somewhat like Bill Fenner in his advisory role – a key, if not critical player, but not necessarily voting (although I am not against this being a voting position – I think however if it is a voting position it might need to become an elected position). This position would serve as the key link between each succeeding BOR administration and the ACVIM administrative staff for maintenance of financial continuity, advice, and BOR oversight. The fact that this individual would be a diplomate would provide a link to the membership that would also help to keep the financial decisions focused on doing things for both the best financial interests of the College as well as the membership. The AVMA has a somewhat analogous position of Treasurer that is elected by their Executive Board (http://veterinarynews.dvm360.com/dvm/Veterinary+news/Schmidt-to-serve-as-next-AVMA-treasurer/ArticleStandard/Article/detail/705918).
The position is currently filled by Dr. Barbara Schmidt
SPECIFIC QUESTIONS: TREASURER According to the By-laws of the ACVIM, the executive director (which was upgraded to the Chief Executive Officer or CEO) is the organization’s Treasurer and Secretary as well as a member of the Finance Committee. In contrast, the Charter for the ACVIM Finance Committee states, “the CEO of the ACVIM will report to, but will not be a member of, the Finance committee”. Do we feel a Treasurer would improve the financial management of the ACVIM? If yes, then Should the ACVIM Treasurer be the CEO, CFO (staff position) or a diplomate? Should the Treasurer be the chair of the Finance and/or Investment Committees? If we decide that the ACVIM could benefit from a Treasurer who is a diplomate rather than an ACVIM staff member then What should the qualifications and responsibilities of the Treasurer be? Should the Treasurer elected by the members, selected by the Board of Regents, or appointed?
Should the Treasurer a voting member of the Board of Regents? Should the Treasurer be paid for his/her services? What is the preferred term of the appointment and are consecutive terms allowed? If the term is greater than a year, should there be an annual evaluation of the Treasurer?
COMMITTEE OPTIONS FOR NON-PROFITS When reading about financial management for non-profits, most documents suggest that we have three committees for an organization of our size. These include a Finance Committee, Investment Committee, and Audit Committee. FINANCE COMMITTEE (The ACVIM Finance Committee is described on pages 3-4 of this document) The typical tasks of the Finance Committee include: 1. Overseeing the financial dealings of the organization 2. Evaluating the organization’s fiscal operation, and those in charge of it 3. Ensuring that the financial elements of the organization are in accord with its vision, mission, and strategic plan 4. Reporting to the Board and/or Executive Committee about Financial condition of the organization, and/or any financial irregularities or inefficiencies 5. Participating in the annual audit (assuming the organization does not have an audit committee) Several advisory groups suggest that the membership of financial committees should be kept small and that the number of Board members on each committee be kept to a minimum. It is suggested that most committees work more effectively when the member number is kept to five people or less. When finance committees are comprised mainly of Board members, the efforts of the members are limited by their other responsibilities. In addition, Finance committees act in an advisory role for the Board, and when the committee is made up of a subpopulation of the Board, this can unduly influence the decision-making by the Board as a whole. In contrast, other resources indicate that having Board members comprise most or all of the Finance committee members is an effective use of time, especially if the members are capable of easily grasping the financial information that the Finance committee is tasked to oversee. The design also works well when the budget is not very complicated and the financial decisionmaking within the organization is not elaborate or contentious. SPECIFIC QUESTIONS: FINANCE COMMITTEE Is there a need to modify the duties of the FC? Is there a need to modify the member composition of the Board (beyond that of adding a Treasurer) INVESTMENT COMMITTEE The current role of the Investment Advisory Committee is provided on page 5. In its current role, this committee is advisory to the Finance Committee. There is no official Charter for the Committee. Documents on Financial Management of Non-Profits list the Investment Committee as a separate advisory committee to the Board. Not all nonprofits need a separate Investment committee, but it is recommended if the organization’s investments exceed $500,000. SPECIFIC QUESTIONS: INVESTMENT COMMITTEE Does the ACVIM need an IAC or should investments be handled by the FC? Is there a need to modify the duties and/or membership of the IAC? Should IAC report to the FC or the Board? AUDIT COMMITTEE An audit is a formal examination of an organization or individual's accounts or financial situation. The ACVIM has an audit performed on a yearly basis. Establishing a separate Audit committee is mentioned frequently in the literature about Non-Profit financial management, and is considered by some to be of greater importance that the Finance or Investment committees. The Audit committee selects the outside auditor, meets with the auditor to receive the report and management letter and meets with the full Board and the senior staff to share the auditors finding and recommendations. The Audit committee also follows up to
9 make sure that the recommendations of the auditors have been followed. It is suggested that the members of this committee be financially literate, include at least one financial professional. In addition, neither the Treasurer nor the Finance Committee chair should be members of the Audit committee, since the audit reviews the activities of the Treasurer and Finance committee. While there may not appear to be a need for the ACVIM to have an audit committee, I signed the contract for our current auditors. In that contract, there are several statements of the following nature: “Our services cannot be relied upon to detect errors, irregularities, employee or management dishonesty, fraud, embezzlement or other illegal acts (hereinafter collectively referred to as "Irregularities"). However, we will design our audit to detect such Irregularities that have a direct and material effect on the Consolidated Financial Statements. In performing our services, we will advise the appropriate level of management of any such material Irregularities that come to our attention. However, you must u n d e r s t a n d that our s e r v i c e s cannot be r e l i e d upon t o d e t e c t s u c h Irregularities. If you have concerns about such matters, please discuss them with us. It may be possible to design a special engagement to assist you in uncovering such Irregularities.” An Audit committee will assist us in making sure we are doing all that we can to manage and oversee the ACVIM finances. SPECIFIC QUESTIONS: AUDIT COMMITTEE Should the ACVIM have an Audit committee? If so, what are the committee’s responsibilities? Who should serve on that committee? REFERENCES
More Effective Boards: A Detailed Guide (15 pages) The Bridgespan group , 501©(3) organization http://www.bridgespan.org/Publications-and-Tools/Nonprofit-Boards/Resources-for-Board-Members/More-Effective-Boards-DetailedGuide.aspx White Paper: Board Committee Structure American Society of Association Executives, 2011 http://www.asaecenter.org/Resources/whitepaperdetail.cfm?ItemNumber=24191 Community Toolbox Chapters Planning and writing an annual budget Managing Accounting Handling Your Money Understanding Non-Profit Status Creating a Financial and Audit Committee Workgroup for Community Health and Development. University of Kansas, 2013 http://ctb.ku.edu/en/table-of-contents/finances/managing-finances/finance-committee/main Nonprofit Accounting Basics chapters Board Accountability The Finance Committee The Investment Committee The Audit Committee Greater Washington Society of CPAs, Educational Foundation, 2013 http://www.nonprofitaccountingbasics.org/governance
10 SECTION 2: ARE OUR FINANCIAL RESERVES ADEQUATE AND IF NOT, HOW SHOULD THE AMOUNT AND MANAGEMENT OF THAT MONEY BE MODIFIED? BACKGROUND MATERIAL ACVIM’S CURRENT POLICY $50,000 in Replacement Capitol Safety Stock Capital :1 year of total expenses which is currently equal to about 3.6 million as of June 2013 Restricted funds: Funds obtained (donated) for a singular or specific purpose ($800,000) OPERATING RESERVE CONSIDERATION FOR NON-PROFITS Information taken from “Operating Reserve Policy Toolkit For Nonprofit Organizations”, First Edition 2010, sponsored by the National Center for Charitable Statistics, Center on Nonprofits and Philanthropy at the Urban Institute, and United Way Worldwide. How much money should the ACVIM designate for operating reserves? To answer this question, the intrinsic and extrinsic risk level associated with the organization’s revenue stream and annual expenditures must be assessed. Revenue risk is based on the predictability of the organization’s annual income and how easily extrinsic forces affect that income. For example, organizations whose main sources of income are grant awards and donations are at greater risk than organizations that have well defined revenue streams like annual dues and income generating services. Likewise, the predictability and stability of yearly expenditures should be taken into consideration. The following are additional factors that influence revenue and expense risk: Revenue Risk Factors: Common factors that impact the risk for volatility in revenue streams include, but are not limited to: Stability of donated revenue from primary sources Predictability of pledge collections Reliability of government grants and contracts Level of dependence on one or two major donors Foundation policies on overhead and annual support Economic health of the community Timing of funding commitments to agencies Likelihood of natural disasters such as floods, hurricanes or earthquakes, especially if the organization’s mission involves disaster relief Publicity that could adversely affect current or future revenues Certain regulatory changes Spending Risk Factors: Common factors that influence the ability to adjust spending levels include, but are not limited to: The organization’s importance in community crisis situations (for example if the organization’s mission involves disaster relief) The extent to which economic downturns or other types of events may effect demand for services, either up or down The extent of funding commitments made for longer than one year Amount of unsecured debt carried by the organization Long‐term leases with substantial penalties for cancelation Level of dependency of programs on stable, individual funding streams Ability to downsize operations quickly and still provide services to the community (e.g. staff have more than one essential duty) Based on the volatility of the organizations spending and revenue, the following decision matrix is provided in the “Non-Profit Tool Kit” referenced above. The greater the number or magnitude of risk factors an organization has, regardless of whether they are risks related to revenue or spending, the greater the need for a higher operating reserve.
Risk for Spending Volatility
Operational Reserve of 3 to 6 months of annual operating costs
Operational reserve of 6 months (at least) of annual operating costs
Operational Reserve of at least 3 months of annual operating costs
Operational Reserve of 3 to 6 months of annual operating costs
Risk for Revenue Volatility
The operational reserve can also be based on maintaining a specific operating reserve ratio. This ratio is determined by dividing the operational reserves by the annual operating expenses and should be at least 25%. That means that the organization should have at least 25% of the annual operating expenses in operational reserves (or 3 months of the annual operating costs). In considering what the ACVIM should have in reserves, here is an overview of our revenue and expenditures based on the 2013-2014 Budget. Recall that this budget was developed using a conservative estimate of revenues.
ACVIM REVENUE (INCOME) Category General Admin Membership General Dues Job Ads Mailing List JVIM Programs Specialty Income (candidate and credentialing fees, specialty dues, exams, courses, sponsors) Forum Investments
Amount 0 $730,000 $575,000 $125,000 $25.000 $380,000
Volatility NA Low Moderate Moderate Potentially high
$2,312,000 $600,000 (2011-2012)
Moderate Policy based
ACVIM EXPENSES (AND POTENTIAL TO REDUCE EXPENSES IN TIME OF NEED) Category General Administration MCC Membership Services JVIM Programs (Ace, Forum)
Amount $605,000 $265,000 $40,000 $290,000 2,900,000
Volatility Low Moderate to High Low Potentially high
Cost can be reduced Costs can be reduced Essential Some cost reduction possible based on publication style Cost can be reduced
If the Board decides to reduce our operational reserves, we would make money available so it may be used for “other purposes”. Once we decide on an amount, we should also make sure that this money is placed in investments that are very low risk and are fairly “liquid”. In some references, it is suggested that operational reserve funds can be set up like internal credit card for the organization. This means that money can be withdrawn on a short-term basis but must be replaced by the end of the month or quarter. This reduces interest fees and because there is a specific plan to repay the money at specific intervals (like an invoice that must be paid at month’s end), it is not considered missing (accrual financing).
12 If we chose to reduce the amount of money designated as operational reserves, we don’t spend the money. Alternative uses could include: Immediate establishment of endowment fund(s) and long term planning Planned reduction of income (reduced membership dues, increased Forum Honorariums, supplement cost of making JVIM an open access Journal) Allocation of funds towards investments with greater risk and greater in an effort to generate money for specific member/mission based initiatives (See the Finance Committee comments provided below on this topic). FINANCE SUBCOMMITTEE’S PERSPECTIVE AND COMMENTS The ad hoc committee had no suggestions for changing the current guidelines for setting the amount of reserves the BOR currently recommends. If we follow the budget guidelines previously developed, the following is needed (in round numbers): $50,000 in replacement capital Safety stock capital = 1 year of total expenses - approximately 3.6 M (June 2013 statement) Total asset goal = Safety stock + replacement capital + restricted funds = $4.4 M (June 2013) While these numbers could be further evaluated or fine-tuned, they are reasonable targets for maintaining a safety net and assuring that in a catastrophic year we can maintain viability and/or weather a crisis Total current assets = $5.7 M Thus, we have roughly $1.3 M to consider for either mission or strategic based expenditures Bottom line – we have had several years of strong growth in our investments – this has given us a great foundation and balance, but it is our belief that the College is not here to accumulate wealth for the sake of wealth – once we have assured that we can meet our operating budget and protect our needed total asset goal (which we can under our current position), then we should set aside each year a pot of money that will be used (based on proposals from the membership, from committees, or from the BOR) for utilizing the funds for programmatic investments (like fellowships or purchase of computers for exams), or key strategic initiatives (e.g. marketing), etc. There was some discussion about setting a target amount to set as an endowment – an untouchable corpus that would become our long term protected base and thus just live off our investment income and not have to rely entirely on fees and Forum. We discussed such numbers as $4/5 M as that target (essentially our total asset goal) – but the concern was that we would then spend the next “x” years trying to reach that target ($5 M endowment with a $4 M working budget) and would not thus be able to spend monies that we currently have to invest in our marketing strategic or other needs. However, it was certainly something that we considered and think worthy of other discussion – particularly with investment experts. There was general agreement that our money should not be spent just to spend it, and if no essential or highly deserving proposals come forward for the use of the money, then it should be reinvested (or possibly invested toward the endowment). But, at the same time, we believe that key leaders of college committees should receive information about the availability of $ and submit a RFP for consideration. All proposals for use of College excess capital should be submitted to the Finance Committee for review, then if approved, to the entire BOR. With the budget completed in September, this process could occur in the fall and be approved at the November or February finance committee meeting. Dr. Roussel offered these comments which reflect the idea that we need to consider our position on the amount of money we need to set aside: I would like to expand a bit on the question of why do we have money and what do we plan to do with it? Deb hit on most of it when she talked about our strategic initiatives. But I'd like to address the question of the reserves. I think what we have a safety stock capital doesn't make sense. I think the idea of having to have one year's total expenditures in reserve is terribly over conservative, and I think that IF WE BELIEVE it's necessary, what we do with that money is totally inconsistent with that belief. Let me explain. Saying that we need one year's total expenditures in case we have a catastrophic year means we need the money if all of the following occur: 1. We have a Forum as usual, but every check of every registrant bounces, no exhibitors pay and we get no sponsorship.
13 Or we have some sort of disaster that causes us to have to cancel and our insurance defaults on us AND we decide to pay for everything even though we don't have the Forum. And... 2. No candidates pay anything for their examinations or credentialing but we decide to go ahead and have the examinations and the credentials evaluations as usual. 3. No diplomates pay annual membership fees, but we continue to maintain full services and we elect to remain fully staffed. 4. All other business including BOR meetings, examination preparation meetings, etc. are carried on as usual. I think this is unlikely. I think it would be unlikely to have a year where we fell short of meeting 50% or even 25% of our expenses through normal operations. If we think we have a reasonable risk of that happening, we probably should look into some sort of insurance as we have on the Forum. But let's say that we convince ourselves that there IS a reasonable risk of this happening. Then there's no way we should have this $3.6 million that we might need next year invested as we do. We have less than $900,000 in relatively liquid assets-about 1/3 in cash and 2/3 in GNMAs. If we really thought we were going to need this $3.6 million in a pinch, in a hurry, we wouldn't have it invested in stocks. So I think we need some different terminology. I think we need to determine what we think is reasonable to have in a true emergency reserve fund that we could tap on short notice and know that it will be there, whether the market is having a good year or a bad year. That means it's in cash, money market, very short-term bonds-and right now that means it is earning essentially no income. It won't go up, but it won't go down. Then we need to know what we're going to have in an investment fund. This is money that we will not spend unless we have a catastrophe that uses up all of our emergency reserve and everything else we have. The goal of this fund would be long-term growth in value. It could be more or less aggressive, but it would be understood that the market value would fluctuate and the goal was long-term growth. We could let it continue to grow, or we could put a cap on it and let everything over the cap flow to strategic initiatives or operations. We would have to understand that the principal may go down and we may have several consecutive years where the fund was below the cap and no funds would be coming out of it. We can adopt a similar philosophy by creating an endowment. The investment mix might be different because an endowment would yield "income" every year to the organization irrespective of market fluctuation. I believe that this is what the investment firms that specialize in nonprofits are accustomed to. I don't think we should think of ourselves as a "nonprofit" from an investment standpoint unless we decide to go with the endowment. I could be very wrong about this, but I think when investment firms think of "nonprofits" they think of organizations that have financial commitments to meet every year (scholarships, research funding, etc.) and the investments have to produce a stable income. The corpus of endowment goes up and down with good years and bad years, but the endowment pays out consistent amount so that in good years the corpus grows and in bad years you pay out what you made in good years. That's an oversimplification, but the general idea. The 3rd fund would be for our strategic initiatives. This is anything that is not an annual recurring expense (staff salaries, facilities and equipment, The Forum, examinations, etc.). I think this fund would currently have quite a bit of money in it. It would be fed by Forum profits, investment income, and revenues over expenses, etc. If we created an endowment, it would be fed by the above, but instead of investment income, the endowment income would go into it. Another comment on endowments. In the text, it sounds like the only endowment is an endowment that completely finances ACVIM operations (or at least membership fees) from endowment revenues. It would certainly be possible to create a smaller endowment that instead of replacing membership fees or examination fees or whatever, and the purpose would be providing money for strategic allocations and programs. $5 million with a 5% annual payout would provide $250,000 annually. SPECIFIC QUESTIONS: OPERATIONAL RESERVES Should the ACVIM change the current “formula” for determining the operating reserves? What are acceptable accounts/methods for housing the operational reserves?
REFERENCES Operating reserve policy toolkit for nonprofit organizations , First edition (September 15, 2010) National Center for Charitable Statistics, Center on Nonprofits and Philanthropy at the Urban Institute, and United Way Worldwide http://www.nccs2.org/wiki/images/b/b4/Operating_Reserves_Policy_Toolkit_1st_Ed_2010-09-16.pdf Executive Service Corps Strengthening the Nonprofit Community 10 Emery Dr, Atkinson, NH 03811 (603) 362-9300 (207) 641-2300 www.nonprofit-consultants.org firstname.lastname@example.org How Much in Reserve Funds Should Your Nonprofit Have? www.nonprofit-consultants.org By Michael Daily, Executive Director of the Executive Service Corps – Northern New England
SECTION 3: HOW SHOULD WE DECIDE TO USE THE MONEY THE ACVIM HAS AVAILABLE? Based on the current policies and finances from 2012-2013, the ACVIM has as much as 1.3 million dollars that can be used to support strategic goals and new initiatives. If we decide to reduce the money that must be kept in reserve, this amount will be even greater. A large proportion of the financial growth that the organization has experienced has come from investments and the investment value has grown because we have feed money back into our portfolio. But is that the best use of this money and is this perspective really benefiting the ACVIM and its members? Most documents on Financial Planning for Non-profits quickly redirect the conversation to the topic of Strategic Planning. Organizations should use strategic planning to guide them towards their financial goals. The implementation of a strategic plan determines those areas where directional (financial) force is exerted. This is a more forward way of considering financial growth and spending than we have used in the past. It suggests that we should first set our priorities (based on the mission, purpose and strategic goals of the organization) then we decide how our money can best be organized to accomplish our goals. FINANCE SUBCOMMITTEE PERSPECTIVE AND COMMENTS The questions of formulas and best approaches for determining the amount of money used each year and how to determine who gets it is an important discussion that will follow when there is a consensus of what is the appropriate amount of money to set aside. However, I believe that for any recurring budget requests or requests over $10K should be in the form of a budget request that is reviewed by a committee, and the proposals must be submitted by April 1 to be considered for the next year’s budget. Proposals could be reviewed twice yearly – at the finance committee meeting in June and at the meeting in November (or alternatively in February and September – although those meetings are not in person). I am open for discussion about what makes the most sense. For reference, the following are the ACVIM’s mission statement, purposes & strategic objectives: ACVIM Mission Statement: The mission of the ACVIM is to enhance animal and human health by advancing veterinary internal medicine through training, education, and discovery. Purposes of the ACVIM: The purposes of the ACVIM are to advance knowledge of animal health and diseases and to foster the continued development of specialty veterinary care in large animal internal medicine, small animal internal medicine, cardiology, neurology, and oncology. To achieve these purposes, the ACVIM will: 1. Certify new Diplomates by guiding training programs and ensuring fair and appropriate credentialing and examination procedures, 2. Promote and advocate ACVIM specialization within the veterinary profession, and to the animal owning public, so the value of certification is recognized, 3. Promote continuing education and the dissemination of knowledge in veterinary cardiology, large animal internal medicine, neurology, oncology, and small animal internal medicine through the ACVIM Forum, the Journal of Veterinary Internal Medicine, and other means, and, 4. Promote the acquisition of new information relevant to the specialties of the ACVIM for the benefit of improved animal health.
15 Strategic Planning Objectives from Feb 2012 Objective 1/4: Engage with our membership (including candidates) and evaluate ACVIM’s public identity, including brand recognition and accessibility Objective 2: Redefine the components/outcomes of the Residency Training Program Objective 3: Improve board leadership and governance Objective 5: Improve research facilitation Several of the proposals being considered during this BOR meeting will require significant financial support. In assessing these proposals, we might first decide how each fits into the ACVIM mission, purpose, and strategic objectives. If we use this perspective, we will then make decisions about spending and investment based on how each proposal fits into the mission of the ACVIM. SPECIFIC QUESTIONS: GENERAL APPROACH TO DISTRIBUTION OF AVAILABLE FUNDS Should we (have we) link our utilization of available funds to our strategic goals? If so, do we know what these goals are and have we prioritized them?
SECTION 4: WHAT SHOULD BE THE PROCESS OF EVALUATING AND FUNDUNG FUTURE BUDGET REQUESTS THAT REQUIRE MORE A SIGNIFICANT INVESTMENT ON THE PART OF THE ACVIM This question is linked to the previous one but it is more focused on the details of how we decide to fund projects. If we agree that major expenditures must align with the College’s mission, purpose and strategic objectives, then is the budget request process adequate? Or should we start by prioritizing our strategic objectives and develop proposals that will help us reach those objectives (or a mixture of both approaches)? And once we decide upon an approach we will need to document our methods to assist future Boards in their decision making process.
SPECIFIC QUESTION: FUNDING PROPOSALS
What is the specific method by which we should develop, evaluate and fund proposals and initiatives?
SECTION 5: MANAGING INVESTMENTS In the initial plan, three questions related to our choice of investment advisors and the current investment plan were included. BACKGROUND Finance Subcommittee Perspectives and Comments This ad hoc committee did not discuss the investment strategy or IAC mission in depth – but there was general agreement that we need to find a company that we trust, give them our goals and investment needs (enough risk to grow our investments but not so aggressive as to be at risk of losing everything), and then let them do it. They would report to the Finance Committee at least 4 times per year, and to the entire BOR at the November meeting Additional Historical Background The ACVIM investments are currently managed by UBS, who has been managing our investments for about 17 years. The overall value of our investments have grown significantly over the years, but for the most part, that growth has been due to added money rather than growth in investment value. In fact, last year Jean showed us information that indicated our stock values have increased by about 4% a year (based on an average of all the years UBS has handled our investments). While we have promoted a conservative approach, this is not very impressive performance. UBS is large firm that provides us guidance, but they do not act a co-fiduciary and are restricted on the advice they can provide us. They have also not been very proactive about communicating with us in the past few years, although this may be related to the changes in management and other changes that have occurred in the recent past. Syntrinsic is an investment company that works almost exclusively with non-profits. They assume co-fiduciary responsibility and provide advice about investments because they are not restrained by “conflict of interest” concerns. Last year, they interviewed strongly when the IAC was conducting the investment company RFP.
16 Both companies will be represented at the November Board meeting to provide investment information and to give us a chance to examine their philosophies and services. SPECIFIC QUESTIONS: 1. Do we have the Investment Advisory group that best fits the needs of our College? 2. Do we receive adequate information and communication from our financial advisor? 3. What is an appropriate balance of risk versus growth in our investment portfolio?
These questions may be difficult to answer during this Board meeting since it is unclear if we should revise the investment strategy first, then find a company to execute it, or work with our investment firm to develop an investment strategy. It is hoped that the information these companies share with us during their presentations will help prepare us for a discussion of the investment related questions.