Note: This report is adapted from Treasurer David L. Hoffman’s 2016 Annual Business Meeting speech.
Fiscal Year 2016 has been a very active year at NCARB. The view from my financial window has been pleasant and encouraging, and the responsibility has been made much easier by the assistance I have received through the hard work of the NCARB staff. To you all, thank you.
To begin my report, I want to share some significant financial highlights demonstrating how the Council is going further:
Today, long-term reserves are at the highest level in the history of NCARB—although we still have a way to go. Recognizing that we will be observing NCARB’s centennial anniversary in 2019, preliminary planning and budgeting has started, with funds set aside within our short-term reserves to cover multi-year efforts.
There are three major topics that I will be reviewing:
Let’s start with how Fiscal Year 2016 closed out. The blue bars on this chart show the FY16 budgets for income and expenses. The orange bars show the year-end operating results. The first two bars on the left represent Council income—the $28.9 million shown in the orange bar exceeds the expected budget of $25.6 million, resulting in a net excess over budget of $3.3 million.
The two bars on the right are expenses. The total expenses in the orange bar ($24.6 million) is slightly below the expected budget of $25.4 million, resulting in net expenses being $200,000 below the budget.
A recovering economy, a new exam, streamlined programs, new systems development, increased outreach efforts, and effective communication have led to higher than anticipated income results. On the expense side, the Council experienced modest savings in employment expenses, reduced operating costs, consulting expenses, and committee costs. The net result of this year’s activity is positive net operating revenues.
Next, let’s take a deeper dive into these net revenues: How much are they? Where did they come from? And what did we do with them?
First: How much are the net revenues? The outcome of our day-to-day operations for FY16 resulted in revenue of $4.3 million, the net of income less expenses. Second: Where did the net revenue come from?
So, how was the $4.3 million net revenue utilized? We invested over $1 million on long-term capital projects, including: overhauling the experience reporting systems to support the new AXP and other programmatic changes; and building a new website, which will launch later this year. These initiatives further our strategic goals of facilitating licensure, fostering collaboration, and centralizing credentialing data, as well as continuing to grow services for our Member Boards.
Another highlight of Fiscal Year 2016 is that we improved our reserve levels by investing $2.5 million in our long-term reserve fund portfolio. We are still working to build it to the desired minimum balance. We also earmarked a subset of short-term reserves, up to a maximum of $500,000, to fund three years of planning and activities associated with the 2019 Centennial. Next, let’s take a look at these reserve levels.
The Council’s reserves consist of the money in the bank and the investment portfolio. I am sure we can all agree that having reserves makes good business sense. The Board has designed the Council’s reserve policy to follow industry best practices. These funds have allowed us to rebuild our technology systems, develop a new exam, plan for future development opportunities, protect against economic downturns, avoid increasing fees, and be able to address unforeseen financial events.
The Council’s financial reserves are held in three accounts, each with their own specific purpose: the checking account, short-term savings, and long-term investments.
The yellow lines on the first two bars of this chart denote the target ranges that the Board has defined for the minimum and maximum amounts in the reserve. The target range for the checking account, as well as the short-term savings account, is between 8 and 12 percent of the annual total expense budget. These accounts could provide funding for approximately three months of expenses if circumstances dictated.
The third bar on this chart shows the status of the Council’s long-term investments that comprise our long-term reserve fund. The balance in this fund was able to be increased nearly $2.5 million this year to $15.1 million. The yellow bar at the top shows the minimum target balance for this fund is $17 million. This target amount was derived from a study of NCARB’s specific business risks and opportunities performed by our auditors, Tate & Tryon, in December 2014. The Board of Directors reviewed that study, evaluated the proposed minimum reserve amounts, and established the $17 million minimum reserve at that time. This study will be repeated in Fiscal Year 2018 and the long-term reserve amounts updated at that time.
The $17 million target balance for the long-term investments provides about seven months of savings for Council operations, which is good business practice and is generally in line with the long-term reserves of other nonprofit organizations similar to NCARB. These investments also serve as collateral for any potential lines of credit that would allow the Council to take advantage of future opportunities. The Board has set aside funds within the short-term reserves to accommodate budgeting for projects and initiatives associated with the 2019 NCARB Centennial.
Now that we have seen where we are, let’s take a look at where we are going.
The FY17 Council income budget that has been approved by the Board of Directors is $27.4 million.
The four main income categories are:
The FY17 expense budget is $27.4 million. The main expense categories are:
Earlier, we looked at income received from our customer base. We can slice expenses in that manner as well. Let’s take a look at how that stacks up.
Starting at the top of this chart, architect services (the green section) provides the largest excess of revenue over expenses. Revenues are expected to exceed expenses by 27 percent.
This income helps to off-set net expense deficits in the other service areas. These areas include the examination and pre-licensure services (shown in the yellow and orange sections) and are expected to operate at a small deficit. Expenses from these areas will exceed revenue by about 7 percent. The “other” component (shown in blue) is largely Member Board services with a 20 percent deficit. These member services include the Council’s growing legislative support activities, a Member Board Chairs/Executives conference planned for this fall, the MBE Workshop, Regional Summit, and Annual Business Meeting taking place next spring—among other services.
Looking forward, the budget initiatives for Fiscal Year 2017 will align with the Council’s strategic planning goals. Advances in facilitating licensure include:
FY17 budget initiatives also foster collaboration with collateral opportunities and increased legislative support to our member boards. Centralized credential data opportunities will expand to better support your needs including:
In the context of these initiatives, I will now expand on the pending fee changes that have been incorporated into the Fiscal Year 2017 budget and future financial forecasts.
For the past 18 months, the Executive Committee—which serves as the Council’s finance committee—has analyzed the Council’s current fee structure with a goal to reduce and simplify fees while also managing deficits. Our ability to streamline fees is directly related to more efficient operations and continued customer growth.
All of these initiatives are the result of significant programmatic changes and new fee structures, and these changes will further support our strategic goals.
As we transition into these streamlined programs, we forecast that there will be a short-term reduction of revenue and increased expenses. These transition efforts are predicted to result in two years of planned deficits. Our recent successes adding funds to the Council’s reserve accounts has positioned us to be able to chart this course. I’ll briefly expand on this.
The programmatic changes to the experience and examination programs will likely result in a “new normal” level of Record and Certificate holders, and general activity that is lower than that of the last few years. Specifically, the new AXP will maintain the requirement of 3,740 core hours that was introduced with the streamlined IDP, and will also realign the former 17 IDP experience areas to six practice-based areas. We anticipate these changes will allow licensure candidates to progress through the program more rapidly (if they desire), while maintaining high standards and rigor.
In the examination program, dropping to a six-division exam will result in roughly a 15 percent decline in the number of divisions being administered each year. Further, we will be delivering both ARE 4.0 and ARE 5.0 concurrently until June 2018, when ARE 4.0 will be discontinued. Maintaining and administering both exams simultaneously will cost significantly more than just the single exam over the next two years.
All of these changes will facilitate not only a more rapid path to licensure, but a path that is financially beneficial to candidates. At the same time, these benefits will not be as financially advantageous to the Council in the near term, as they will be over time.
In the final chart, we see recent history of the Council’s bottom lines, as well as the projections for the next few years.
I hope that this information demonstrates to you that there has been a very thoughtful analysis completed toward managing the financial impact of the coming changes. We have carefully planned for these deficit years.
Thank you very much for the tremendous opportunity to serve you and the Council as treasurer this year. It’s been a year working with great people and wonderful staff.
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