Note: This report is adapted from Treasurer Terry L. Allers’ 2017 Annual Business Meeting speech.
Fiscal year 2017 has been a very active year at NCARB.
To begin my report, I want to start by sharing some significant financial highlights demonstrating how the Council is going further:
There are four major topics that I will be reviewing today:
Let’s start with how fiscal year 2017 closed out. We ended this fiscal year with a $2 million surplus, $1.1 million of which is the result of our operating activities. This surplus will be the focus of my comments. The remaining $900,000 is from gains on our long-term investment portfolio. We do not budget for market gains or losses in our portfolio, because some years the market returns gains and some years it does not.
This chart shows the year’s ending income and expenses. The blue bar is our operating income, and the red bar is our operating expense. The line represents the FY17 break-even budget of $27.4 million for revenues and expenses. At a macro level, you can see that revenues exceed the income budget, and expenses were slightly under budget. A robust economy, a new exam, new systems development, increased outreach efforts, and effective communication have led to these higher than anticipated income results.
Next, let’s take a deeper dive into these net revenues. Where did they come from? What did we do with them?
First question: Where did the $1.1 million net revenue come from?
Second question: How was the $1.1 million net revenue utilized? We have added more than $700,000 to our checking account balance since June 30, 2016. Also, we have fully funded our short-term reserve portfolio by investing $340,000.
Increasing these funds, in addition to the amounts added to our long-term reserve fund in the past few years, will allow us to further our strategic goals of facilitating licensure, fostering collaboration, and centralizing credential data, as well as continue to grow services for our Member Boards.
Now, let’s take a look at our financial accounts—checking, savings, and the investment portfolio.
The Board has designed the structure of the Council’s accounts 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, and avoid increasing fees.
The red line on the first two bars of this chart denotes the top of the target range that the Board has defined as the maximum balance to be held in the checking and short-term savings accounts.
Together, these accounts could provide funding for up to three months of expenses if circumstances dictated. Both of these funds are at the top of the range as of June 30, 2017.
Now, let’s look at the third bar. This shows the status of the Council’s long-term investment portfolio. As I noted at the beginning, the portfolio returned $900,000 in market gains this year. The balance today is $16.5 million.
The red bar at the top shows the minimum target balance for this fund is $17 million. This target balance 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.
The $17 million target 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, if appropriate, based on the results of the study.
This investment portfolio also serves as collateral for a line of credit. The line of credit allows the Council to take advantage of future business development opportunities.
The fourth bar of the chart represents a special short-term fund. Planning has already started on recognizing NCARB’s Centennial anniversary in 2019. The Board of Directors set aside a special centennial fund last year so that it will not be necessary to tap reserve funds in later years. You will understand why this is important when I discuss the budget for the coming year and long-range planning forecasts.
Now that we have seen where we are, let’s take a look at where we are going.
In fiscal year 2018, we have been planning for a $1 million budget deficit. We will rely on the higher balances in the checking and short-term savings accounts to cover operations and avoid raising fees. The $1 million deficit arises because we are projecting revenue of $28 million and expenses of $29 million.
Let’s spend a moment exploring what is driving this projection.
The programmatic changes to the experience and examination programs are anticipated to result in a “new normal” level of Record services that is lower than that of the last few years. Specifically, the Architectural Experience Program’s™ (AXP™) requirement for 3,740 core hours versus the previous 5,600 hours, and the realignment of the former 17 experience areas to six practice-based areas, is anticipated to reduce the timeline to licensure, while maintaining high standards and rigor.
In the examination program, ARE 5.0 is comprised of six divisions rather than the seven divisions in ARE 4.0. This represents a 15 percent decline in the number of divisions that will be administered each year. Additionally, we have been experiencing an unusually high volume of exam deliveries as the launch of ARE 5.0 was pending. This high volume of deliveries is declining already, and will cease entirely when ARE 4.0 is no longer available.
Additionally, for the next year, we will be delivering both ARE 4.0 and 5.0 concurrently until June 30, 2018, when ARE 4.0 is discontinued. Maintaining and administering both exams simultaneously will cost significantly more than just the single exam over the next year.
All of these changes will facilitate not only a more streamlined path to licensure, but a path that is financially beneficial to candidates. Now, let’s go a little further into the future.
We are also projecting deficits for two more years beyond next year as we adjust to this “new normal” level of service delivery. Let me show you what that looks like. In this chart, we see recent history of the Council’s bottom lines, as well as the projections for the next few years.
The first three blue columns show that fiscal years 2015, 2016, and 2017 have healthy bottom lines primarily due to abnormally high levels of exam activity. This enabled us to contribute to our reserve accounts in anticipation of the next few lean years.
The next three red bars show that the “new normal” level of activity from recent programmatic changes means the next three years will have planned deficits.
In fiscal years 2018, 2019, and 2020, we will rely on our reserves to cover operations and avoid raising fees. Our business development activities will be funded through a line of credit that is collateralized by our long-term reserves.
In fiscal year 2021, we expect that all programmatic changes will be fully implemented and we will return to a surplus operating budget.
To reiterate, we have been expecting these coming deficits and we have planned for them. The reason we did is because we do not wish to increase fees, and we do not wish to decrease services just to eliminate deficits. For an organization in a state of growth—as NCARB is—occasional deficits are nothing to be feared. They are just something to plan for.
A spot of good news is that these deficits are smaller than we previously expected. We also have a history of budgeting conservatively and will not be surprised should the final outcomes in each year be better than today’s projections. However, in the event of unexpected economic developments, CEO Michael Armstrong has already briefed the Board on contingency plans that can be enacted immediately if necessary.
In recent BOD Briefs issued after Board meetings this year—and from conversations held at the Regional Summit and Member Board Executive Workshop in March—you have likely heard that we are exploring some new business opportunities that may be available to us by expanding and licensing NCARB’s proprietary software.
Our initial focus will be to become a vendor providing a license management system for licensing boards. Additionally, market research is underway on licensing a volunteer management system that was developed for our staff and incoming presidents.
Licensing our technology may lead to new revenue sources that can provide a hedge against future fee increases, may enable us to explore some fee reductions, and provide funding for new services for our Member Boards and customers.
The Board of Directors has authorized a limited amount of long-term reserves to fund research into these opportunities. Forays into this new realm will have no impact on existing services to Member Boards or customers.
I want to remind you that if you are interested in following the Council finances throughout the year, we post the unaudited interim financial statements on the Registration Board section of My NCARB every quarter.
In summary, I hope that this information demonstrates to you that there has been a very thoughtful approach to managing the financial impact of the coming changes; we have carefully planned for these deficit years. The Council will continue to provide excellent service while maintaining fiscal solvency during these future periods.
Thank you very much for your attention and 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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