Right Sizing Your Reserves: A Better Way

Transcription

1 Right Sizing Your Reserves: A Better Way ROB OLCOT T, R EGIONAL DIREC TOR, DIMEO SCHNEIDER & A S SOC CHRISTIAN SPENCER, PA RTNER, TAT E & TRYON ROB DICKINSON, CONTROLLER, N CARB

2 A Brief History of Association Reserves

3 Reserves Begin With Revenues Dues Publications Meetings Education/Certification

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5 Calculating Reserves

6 Investing Reserves--Then

7 And Now

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9 Challenges to Associations And Your Reserves Revenue sources are mature or maturing Planned and unplanned expenses may be more consequential Competition for members time and wallet share The R word

10 Coming to a theatre near you.

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12 Implications For Your Association and Your Members Investing Reserve Funds Revisit Investment Policy Statement Realistic return assumptions and risk tolerance Stress test your portfolio Consider Reserve Funding targets Eliminating any investment income/earnings above the line Economic trends and impact on membership Prepare alternative scenarios Fiduciary requirements for your retirement plans

13 Right Sizing Reserves Through Enterprise Risk Management

14 Enterprise Risk Management ERM (Enterprise Risk Management) is a process, effected by an entity s board of directors, management, and other personnel, applied in strategy setting across the enterprise, designed to identify potential events and opportunities that may affect the entity, and manage risk to be within its risk appetite, in order to provide reasonable assurance regarding the achievement of entity objectives.

15 ERM- A Top Down Approach Strategic Plan Identify the mission critical risks and opportunities. Operational Plan Financial Plan Reserve Policy Determine how resources will be deployed. Quantify risk exposure and potential opportunities and identify costs associated with strategic initiatives. Quantified risks and opportunities impact the level of reserves. Investment Policy Time horizon when risks could occur and timing of strategic initiatives will influence investment allocation.

16 Scenario Identification 1. Identify potential opportunities and risks 2. Qualitative assessment of identified opportunities and risks Likelihood -event likely to occur with-in X years Moderate-event possibly will occur with-in X years Low-event has a remote chance of occurring with-in X years Magnitude -financial impact over $XXX Moderate- financial impact between $XXX - $XXX Low- financial impact less than $XXX 3. Quantitative assignment of a numerical value to each risk

17 Potential Strategic Opportunities - New program offerings for members - Purchase of trade show - Purchase of real estate - Geographic expansion overseas - Monetize existing line of business using an LLC

18 One Example..American Association of Airport Executives (AAAE) - Trade Association representing those in the aviation industry - After the events of 9/11 AAAE obtained a government contract to run the background checks for all airport and airline employees through the Transportation Security Administration - AAAE used reserves to invest in the IT infrastructure to facilitate background checks - AAAE leveraged the platform they created to expand the background check services to other industries (schools, daycare centers, state governments, non-aviation services) - Created an LLC to run the non-aviation services

19 General Risks Considered Economic Natural Environment Political Social Technology Capital availability Credit default Concentration Liquidity Financial markets Unemployment Competition Mergers and acquisitions Emissions and waste Energy Natural disaster Sustainable development Governmental changes Legislation Public policy Regulation Demographics Consumer behavior Corporate citizenship Privacy Terrorism Interruptions Electronic commerce External data Emerging technology

20 Technology - Resources must be in place for threat prevention, detection and analysis - Protection of personally identifiable information- Impact of General Data Protection Regulation (GDPR) - Legislation proposed that would require publicly traded companies to include cyber security assertions with Sarbanes Oxley certifications - Example of cyber breaches include Target, Equifax, and the U.S. Government - December 2018 Marriott- 383 million customer records stolen, including 25 million passport numbers- 5 million in plain text- hack was over 4 years - Average cost to recover from a data breach was $3.6 million (2017) - IT enhancement should be a component of your reserves

21 Membership and Recruitment - Price is what you pay. Value is what you get. - Warren Buffett - Organizations are increasingly having to demonstrate value to their members - What is included/ excluded with membership? Publications, webinars, advocacy? - The format and content of your annual meeting or the way you disseminate information (print/electronic) will evolve with the demographics of your membership - Reserve funds should be earmarked for member recruitment and enhancement of member value - Determining the cost and related value of a membership is not a static exercise

22 Membership and Recruitment - Example - $7 million trade association from : - Membership revenue down 25% - Advertising revenue down 50% (print versus online) - Overall revenue down 12% (meetings keeping them afloat) - Currently analyzing the entire business model and how they provide services to their members - Member needs survey and consultant - Analysis of back office procedures and staffing - Analyzing the content and viability of the annual meeting

23 Government Affairs - Significant for trade associations and organizations reliant on governmental funding and individual contributions - Political landscape drives availability of governmental funding for certain initiatives. (healthcare, environmental, international) - New tax law (Tax Cuts and Job Act) nearly doubled the standard deduction (now $24,000 for married filing jointly) and imposed a limit of $10,000 on all state and local tax deductions (personal property, real estate and income taxes) - This may result in some tax payers that previously itemized now using the standard deduction, thus reducing their incentive to donate - Organizations that rely on government grants and individual contributions should include a possible downturn in these funding sources as a component of their reserve

24 Benchmarking Overview - Reserves are typically presented as a percentage of operating expenses - Industry benchmarks suggest reserves of 75% - 100% of annual expenditures (ASAE ORR and Association Investments Report) - How much is too much? - IRS has not successfully challenged accumulation of reserves - Only private foundations are required to expend at least 5% of the value of their endowment in furtherance of charitable purposes - Appropriate amount of reserve depends on individual organization s event identification and risk appetite - Type of organization and nature of revenue streams must be considered

25 National Council for Architectural Registration Boards (NCARB) - $30 million 501 (c)(6) association that develops standards for licensing and credentialing of architects - Majority of revenue comes from maintenance of architects records and examination income (small dollar high volume transactions) - Reserves are targeted in two key areas: - Opportunities to provide enhanced member/ constituent value - Insulating against risks that could disrupt ability to provide services - Process is to review reserve targeted reserve levels every 4 years - Includes senior management, executive committee, and Board of Directors

26 Identified Strategic Opportunities Likelihood Magnitude Description of Risk/ Opportunity Present Value Discounted at 3.0% Investment in key tools to support evolution of NCARB program offerings (practice analysis, additional stakeholders, certificate holder benefits, further reduction of transmittal fees) $2,000,000 Develop in-house candidate management system, reevaluation of exam vendor and other significant vendors (ARE 5.0 vs 5.1 will not substantially change, but the vendor relationship may) $1,200,000 Support for legislative initiatives to facilitate licensing process and promote alignment with NCARB models $1,600,000 New business development opportunities (offering consulting services or SME assistance) $1,700,000 Moderate Building out new member and/ or influencer engagement opportunities (i.e. Regional Licensing Advisor workshops to increase awareness and understanding of licensure path.) $700,000

27 Identified Strategic Opportunities Likelihood Magnitude Description of Risk/ Opportunity Present Value Discounted at 3.0% Moderate Continued additional investment in IT development (potentially in-house or with external vendor i.e. a focus on data development or a CE tracking platform) $400,000 Low Branding support (Public relations-crisis management) and/ or practice brand expansion / marketing campaign to new audiences $300,000 Low Joint initiatives with other organizations $200,000 Moderate Low Global growth of program offerings: Assessment and pursuit of additional international arrangements $200,000 Total opportunities reserve fund $8,300,000

28 Identified Risks Likelihood Magnitude Description of Risk/ Opportunity Present Value Discounted at 3.0% Moderate Inability to administer exam due to exam vendors going out of business or disruption in vendor service $ 1,100,000 Decline in Investment porfolio $ 3,500,000 IT Security and keeping up with technological advancements (Proactively enhancing security/ costs for an incident response) $ 900,000 Low Lost revenue as a result of not retaining registered architects or a reduction in demand for exam deliveries $ 1,100,000 Low 9 Months of administrative costs (rolling contractual liabilities) $ 1,800,000

29 Identified Risks Likelihood Magnitude Description of Risk/ Opportunity Present Value Discounted at 3.0% Moderate Moderate Unanticipated legal costs $ 500,000 Moderate Preserve Human Capital $ 500,000 Low Office relocation/ lease transition, or emergency office facilities $ 500,000 Low Maintaining organizational structure and function through planned deficit budgets in FY 19/ 20 $ 300,000 Low Defense of deregulation challenges (travel/ time for legal counsel, consultants, and lobbyists) $ 200,000 Low Data breach or similar event results in need for business process engineering in the directorate/ customer service experience $ 200,000 Total risk reserve fund $ 10,600,000

30 Conclusion/Recommendations The overall level of challenges facing non-profits is increasing: Member and constituent needs Competition Outsized financial consequence IT needs Economic conditions The rising level of uncertainty requires non-profits to maintain a reasonable long-term strategic reserve to ensure it is able to meet the needs of its constituents Consider having a risk management committee that reviews risks and opportunities periodically throughout the year Align your level of long-term strategic reserves with potential opportunities and risks

31 Thank You! Rob Olcott, Christian Spencer, Robert Dickinson,