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EBD #4.2
(2007-2008 Fall Meeting)

Finance and Audit Subcommittee Report to the Executive Board

2007 Fall Meeting, Chicago, Illinois
Thursday, October 18, 2007

The primary objectives of the meeting included a review and discussions on the following topics:

• FY 2007 Unaudited 2nd Close Results--EBD #14.3.1
• FY 2008 Final Budget Ceilings--EBD #3.4
• Audit Planning Discussion
• Controller's Report--EBD #4.5
• Financial Discussion
• BARC Report--EBD #3.1

FY 2007 Update--EBD #14.3.1

Greg Calloway updated the committee on the status of the FY 2007 budget based on the available 2nd close information.

Total ALA
Total ALA revenues for the year were $47.6 million, which is .5% or $219,000 more than budget of $47.4 million. Expenses for the year totaled $46.5 million, which is 5% or $2.2 million less than budget. This was due to lower General Fund expenses of $1.7 million related to Publishing and Division expenses of $912,000. These budget reductions were offset by an overage in Grants & Awards of $587,000 resulting from additional grant activity. Cash and short-term investments are $20.0 million and the Long-Term investment fund stands at a record high of $30.2 million. Total assets of the Association now stand at $68.4 million, while liabilities are at $35.5 million. The result is a net asset balance of $32.9 million.

General Fund
General Fund revenues for the year totaled $28.2 million and were 5% or $1.5 million less than budget of $29.7 million. Publishing and Dues were the primary areas of the shortfall. Publishing was impacted by a delay in the release of Guide to Reference Books and slower sales from Booklist Online. Also contributing was lower dues revenue, which was less than budget by $440,000 due to an ambitious budget and a shift in the category mix of renewing membership types. Combined conference revenues were essentially on budget at $9.1 million. Annual Conference, which set attendance records, had revenues of $6.3 million and was under budget by 2% or $159,000. Midwinter Meeting revenue was $2.8 million and over budget by 65 or $152,000.

General Fund expenses for the year totaled $27.9 million, which was 6% or $1.7 million less than budget of $29.7 million. The largest savings was in Publishing, which was 10% or $1.2 million less than budget due to adjustments made as a result of projected lower publishing revenues. ALA Editions ($472,000), Booklist ($413,000) and American Libraries ($249,000) accounted for mot of the shortfall. ALA Editions had a severe drop off in several key titles i.e. Information Power, Copyright Primer and AACR2. Note that AACR2 is being converted into an online product now being called RDA, Resource Description and Access. Also, Guide to Reference Books was postponed and accounted for $200,000 of the shortfall. Marketing expenses were down by $179,441 due to late release of titles and not marketing Guide to Reference Books. Conference expenses were slightly under budget at $7.1 million compared to budget of $7.2 million. Annual conference expenses were $4.9 million and under budget by 1% or $50,000. Midwinter Meeting expenses were $2.3 million and under budget by 2% or $52,000.

As a result, the General Fund realized positive net revenue of $212,000. Additionally, it should be noted that despite the shortfall in Publishing revenue adjustments in expenses resulted in net revenue of $1.5 million. This exceeded the budget by $216,000 or 17%. Also, conferences realized net revenue of $1.9 million and exceeded its budget by $95,000, primarily from the Midwinter Meeting ($204,000).

General Fund Net Revenue Adjustments

The General Fund ended the year with a positive $212,000. This figure was adjusted up to reflect 2010 projects totaling $171,000 that were to be funded from net asset resulting in a net revenue balance of $383,000. As a result of the positive ending net revenue management proposed a number of recommendations to utilize this figure.

Organizational Incentive
Management would like to recommend to the Executive Board that a portion of these funds be allocated to provide an organizational incentive. In August 2000 a new compensation plan was put in place. One component of the plan is an organizational incentive. In order to make this award, four goals must be met--net revenue of $250,000, improved customer service, 100% employee participation in CE and increasing membership. Like last year, the first time the award was made, three of the four goals were met in FY07 i.e. increased membership. This year management would like to make an award of $500 to approximately 240 qualified employees. The total cost with benefits is $150,000.

• F&A recommends to the ALA Executive Board approval of the FY 2007 Organizational Incentive Plan ($150,000) as recommended in 2007-2008 EBD #4.13.

New 2010 Projects
K. Fiels noted during the meeting that there were a number of good 2010 related projects that went unfounded in FY07 and that any additional funds that could be utilized would be helpful. A goal of $250,000 dedicated to 2010 would go a long ways towards reaching the membership and public in very positive ways. There is currently $100,000 in the FY08 budget. As such, management proposed that a portion of the remaining General Fund net revenue be allocated to 2010 projects in the amount of $150,000.

• F&A recommends to the Executive Board approval of $150,000 from FY 2007 Net Revenues to be used for funding 2010 Initiatives in FY 2008.

FY 2008 Budget Overview--EBD #3.4

Greg Calloway presented an overview of the final FY 2008 budget. At the Annual Conference the Executive Board and Council approved the total ALA “Annual Estimate of Income†for the fiscal year 2008. This included preliminary revenue estimates for all funds. Since then, there have been adjustments to the budgets for the Divisions as recommended by their Boards, new approved Grants & Awards, increased benefit costs, revisited general fund targets and the Long-Term Investment fund. Also included is a $100,000 placeholder for 2010 related projects and an additional $50,000 in negotiated audit engagement fees. As a result, the following actions were taken for the final FY 2008 budget:

• F&A concurs with BARC and recommends to the Executive Board approval of the Final FY 2008 General Fund Budgetary Ceiling of $29,277,318 including a $1,711,450 net asset transfer to offset the Plant Fund net operating expenses.

• F&A concurs with BARC and recommends to the Executive Board approval of the Final FY 2008 Divisions Budgetary Ceiling of $24,745,761.

• F&A concurs with BARC and recommends to the Executive Board approval of the Final FY 2008 Round Tables Budgetary Ceiling of $950,626.

• F&A concurs with BARC and recommends to the Executive Board a $1,711,450 transfer from the General Fund to offset the Plant Fund net operating expenses.

• F&A concurs with BARC and recommends to the Executive Board approval of the Final FY 2008 Grants and Awards (Restricted Fund) Budgetary Ceiling of $7,636,857.

• F&A concurs with BARC and recommends to the Executive Board approval of the Final FY 2008 Long Term Investment Fund (Endowment Fund) Budgetary Ceiling of $1,324,025 including $152,723 capital gain to be allocated for funding the ALA Spectrum Initiative and a transfer of $191,363 interest and dividends from Endowment Fund to the General Fund in accordance with Policy 8.5.1.

• F&A concurs with BARC and recommends to the Executive Board approval of the transfers from Division operating fund balances to Long Term Investments of $448,999; PLA $250,000, AASL $50,000, RUSA $50,000, LITA $49,999 and ALSC $49,000.

• F&A concurs with BARC and recommends to the Executive Board approval of the Final FY 2008 total ALA Capital Budget of $2,569,275.

• F&A concurs with BARC and recommends to the Executive Board approval of the Final FY 2008 General Fund Small Division allocation of $140,453.

• F&A concurs with BARC and recommends to the Executive Board approval of a 3% compensation adjustment to base salary and a .5% individual incentive with a fiscal year impact of $500,000 in FY 2008.

• F&A concurs with BARC and recommends to the Executive Board approval of the addition of 3.968 FTEs to the General Fund Table of Authorized Positions.

• F&A concurs with BARC and recommends to the Executive Board approval of the addition of 2.0 FTEs to the Division Fund Table of Authorized Positions.

• F&A concurs with BARC and recommends to the Executive Board approval of the Final FY 2008 Total ALA Budgetary Ceiling of as follows:

Controller's Report--EBD #4.5

ALA Controller, Russ Swedowski's, presented the fiscal year end status of the inventory, credit & collections and cash and short-term investments.

Inventory
Inventory levels at 8-31-07 for ALA Editions and Products & Promotions were $726,314 and $692,621 respectively. The ALA Editions inventory reflects a $37,000 valuation for the 11th edition of Guide to Reference books. The largest item in the inventory for Products & Promotions are the “Read†products (34) valued at $67,311.

The excess and obsolete inventory reserves for ALA Editions and Products & Promotions were $277,000 and $133,000 respectively, which are appropriate. To date there has been $47,000 (Editions) and $43,000 (Products & Promotions) of destruction of excess or obsolete inventory. Testing of reserves was performed as part of the year-end closing process, which resulted in a reduction in reserves of $20,000 in Graphics and $10,000 in ALA Editions.

Credit and Collections
As of 8-31-07 trade receivables totaled $2.7million as compared to $2.2 million a year earlier. This is normal growth. However, trade receivables did experience an unusual departure from historical trends as the 150+ day category increased to $636,237. This compares to $207,376 in FY06. This is due most likely to early Midwinter exhibit billings. During the 2nd close ALA's fulfillment company--PBD--will be providing several year-end reports to test the adequacy of the bad debt reserve. The current pre-adjusted reserve is $444,639. It is expected that year-end testing will illustrate that the reserve level is more than adequate due primarily to excellent collection efforts.

Cash Management and Bond Fund
As of 8-31-07 the balance for cash and short-term investment was $19.9 million due in large part to higher deferred revenue related to Meetings & Conferences/Grants & Awards. This compares to $16.6 million last year. Year-to-date interest income is $789,000, which is $11,000 less than the budget but $161,000 more than last year. The Nueberger Berman bond fund balance is $12.2 million. This investment has generated over $6.4 million in interest income since December 1991 and a cumulative net realized loss of $386,000. WHY?

Annual Audit
Accounting staff met with representatives from Ernst & Young on July 30, 2007 to commence the preliminary audit work. Auditors were provided with requested work papers and reconciliations. The auditors will be back in the office for final fieldwork during the period between November 7th--November 18th. The work on the A-133 will be completed in April 2008.

Audit Planning Discussion--Ernst & Young

Ken Herlin, Coordinating Partner, and Serena Legatos, Audit Senior Manager of Ernst & Young, met with the committee to discuss the process for the upcoming audit. They provided the committee an overview of the audit process. This included an acknowledgement of what the audit committee and management expects from the audit, an understanding of the business of ALA, the establishment of an audit strategy and performance testing of ALA procedures and assumptions. They went on to explain exactly what the audit engagement is expected to cover, i..e. express an opinion on the consolidated financial statements, issue reports in accordance with government auditing standards related to the A-133 and a management letter that provides recommendations regarding opportunities for improvement to internal controls. The areas of emphasis include accounts receivable, inventory, investments deferred revenue IT controls accounting for taxes etc. It was noted that preplanning sessions with staff occurred in July and fieldwork will begin the week of November 12. A draft of the statements should be completed before the holidays in December with a final product presented to the Executive Board at the Philadelphia Midwinter Meeting.

Financial Discussion

ACRL/Choice Property Options
Mary Ellen Davis met with the committee to discuss the proposed property options currently being considered by ACRL/Choice. Choice has been exploring for some time now the feasibility of purchasing permanent office space in Middletown, Connecticut. After a number of attempts, Choice is now considering a project that involves Choice's current landlord--Harding Development Group. This is a new project two blocks from their current location; i.e., SW corner of Main and Liberty streets. This will be a three-story condominium type structure with Choice to occupy the third floor comprising approximately 7,000 square feet. Choice believes that this space best suits its needs when compared to previously considered options. On August 3, 2007 Choice/ACRL/ALA and Harding signed a non-binding Letter of Intent stipulating a price of $239 per square foot--$1.673,000. Neither party is legally obligated to complete the transaction.

• F&A recommends to the ALA Executive Board to authorize ALA management to enter into negotiations with Harding Development Group, d/b/a MACKY, LLC for the purchase of an office condominium unit of approximately 6,500 square feet comprising the complete third floor of a new building known as Liberty Square, to be erected on the Southwest corner of Liberty and Main Streets in Middletown, CT, and, if successful, to bring to the Board for its review and approval a draft Purchase & Sale agreement for said property.

Conference/Publishing Targets
As noted previously both Conference Services and Publishing met their budgeted net revenue targets at $2.0 million ($1.9 million budget) and $1.5 million ($1.3 million budget) respectively.

Office Space
Office space continues to be a challenge. The Association's needs continue to grow with the growth of more grants and awards. Although rental prospects are still being considered, internal needs continue to expand.

Technology Needs & Challenges
G. Calloway and K. Fiels discussed with the committee the expected technology and related costs that are on the horizon that need some consideration now. The Association will need to replace its association management system, as well as its finance and accounting systems in the next 3-4 years. Although it is early, the preliminary costs would be $2-$3.5 million for the association management system and $800,000-$1.2 million for the finance and accounting system. Preliminary planning will likely begin immediately with more serious planning in the FY09 budget. To minimize the potential impact, the use and growth of ALA's net asset balance (reserve) might be considered. Also being considered is the transfer of net interest from the Future Fund per the guidelines of Policy 8.5.1 in order to increase the Associations net asset balance, which could then be tapped, as we get closer to a decision.

Graduated Dues Study--BARC #14

F&A reviewed the report on the Graduated dues study. The discussion was informed by the work done by the BARC committee. As at BARC, a serious discussion took place. Each of the components of the study as discussed in detail. The cost of the study ($624,000) was highlighted as being difficult to implement, particularly in one fiscal year. The proposed membership survey was identified as being imperative not only to determining the merits of a graduated dues structure, but also to the future success of the Association. As such, it was thought that the survey could potential be conducted and paid for over two fiscal years. Running parallel to the proposed survey an IMLS grant Jose M. Griffiths has to study trends in the profession by surveying practicing librarians.

The following motion was made:

• F&A concurs with BARC and recommendations to the ALA Executive Board in total:

  1. Accept the Graduated Dues Task Force report,

  2. Recommends proceeding with Component A, delegating the implementation and financing to the ALA Executive Director,

  3. Recommends that ALA work with J.M. Griffiths, the project director of the IMLS grant study on The Future of Librarians in the Workforce,

  4. Recommends that ALA revisit the graduated dues issue after seeing results of the membership survey and the trends of the profession survey,

  5. Recommends against any graduated dues structure without the entire study being completed,

  6. Recognizes that there are significant financial risks associated with changing the dues structure and BARC recommends that any graduated dues structure not be implemented unless there is strong evidence that a graduated dues structure will increase revenue.

As with BARC F&A felt that the report was well prepared and commended all the participants of the document.

BARC Report--EBD #3.1

M. Henshaw reported to the committee some of the highlights undertaken by BARC during their meetings on October 3rd –5th, 2007. She noted that the committee members went through a general orientation that proved to be very beneficial to both the new and continuing members. The manual that was produced is expected to be a standard for all future committee members. She also reported on the first close information, which was preliminary. Total ALA revenues were $47.6 million and total expenses of $46.8 million resulting in net revenue of $3.5 million. General Fund revenues totaled 28.3 million, which are 5% less than budget but 6% more than FY06. This was due primarily to a shortfall in Publishing ($936,000) and dues ($445,000). Conference revenue was on budget at $9.1 million. Total expenses were $28.3 million, which was 5% less than budget. This was due primarily to publishing activities, which were adjusted based on projected lower revenue. The resulting net revenue was $149,000.

The final FY2008 budget was discussed and finalized. Adjustments included raising the healthcare benefit rate and new approved grants. Dues were adjusted down to FY07 levels after reviewing the mix of membership categories trends of late. Audit fees were also adjusted upward due to the more complex grant reporting requirements. Division budgets were increased by $59,000 to $16.4 million. Roundtables remained the same and that there was some discussion regarding the ALTA/FOLUSA cooperative venture.

The Graduated Dues study task force report was reviewed and discussed extensively. Essentially the study concluded that a full blown effort at this time would be cost prohibitive as it would be difficult to move forward without any trend/profile information on the profession. However, information about the profession was viewed as absolutely necessary if the Association was going to be in a position to progress in a positive way. BARC wanted to proceed on the first two points of the study i.e. conduct a membership survey Jose M. Griffiths is conducting with an IMLS grant.

The report was concluded with the mention of the work that was being done in preparation for the Midwinter Meeting ie Finance 101, PBA, Division/BARC meeting.

Acknowledgement

On behalf of the Finance and Audit Subcommittee I want to thank ALA Finance Staff Greg Calloway, Keith Brown, Russ Swedowski, Sandy Lee and Elaine Klimek for all their help in preparing for and executing the meeting and activities of the 2007 ALA Fall meeting.

Respectfully submitted,

Rodney Hersberger--Treasurer
Roberta Stevens
Larry Romans
Patricia Smith
Marilyn Hinshaw--BARC Chair