NCARB 2013 Annual Report

 

Dennis S. Ward, AIA, NCARB

Officer Report:

Treasurer

Note: This report is adapted from Treasurer Dennis Ward’s 2013 Annual Meeting report to Member Boards.

 

This year, so many things happened at the Council that will enhance candidate and Certificate holder experiences—we want everyone to feel the excitement. NCARB is not a reactive organization, but a highly successful proactive one. That is a cause for celebration!

 

You heard about exciting things happening with Architect Registration Examination® (ARE®) 5.0, now let’s look at a few other celebratory highlights from my perspective as NCARB treasurer:

● The planned operating deficit for FY13 did not happen! An increase in demand for Record-holder services coupled with a successful “Welcome Back” amnesty program, unexpectedly higher ARE volumes right before the July and August blackout, and a conscious effort by staff to continue finding operational efficiencies increased income and reduced planned expenses.

● These additional funds allowed us to shorten the payback period on the line of credit by two years and allowed the Board of Directors to reduce the authorized borrowing limit from $4 million to $2.5 million.

● In addition, recovering financial markets continue to improve the state of the Council’s long-term reserve fund. Today, it is at the highest level since before the recession.

 

With all of these successes as a backdrop, let’s review the financial results for the Fiscal Year 2013 (FY13) that ended June 30; the budget for the Fiscal Year 2014 (FY14) that began on July 1; and, take a quick trip into the future to view highlights from our long-range planning forecast through fiscal year 2017. I will wrap-up with a brief report on the activities of the Audit Committee.

​Here you see results for income, expenses, and investment gains. Income is approximately $24 million—close to $2.2 million above the budget. New Record applications, renewals, transmittal requests for reciprocity, and ARE administrations were all higher than originally anticipated. The ARE blackout created a surge in May and June administrations. Especially in June, we administered almost 9,000 ARE divisions—close to 6,000 more than we normally administer.

 

Expenses—at $21.2 million—came in nearly $1 million below budget due to savings in operating costs, consulting expenses, and committee costs.

 

As you see on the bottom, the net results from income and expense activities provided us with an operating surplus of $2.8 million. On the far right, you can see that we also experienced gains on the investment portfolio. Because market conditions are not under our control, investment results are not part of operating activity; however, they do add to a positive financial outcome. The sum of the operating surplus and investment gains was a positive $3.3 million; however, this is not the end of the story.

 

 

 

 

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The Council recorded a special, one-time charge on the financial statements of $4.6 million this year. This expense is for ARE development costs from the past five years.

 

As with other successful organizations, the Council invests in research and development of emerging technology to improve the services we offer to our stakeholders. We have been engaged in significant research and development activity for the future of the ARE for many years.

 

This year, emerging technologies combined with the culmination of several years of work by the Council’s Research and Development Subcommittee, assistance from the ARE Grading Subcommittee, and the product of a special staff research team resulted in a new and exciting path forward.

 

Our balance sheet held $4.6 million in capitalized development costs. As a result of the decisions reached by the Board and the new direction for the future, these development costs were expensed this year in a special, one-time charge to the Council’s financial statements. This money was an investment to put us on a better path.

 

This year’s decision will have a side benefit of a positive economic impact on the Council while continuing to deliver the highest-quality examination that remains psychometrically justifiable and legally defensible.

 

The purple line demonstrates our history of research and development costs as well as estimated costs for the current and future years. While we are only showing activity from 2008—this path actually goes back to before 1997 with the development of the computer-based ARE. Staying on this path would have continued to have significantly higher—and harder to determine—costs in the future.

 

The solid blue line shows the financial impact of the new path we are now on. As you can see, there is a lower initial investment as well as lower annual maintenance costs. Converting to this new path is estimated to save the Council several million dollars through FY19.

 

This will allow the Council to meet several objectives:

●  Eliminates some future planned fee increases

●  Pay off the line of credit

●  Build the long-term reserve fund

●  Provide resources to continue improvements in services to members and Record holders

 

These are certainly great reasons for celebration!

 

Coming back to the $4.6 million, one-time expense, this expense was offset by the surplus from operating activity and gains from investments mentioned earlier—resulting in a $1.3 million “book” loss for the year. I say “book” loss because these funds have all been paid. There was no impact to our cash balances or investment portfolios. While these funds were originally borrowed from the line of credit, the final repayment of those costs was made early this fiscal year. I will talk more about the line of credit shortly.

 

Let’s take a look at the status of the Council’s financial health. By financial health, I mean the net results of money in the bank vs. money owed.

 

 

 

 

 

​Continuing our theme of celebration, the story I want you to see in this chart is that our assets—the operating and short-term reserve fund on the left and the long-term reserve fund on the right—far outweigh the money owed to the line of credit. This is represented by the orange bar on the right.

 

Above the chart you can see that the operating and reserve funds exceed the monies owed to the line of credit by $12.6 million! That is financially healthy—another reason to celebrate!

 

 

 

 

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Let’s take a look at where NCARB stands among other organizations similar to us. We benchmarked our cash and reserves against five organizations whose missions are similar in nature to NCARB—the pharmacists, the accountants, the engineers, nurses, and landscape architects as well as three of the collateral organizations—the American Institute of Architects (AIA), the National Architectural Accrediting Board (NAAB), and Association of Collegiate Schools of Architecture (ACSA).

 

The chart represents the level of savings as a percent of an organization’s annual revenue budget. NCARB is the first bar on the left. Our level of savings is slightly more than 50 percent of our annual revenue budget. Across the chart, only the landscape architects and NAAB—significantly smaller in scope and budget—are as low. While the Council’s investment policies call for a slightly higher level savings than we currently have, the reduced level is due to the fact that we have been in a sustained period of regeneration—investing in our programs and infrastructure.

 

In addition to this benchmarking, our investment advisors studied the Council’s saving levels. During our meeting with them in December, they noted that the current level remains healthy.

 

 

 

 

 

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Several times, I have referenced the Council’s line of credit. I told you that this year’s one-time $4.6 million expense was borrowed from the line of credit, but has been repaid. The $1.62 million balance in the line today is for:

●  A new capital project begun two years ago when we entered into a new partnership to develop a candidate and content management system with two exam vendors and our internal Information Systems (IS) team.

●  Development of exam content in this new system began earlier this year with our volunteers. The new system replaced the slow and completely manual system of the past.

●  The Member Board Executives (MBEs) now have improved access to exam candidates.

●  For candidates, the new system provides transparency into their exam status, which is integrated with their NCARB Record for the first time in history.

 

The MBE and candidate services launched after the blackout due to the need to migrate and quality-control check all historical examination data from the existing vendor to the new vendor and to NCARB. The balance shown on this chart of $1.62 million is what’s left to pay off on this project through FY18.

 

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Now that we have seen the many wonderful successes of the past year and financial health of the Council, let’s look at the FY14 budget.

 

Every year, the budget process includes development of the next year’s budget plus a long-range planning forecast for an additional three years. This provides a total four-year outlook that helps the Board identify and plan for significant events. We begin the budget process with historical trend analysis of NCARB services and expenses. We take into consideration the economic projections. We define the initiatives planned for the next four years and the resources needed to accomplish them.

 

This chart shows the Council’s revenue sources. As we can see, “Architect Services” provides over half of the Council’s annual income. This includes Certificate Record renewals and transmittal requests for reciprocity. Revenues from the ARE provide about 22 percent of the income budget. Revenues from intern applications and renewals provide approximately 20 percent of the budget.

 

 

 

 

 

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This chart displays the costs for the Council resources needed to accomplish our services and programs. The four main categories are:

●  Employment and human resources, which today makes up about 40 percent of the budget.

●  Operating expenses, including rent, equipment leasing and maintenance, publishing costs, depreciation, etc. makes up about 25 percent of the expense budget.

●  Consulting expenses, mostly exam related, constitute 16 percent of the budget.

●  Travel and meeting costs represent 14 percent of the budget.

●  The “Other” category is NCARB’s contribution to the NAAB and the amount awarded through the NCARB Award.

 

Key factors included in this budget:

●  First, based on economic conditions, we are not increasing fees in FY14. This is the third year in a row with no fee increase.

●  We will continue our investments in more in-house systems development. A new online application system launched July 1. Over the next year, our in-house team will be developing a new renewals system, improving the monograph system, and continuing to grow our new data warehouse—just to name a few of the many initiatives planned. Keeping our systems current is critical to the quality service to our members and Record holders.

●  In FY14, NCARB will host the single Regional Meeting.

●  The launch of the new ARE systems for MBEs and candidates.

●  International delivery of ARE started in September 2013 in London and Abu Dhabi with delivery in Hong Kong expected sometime in late 2013 or early 2014.

●  Beginning the development of ARE 5.0. That includes new performance item types that will continue to be psychometrically justifiable, legally defensible and financially sustainable.

●  We will also continue to host the IDP Coordinators Conference and our outreach activities. These activities include visits to Member Boards, schools, firms, conventions, and other state events.

 

After accounting for all of these initiatives, the FY14 budget is balanced at $22.8 million. This is actually the first time in several years that the outcomes for services and new initiatives achieved a balanced budget at the outset of the year.

 

Let’s look at few of the highlights for the three future years as well:

●  There are currently no plans to increase fees in FY15, FY16, or FY17.

●  If, for any reason that would change, there would be at least an 18-month advance notice to membership and Record holders.

●  We will be completing replacement of 20-year old in-house systems to provide improved integration with Member Boards and key vendors while also providing improved access and transparency to all users.

●  We will develop and launch ARE 5.0 with an associated cut score study.

●  We will begin the next Practice Analysis—another fairly costly process.

●  We will continue to make payments on our line of credit with expected completion no later than FY18.

●  We will build long-term reserves as funding availability permits.

 

With all these initiatives, we still expect to maintain nearly balanced budgets. I hope you agree with me when I say our financial future looks very promising and that we will continue having more reasons to celebrate.

 

As a last order of business, it is my fiduciary responsibility to report to you on the activity of the Audit Committee this year. As spelled out in the Bylaws, this committee is composed of members of the Board of Directors. It is chaired by the treasurer, with one other member of the Executive Committee and three other directors. The committee’s responsibility is to oversee the Council’s financial controls and the independent financial audit.

 

In FY13, the committee:

●  Reviewed the findings of the FY12 audit with the independent auditors.

●  For another year, we again received a “clean” audit opinion from the auditors.

●  This year, the audit committee also issued a “Request For Proposal”

●  A new firm was selected for the coming audit.

●  The FY13 audit report was completed in late September and is included in this Annual Report.

 

As we move forward into FY14, I anticipate that we will continue down this path of success. We will begin development of an improved ARE, continue to reduce the balance in our line of credit, and build our long-term reserves. Finally, we will do all of this without increasing fees to our constituents.