David L. Hoffman, FAIA, NCARB

2015–2016 Treasurer

Financial Highlights

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.

 

Financial Highlights

To begin my report, I want to share some significant financial highlights demonstrating how the Council is going further:

  • We have been able to serve our members and Record holders for a sixth consecutive year without fee increases!
  • We have streamlined, simplified, and reduced a number of Council fees.
  • Our short-term reserve funding continues to be near the maximum established by the Council’s financial policies.
  • We have continued to grow our long-term reserve fund, adding $2.5 million this year.

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:

  • The financial results for Fiscal Year 2016, which ended June 30, 2016;
  • Council Reserves; and
  • We will review the budget for the upcoming Fiscal Year 2017 that began July 1, 2016, as well as take a look at what we anticipate in the next few years.

 

FY16 Financial Activity

 

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?

  • The blue section of this chart shows that 45 percent of the net revenue was generated by exam activity that exceeded expectations. We always experience increased testing levels when the launch of a new exam is approaching, and we anticipated that to happen again. Even so, actual volumes still exceeded those elevated expectations.
  • In the orange section, 21 percent comes from a healthy pipeline of licensure candidates, surpassing expectations for pre-licensure services.
  • Part of the net revenue also comes from expense savings—represented in the 19 percent yellow section of the chart.
  • Eleven percent comes from services to architects. This is largely due to improving the retention rate of our current Certificate holders.
  • The final 4 percent of the surplus comes from other revenue, which includes increased investment revenue and increased demand from foreign architects under the previous BEFA process (before the new certification path, which was passed at last year’s Annual Business Meeting).

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.

 

Council Financial Health

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.

 

FY17 Budget

The FY17 Council income budget that has been approved by the Board of Directors is $27.4 million.

The four main income categories are:

  • Architect services at 52 percent of the budget. This includes revenue from Certificate applications, reciprocity transmittals, and architect Record renewals.
  • Examination Revenue at 27 percent of the budget. This includes all income derived from the ARE.
  • Pre-licensure services, at 18 percent of the budget, comes from fees paid by those seeking licensure.
  • Other income includes Member Board dues, investment income and other minor sources shown by the 3 percent slice.

The FY17 expense budget is $27.4 million. The main expense categories are:

  • Employment and human resources at 38 percent of the budget. This is in sync with other nonprofit service associations similar to NCARB.
  • Operating expenses at 26 percent of the budget. This includes rent, equipment leasing and maintenance, communications costs, and depreciation, among other daily business expenses.
  • Consulting expenses, which includes ongoing operational costs of the ARE 4.0 exam, constitutes 17 percent of the budget.
  • Travel and meeting costs includes all committee meetings, the Licensing Advisors Summit, the Regional Summit, and this Annual Business Meeting. It represents another 16 percent of the budget.
  • The remainder in the “collateral support” category includes NCARB’s contribution to the NAAB among other opportunities.

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:

  • Reduced and streamlined fee structure.
  • Launch of the psychometrically justifiable, legally defensible, and financially sustainable
    ARE 5.0.
  • The new AXP, the  new Architectural Experience Program® (AXP®), which launched
    June 29, 2016.
  • Revised alternative paths to certification and continued focus on increasing the benefits of certification—including continued growth in the new monograph inventory, which provides free continuing education choices to active Certificate holders.

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:

  • Expansion of the NCARB by the Numbers.
  • Renewed focus on the disciplinary database.
  • Expanded auditing of Record services.

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.

 

Council Fees

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.

  • The Board of Directors reviewed the efforts of the Executive Committee and approved the following changes:
  • Reduced application fees:
  • The application fee for the AXP will drop by $250 to $100.
  • The Certificate application fee will decline by $400 to $1,100. This fee will continue to be waived for new licensees with active Records who seek certification within a year of licensure.
  • The annual renewal fee for a licensure candidate Record will move from $75 to $85 per year. However, combined with the reduction in application fee and reduced projected average completion time, the candidate will save around $70 over current total costs.
  • With the launch of ARE 5.0, the six-division exam will save candidates $210 over the cost of the current seven-division exam. Also, the extra $100 per division international delivery fee has been eliminated for candidates testing in London, Abu Dhabi, and Hong Kong.
  • Finally, the review fees of up to $5,500 associated with the former Broadly Experienced Architect (BEA) and Broadly Experienced Foreign Architect (BEFA) processes will be eliminated, removing a large financial impediment to those seeking licensure through alternative pathways.

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.

 

Long-range Forecast

In the final chart, we see recent history of the Council’s bottom lines, as well as the projections for the next few years.

  • FY15 and 16 ended with healthy bottom lines, primarily due to abnormally high levels of exam activity—this is also why we have been able to contribute what we have to our reserve accounts.
  • As discussed, FY17 is expected to break-even.  Adjusting to the “new normal” level of activity from programmatic changes means FY18 and 19 will be years with planned deficits.
  • In FY18 and 19, we will rely on our reserves to cover operations and avoid raising fees.
  • By FY20, we expect that all programmatic changes will be fully implemented and we will return to a nearly break-even budget.

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.