epending on how you look at its financial reserves, the Society for Human Resource
Management is either a fortress of fiscal strength or just a typical, well-run nonprofit.
There is no law or industry standard governing what level
of financial reserves a nonprofit association like SHRM needs to weather economic
trouble or fund new initiatives. There isn’t even a fixed definition for calculating
reserve levels. Tallying up the value of long-term investments is one approach,
while another is to focus on net assets.
SHRM defines reserves as unrestricted net assets, meaning
resources that aren’t earmarked for a specific purpose. At the end of 2006, SHRM
had $138.3 million in such assets. Reserves are generally compared against annual
operations. For 2006, SHRM took in revenue of $95.5 million and had expenses, including
income tax expense, of $89.1 million. SHRM sees its level of reserves as typical
of well-run not-for-profit organizations. That view is backed by placing the organization’s
reserves in the context of a report on not-for-profits by financial ratings firm
Moody’s Investors Service, says Hank Jackson, SHRM’s chief financial officer.
SHRM’s 2006 ratio of net assets to operating budget was 1.55,
Jackson says. That figure, he says, corresponds to Moody’s data on the ratio of
"expendable financial resources-to-operations" for not-for-profits.
Moody’s found that the 2005 median ratio for "Baa"-rated not-for-profits
was 1.09, while the median ratio for "A"-rated not-for-profits was 1.72 and the
median ratio for "Aa"-rated organizations was 2.91. A median is the midpoint in
a sample. Moody’s ratings reflect the financial soundness of an organization, with
an "Aa" rating exceeding a "Baa" rating.
"We seem sort of in the middle," Jackson says.
SHRM does not have a rating from Moody’s. It would typically
obtain one if it were to sell debt to finance a major transaction.
SHRM may look normal among nonprofits rated by Moody’s, but
it seems to possess unusual monetary muscle when compared against other large not-for-profits
in its IRS category—501(c)(6) business leagues. Even taking into account different
definitions of reserves, SHRM stands out, says Andrew Lang, a certified public accountant
with expertise on 501(c)(6) organizations.
Lang looked at SHRM’s 2006/2007 annual report in the context
of data on the reserves of 501(c)(6) groups published by the American Society of
Association Executives. The association serves as a resource for trade and professional
associations.
"They have reserves well in excess of the industry average,
no matter how you calculate it," says Lang, who has taught seminars on financial
matters for ASAE.
ASAE does not prescribe a particular definition of reserves,
but asks 501(c)(6) organizations about their year-end reserves as a percentage of
their annual operating budget. According to ASAE’s "Operating Ratio Report" from
2003—its most recent published data—501(c)(6) organizations with annual revenue
of more than $10 million had average reserves of 56 percent of their annual operating
budget. The median in the sample of 41 associations was 45 percent.
Given SHRM’s definitions of reserves and operating budget,
its comparable figure for 2006 was 155 percent. Anecdotes from other 501(c)(6) groups
fill out the picture. While SHRM’s net assets for 2006 were well above its expenses
for the year, other 501(c)(6) groups report net assets well below their expenses.
The American Academy of Family Physicians had total expenses for the year ended
May 2005 of $70.7 million and net assets of $54.7 million. The American Bankers
Association had total expenses for the year ended August 2005 of $72.4 million and
net assets of $48.4 million.
SHRM’s Jackson argues that it is not very meaningful to compare
SHRM with 501(c)(6) groups of just $15 million or $20 million in annual revenue,
given that SHRM’s revenue for 2006 was $95.5 million.
He also says the American Bankers Association is a poor reference
point, since it has an easier time renewing its members, which are banks. "You don’t
need the level of reserves you need" with an organization that relies on individuals
as members, Jackson says.
| 2006 FINANCIAL SNAPSHOT: |
| TOTAL ASSETS |
$179.6 MILLION |
| RESERVES |
$138.3 MILLION |
ANTICIPATED 2007 RESERVES
(unrestricted net assets predicted by organization) |
$160 MILLION |
| LONG-TERM INVESTMENTS |
$122.4 MILLION |
| REVENUE |
$95.5 MILLION |
| EXPENSES |
$89.1 MILLION |
|
|
"[SHRM has] reserves well in excess of the industry average, no
matter how you calculate it." |
|
—Andrew Lang,
CPA with expertise on 501(c)(6) organizations |
Whether or not SHRM is rich in reserves, there’s no question
those reserves have been growing. In 2003, the organization had reserves, or unrestricted
net assets, of $86.3 million. The books haven’t closed yet for 2007, but SHRM expects
its reserves to hit nearly $160 million for the year.
Although outgoing SHRM chief executive Susan Meisinger oversaw
a major increase in reserves over the past several years, the roots of SHRM’s financial
strength may lie with Mike Losey, who served as CEO of the association in the 1990s.
During his 10-year tenure, SHRM’s net assets rose from about $5 million to more
than $70 million.
Losey, a former vice president at technology company Sperry,
made no bones about running SHRM as a business.
Even when board members occasionally cringed at annual surpluses
of $10 million or more, Losey did not flinch at beefing up SHRM’s coffers. "Sometimes
board members would say, ‘My God, we made how much?’ " Losey says. "I wrote it off
as ‘They’re HR people. They’re not business people.’ "
Now an advisor to other nonprofits and an instructor for SHRM,
Losey applauds SHRM for its current reserves. He says the value of long-term assets
can fluctuate wildly with the stock market. And, he says, all the hard work it takes
to build up reserves can be reversed quickly in troubled times. "The air goes out
of the balloon a lot faster than it goes in," he says.
At some point, though, it becomes an issue whether an association
flush with cash should tap its reserves to provide more services or cut fees, says
Bruce Hopkins, a Kansas City, Missouri-based attorney who specializes in representing
nonprofits. "Somebody could argue that the dues are too high, or the conference
fees are too high," says Hopkins, who is part of the law firm Polsinelli Shalton
Flanigan Suelthaus.
Jackson says that in practice, SHRM aims to keep its reserves
between 50 percent and 200 percent of its operating budget. Much of the expansion
in recent years has come from a strong stock market, Jackson says. SHRM had $122.4
million in long-term investments in 2006, up from $65.6 million in 2003.
The growing value of investments has triggered some spending
of reserves in the past few years, Jackson says. Last year, for example, SHRM spent
about $7 million of its reserves on items including the promotion of HR education
at the university level.
In 2006, SHRM was recognized by ASAE in its book 7 Measures
of Success: What Remarkable Associations Do That Others Don’t. Among ASAE’s criteria
for success are two tied to finances: data-driven strategies and organizational
adaptability.
Bob Skelton, chief administrative officer for ASAE and a SHRM
member, has no qualms with SHRM’s reserves or its level of service. He finds e-mail
bulletins from SHRM helpful, and may sign up for a new SHRM mentoring program. SHRM’s
reserve level might be a problem, Skelton argues, if it were raising dues dramatically.
SHRM has kept its annual dues constant for more than a decade,
at $160.
SHRM is "very well run," Skelton says. "I get value for my
annual dues in excess of what I pay."
Workforce Management, February 4, 2008, p. 21
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