At last year's Annual Meeting my report focused on the Academy's inability, as evidenced by ten years of successive failures, to carry out its business within approved annual budgets. The overages for this period amounted, on average, to $50,000 per year – with the result that after a decade, the Academy carried more than half a million dollars of operating deficit on its books. The report pointed out, among other things, that the cumulative effect of this pattern of over-expenditure has cut into the funds available for investment and therefore into the usable investment income available each year to support the Academy's programs.

These remarks were intended to sound an alarm about a structural deficit that had come to be built into the Academy's annual financial plans. They also proposed four steps toward a remedy. The first involved stepping up timeliness and utility of financial reports on the premise that regular monthly reports would foster more proactive responses to deficits as they emerged during the year. The second involved setting a clear spending rule for the Academy's invested funds, and, as a necessary corollary to this action, eliminating the so-called "contingency fund” that for several years had been permitted to expand in size during the course of a year so that it masked the deficits that were being incurred. The third step addressed the Academy’s income stream by aligning our membership dues with those collected by most other comparable learned societies. Finally, the report closed by recommending the creation of a comprehensive and strategic plan for the Academy’s finances. It suggested that this step would require time for careful deliberation and that it would count importantly on the fresh insight and seasoned experience that a new Executive Director would bring to the table.

Given the serious impact that an unchecked structural deficit has had on the Academy’s ongoing financial health, it is appropriate to ask what progress has been made over the course of the past year toward resolving this problem. First, the bad news. The Academy closed its books on December 31^st with an operating deficit of $76,833. Viewed in isolation, this deficit, which amounts to $29,926 more than the deficit that been originally scheduled into the 2011 annual budget, implies a worrisome acceleration of the ongoing erosion of the Academy’s financial base. But our response here should be tempered, I suggest, by comparing the actual amount we were over budget to an even larger shortfall that would have occurred had the Academy’s new Executive Directors not taken swift and decisive action to head off a substantially larger deficit that loomed on the horizon when they took office on September 1^st. As the result of their difficult decision to place staff on a reduced work schedule, $43,167 was trimmed off a deficit that would have occurred by year’s end.

As a token of the kind of determination that it will take to shore up the academy’s finances, the imposition of this emergency measure bodes well. Moreover, during the last six months in spite of a 20 percent reduction in staff hours, the new Executive Directors have made good strides toward reversing the negative financial pattern that they inherited. Excellent progress has been made toward strengthening the Academy’s accounting systems: updated software has been acquired and expert help has been engaged to assist office staff in its proper use. As one result of these improvements, members of the Finance Committee, for the first time in memory, are able to monitor income and expenses on a monthly basis thanks to reports that can now be generated. On another significant front, a new and highly competent auditor has been hired after a diligent search. She is presently guiding us through a process that will cast the academy’s financial statements along lines mandated by the recent state legislation involving the prudent management of institutional endowments. Finally, as an another indicator of positive change, this Fall the Finance Committee proposed, and the Executive Committee approved, an annual budget for 2012 that projects a modest surplus at year’s end.

All of the foregoing supports a view that a significant turnaround in the Academy’s finances is now under way. Financial reporting has been measurably improved, new budgetary discipline has been imposed, and a strategic cast of mind, so important to the development of the long-ranged financial plans, has been evidenced in decisions made by the new Executive Directors. Moreover, the recent resignations of two staff members have opened the possibility of addressing our structural deficit and its long-term effects through a significant reconfiguration of the resources that the Academy employs to carry out its mission.

It would be premature at this point to claim that the problem has been eliminated. Membership dues for 2012 are still being collected. At the moment it is hard to evaluate the effect of the increases mandated last March but not tested until now. Furthermore, there is a possibility that the NEH may require the return of some expended grant monies, a move that could impose an unbudgeted draw of up to $27,975 on resources allocated for the current year. Added to these uncertainties, predictable future increases in the cost of doing business—higher health insurance expenses, higher rental charges when our current lease runs out, to name two—urge that we must act with continued vigilance to insure that our structural deficit is eliminated and not just abated for a few years as it has been in the past. That warning heeded, it is reassuring to point to the positive steps that have already been taken by our new Executive Directors. These steps, coupled with developments in staffing circumstances, make this an auspicious time to hope for the achievement of a sustainable solution to the Academy’s longstanding financial issues. Our Executive Directors have shown every indication they are up to the task of leading the way.

The Finance Committee should also be acknowledged for its contributions to progress achieved. Indeed, in addition to its participation establishing the Academy’s annual budget, it has decided, as of a vote cast at its last meeting in February, to turn a fresh eye on evaluating the performance of those who handle our investments. So, as we seek to limit the draw on our invested assets to the amount approved at the beginning of each budgetary cycle, we will also seek to assure ourselves that our return on their investment matches, or surpasses, that of similarly situated organizations. For this work, the members of the committee, John Contreni, Felice Lifshitz, Kathryn Reyerson, William Stoneman, and Grover Zinn, deserve the Academy’s warmest thanks.

Respectfully submitted,

Eugene W. Lyman, Treasurer