Treasurer’s Discussion

25 May, 2012G, Billings

Not included:•Dusa bequest ($261k, went straight to endowment)•Grant money that flowed through to direct expenses•Donations for AAVSOnet/APASS/2GSS hardware

Background on our endowment• After considerable research and discussions, treasurer of the time, Lou Cohen,

recommended moving our investments to Back Back Financial Group (now Modera), in 2005

• Back Bay invested us in a weighted mix of many institutional (low MER) funds. Broadly diversified to reduce risk, but strong equity component for long term viability

• Lou also performed Monte Carlo conditional simulations of the fate of our endowment, incorporating historical market volatilities, BBFGs rebalancing strategies, and various AAVSO withdrawal schemes, and recommended a rule for maximum withdrawals.

• The withdrawal rule we have settled on is to withdraw no more that 5% of the backward-looking average of start-of-FY endowment balance (“the 5BA rule”).

• This rule is compatible with Modera’s rules of thumb, i.e. that withdrawals of 4-6% are typical, and with long-term market statistics

• Note that in Lou’s simulations, strict adherence to this rule did sometimes lead to us going broke. Presumably council would amend the rule before that happened.

• This spending rule is not based on growing the endowment! It is based on withdrawing as much as possible with only small chance going broke.

Using the endowment:

200 yr history, different instruments

Total returns, not just

a stock price index

From Siegel, “Stocks for the long run”, 4th Ed’n, McGraw Hill, 2008

200 yr history: equities

From Siegel, “Stocks for the long run”, 4th Ed’n, McGraw Hill, 2008

200 yr history: bonds

From Siegel, “Stocks for the long run”, 4th Ed’n, McGraw Hill, 2008

200 yr history: “Balanced” 65/35• 65% equities at 6.8% real• 35% bonds at 3.5% real• Weighted portfolio result: 5.64%• So, if our diversified stock and bond portfolios

mimic the longer term statistics, and if historical statistics still apply, our 5% withdrawal rate is close to the long term max sustainable

• Our 5-year backward average eases management problems (avoids immediate staff layoffs when markets decline), but increases investment risks

Our portfolio performance at Modera“benchmark” – a weighted sum of 3 mkt indexes

Our portfolio, if $10,000 invested on Oct 19, 2005, with no withdrawals

Our portfolio compared to retail index ETFs (unmanaged):

Treasurer’s recommendations

Observations:• AAVSO financial flows are getting ever-more

complicated:– Overlapping large grants funding salaried and contract

staff, with overhead components that we apply to our operating budget, and “flow through” expenditures that bulk up our numbers but aren’t a matter for council decision

– New staff member with salary and expenses externally funded

– Multiple grant+donation “virtual accounts” for hardware, not segregated from other funds

• External auditor confirms all the $ are accounted for, but is otherwise not helpful for council purposes

Implications:

• Transforming accounting data into something suitable for council discussion is increasingly difficult

• Results are increasingly opaque

Recommendations:• Council set expectations for the budgeting / reporting process (to

justify cost of achieving):– Increased staff role in preparing financial material?– Director responsible for preparing budget (part of Budget

Committee?), and report of actuals vs budget?– A budget committee to jointly prepare budget?

• More explicit segregation of monies– more bank accounts?– more visible separation of the monies under our control, versus not

• We are interpreting our 5BA rule by using the entire endowment balance, rather than the unrestricted endowment balance. Try to correct this… will be aided by keeping “virtual accounts” out of the endowment.

• Align bylaws to actual function of Treasurer

Break to spreadsheet

Comments re FY2011 financials:• In FY2011, we withdrew 800k from endowment, versus budgeted 717k

(83k difference). Explanation: 61k less than budgeted received from Matt’s grants. Assume it will come in future years, so treat this as a loan from the endowment. When those funds come in, they should go straight to endowment. An additional $21k of carried-forward AAVSOnet money was spent in 2011. So, 61k+21k=82k, explains the difference.

• But there is another hidden problem: we received a 100k grant for 2GSS in 2011, and spent 46k. So, 54k to be carried forward. But it was not transferred to the endowment, nor was carried in cash at year end. If we just “magically” assume it is carried forward in the endowment, then either:– We overspent 54k on other projects– We under-recovered 54k on other grants, perhaps due to timing of money

flowsSo, we either have an bean-counting problem, or a $ problem. Either way,

more formal practices would avoid this.

Comments re FY2012 financials:• mid year, so all numbers are screwy• I overestimated dues income, due to previous years’ being inconsistently

adjusted in QB: it looked like typical year was 80k, but is really 60k. FY2012 is special as dues are for 15 months instead of 12, so estimate was (5/4)x80=100 – should have been (5/4)x60=75.

• Main thing to flag is that at end March, we had drawn 370k from the endowment. Budgeted amount for FY2012 is 669k (370/669=55%):– That should be reduced by any money coming in from Matt’s grants.– 53k was allocated for a post-doc. Didn’t get him, so I suggest Council reduce

the FY12 allowable by $53k and other adjustments mentioned here (and in an ad hoc manner, move it to FY13 where the situation is more desperate)

– Bump up by spending carried over money re AAVSOnet, 2GSS, though with some Treasurer-angst because it is not clear how that money made it in to the endowment

– So, much less withdrawals in 2nd half of FY

Recommendations re FY13 and later financials:

• I recommend we tentatively approve a 5BA draw of $621k for FY13. This is based on an end-FY12 balance of $12.7M. To be reviewed at the fall Council meeting.

• In addition, I recommend we move the unspent $53k for a FY12 postdoc, to FY13. This is 5BA compatible “in spirit”, if not in form.

• This will leave us with only a deficit of $14k but does not fund:– A post-doc in either year– Any non-donation money for AAVSOnet

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