2003 Annual Reports for Boards and Committees

FINANCE COMMITTEE REPORT FOR 2003

During 2003, the Finance Committee (FC) continued to address the major financial issues of concern to the Association. These issues included: budget oversight, building refinancing, audit firm transition, and long-term investment portfolio performance.

Although 2002 resulted in a significant deficit from operations, the management, FC and BOD with the support of the COR, implemented many operational changes in late 2002 that also lead to a much improved “bottom-line” for 2003. Although the books are not yet closed, we expect to end 2003 with a modest surplus from operations - the first surplus in many years. This turn-around did not come without its hardships and difficult decisions. All areas within the Association were impacted - from the canceling of one round of consolidated meetings, to including no merit increases for staff, to restricting travel/printing/special projects to name only a few. Because many of the corrective actions taken in 2002/2003 did not automatically carry forward into 2004, the FC recommended to the BOD that proactive steps be taken to shape 2004 prior to the budget development. As approved by the COR in August 2003, the management, FC and BOD were able to provide sufficient guidance in shaping the 2004 budget thereby projecting a modest surplus for the second year in a row. The FC’s efforts throughout 2004 will be focused on 2004 actual activity to avoid a repeat of the drastic steps necessitated in 2002/2003.

As many will recall, much of 2002 and 2003 was focused on the building refinancing transactions. Although the bulk of the refinancing took place mid-November 2002, the tax-exempt portion settled in March of 2003. Given the complexity of the refinancing, many staff hours were spent with our audit team (PricewaterhouseCoopers) during the early part of 2003 to properly record each element of the transaction (including closing of the partnerships, retirement of debt, creation of the new LLC’s, and the buy-out of our partner – NASW). The most significant of these was the accounting treatment that required the one-time recognition of the $11M pre-payment penalty in 2002 rather than being able to recognize the pre-payment expense over the period of the new loan. Throughout this process, the FC and BOD have received updates throughout the year in an effort to keep all informed of the various developments as they surfaced.

During 2002, the FC worked with the staff to conduct an audit firm search as is our standard practice every 5-7 years. The process was quite timely given the mid-2002 collapse of Arthur Andersen, our audit firm at the time. PricewaterhouseCoopers (PwC) was selected as the replacement audit firm beginning with the audit engagement for 2002 operations. In addition to dealing with the complex refinancing transaction during our first year with our new audit firm, the FC spent a significant amount of time addressing the many transition issues that are inherent in any such change. For a variety of reasons, the PwC team took exception to a number of positions our former auditors supported. In the final analysis, these differences in interpretation resulted in several prior period adjustments to our financial statements (first time in APA’s history). In addition to some interpersonal working style issues with the new audit firm, recent new accounting requirements led to a proposed 60% increase in the fees for the 2003 audit work. The FC held several conference calls and a subcommittee was formed to assist staff in negotiating with the PwC engagement partner. The final result, as supported by the BOD, was to continue the engagement with PwC for one year under several conditions (some audit personnel changes and a compromise on the fee) with the goal of moving toward a healthier relationship with the audit team going forward.

It is the responsibility of the FC, with the help of its investment community members, to oversee the performance and management of APA’s long-term investments. Unlike recent years, 2003 was an outstanding year for our long-term portfolio. In fact, our long-term portfolio grew from $32.5M (January 1, 2003) to $42.6M (December 31, 2003). Of the $10.1M gain during 2003, $6.5M was from our account that is managed by Southeastern Asset Management (large cap value manager).

The highlights for 2003 are as follows:

A manager search was conducted to identify potential small cap value firms to move the Association closer to the recently revised asset allocation*. The Earnest Partners mutual fund was selected and an initial investment will be made with them in early 2004.

* Asset allocation follows:

Due to less than desireable performance, the FC voted to liquidate our current international mutual fund holdings (EuroPacific and Vanguard) and to invest in Longleaf International mutual fund (managed by Southeastern Asset Management).

Note: The above changes resulted in the shifting of existing funds as well as the addition of approximately $2M from APA’s working capital into the long-term portfolio.

As is the case at every meeting, the FC reviewed and made a number of changes to the Associations’ Long-Term Investment Policy statement. The policy statement, as revised, was approved by the BOD in December 2003 and will be provided to the COR for information in February 2004.

The FC’s focus for 2004 will be devoted to overseeing the development of the budget and forecast for 2005-2007, and ensuring that the philosophy approved during 2003 is upheld whereby we continue to build our resources to offset in part the projected 2012 building loan balance.