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Pacifica CFO Financial Overview - Feb. 2004

From: http://pacifica.org/finance/CFOreport_toCommunity_Feb04.html


Pacifica Foundation Budget and Finances:
A Report to the Pacifica Community-
How are we Doing?


by CFO Lonnie Hicks
February 2004

This is a report to the Pacifica Community on the finances of the Pacific Foundation, and, simultaneously, I hope to give the new Board and Local Station Directors a short primer on the over-all finances of the network.

I also hope to give those new to network finances points on how to read the budget and finance documents we work with. More pointedly, the goal is to provide an understanding of the financial dilemmas, choices and issues in our financial structure.


Overview of Network Finances

The fiscal year of the network begins October 1 of each year and extends to September 30 of the following year. As most of you know we receive most of our funds from listener fund drives which occur three times during the year. Most stations add a summer drive as well.

This fiscal we will, on projection, raise $14.79 million dollars. Seventy-seven percent of those funds will come from individual listener donations. This is tremendous support for the network but it is also our vulnerability. If listeners materially reduce their support (as occurred at WBAI this fall) it can be difficult for the network.

We also receive significant funds from grants, including those from the Corporation for Public Broadcasting which total $1.38 million or 9.3 percent of total revenue.

Expenses are projected to total $13,157,708, half of which is used for salaries and benefits. The remaining expenses include administrative expenses which such as telephone, postage, and bank finance charges connected with on-air fund drives, utilities and the like. Administrative costs vary from station to station but average 22 percent for all stations.

Legal Expenses: One of our Biggest Headaches
One of the largest expenses are legal and professional service firm fees which have been with us since the change-over from the old Board to the interim Pacifica National Board (1999-2001). As most of you know, this has been a daunting challenge and in recent months, we’ve faced new bills related to both old litigation, legal costs in the bylaws area, and final settlement costs from old suits.

The good news is that most of the litigation is behind us. The bad news is that we have new current legal bills to pay. As of this date, the Pacifica Foundation faces current due and payable legal debt of approximately $475,000. This debt includes personnel cases, by-laws, elections, new legal settlements, and, of course, attorney fees. In addition, Pacifica faces $370,000 in legal and professional service firm debt dating back several years. Most of this $370,000 service firm debt is not active, not currently being invoiced, and is a potential write-off for Pacifica.

Please note that some of these legal costs are moving targets and may change as the fiscal year proceeds.

Central Services
Central Services are those expenses managed by the national office on behalf of all stations and on behalf of the network. They include insurance (204k per year), National Board expenses, Federal Communication Commission related costs, legal expenses. (these can be very large and vary from normal attorney costs to large dollar amounts stemming from legal settlements, expenses and taxes). Also included are National Office staff: accounting staff, a Development Director and Human Resource Director and other staff who work on network wide issues.

Staff costs total 33.5 percent of total National Office expenses.

Other expenses at the national level include monies for audit and legal, election expenses, and National Programming including Democracy Now! and other special event and news coverage.

Central Services in the proposed FY04 budget total 16.6 percent of total expenses, 14.8 percent of total revenue and 19.1 percent of listener income. The National Office holds the FCC licenses of the network and is the office with responsibility for the overall operation of the network.


The Bottom Line

The net surplus/deficit line indicates a total surplus of $1.64 million on expenses of $13.15 million. This is a return of 12.5 percent on “operating.” Operating expenses are those expenses incurred by the organization in the normal course of its yearly operations. Twelve and one-half percent is an excellent return. Operating return identifies how much surplus the organization can produce in a given year. By comparison, this amounts to saving $312/per month on a $2,500/per month salary.

After operating revenue and expenses are calculated, Pacifica’s practice in the past has been to add on a “Capital and Cash Budget” below the operating budget. This “Cash and Capital Budget” has been in use for several years. It tells the reader how each station plans to spend its “surplus” in a given fiscal year on capital items or other items which may require a cash layout. This particular aspect of the budget, I believe, ought to be eliminated because it causes some real difficulties not only for the network but also for staff as we seek to manage the finances of the system.

As I have relayed to the Board, here are a few points on this to consider:

Accounting practice is not to mix income statements, cash flow statements, and capital expense items in the same statement. This causes confusion and mixes apples and oranges, and is incorrect. It also confuses our bankers, our creditors and others who are not used to seeing this statement mixed in this way. It should be eliminated.

The “Cash and Capital” budget should be two budgets (Cash Flow and Capital Budgets) and I am working on reorienting our current systems, (accounting, budgeting, cash management, accounts payable, etc.) to produce the relevant information. Our current finance staff has had possession of the books here for only six months and will require time to finish the audit and then we will take up these issues. This will take time, perhaps several months. But it will be ready for the 2005 budget year. Meanwhile, I have taken some stop-gap measures which I use to measure our current situation.

This notwithstanding, the budget represents a considerable step forward for the network in that each station now has a requirement of one months operating reserves in the budget to be achieved by September 30, 2004. This is crucial in that it allows the system to have reserves for emergencies in the fiscal year including monies for emergency repairs to transmitters, and for unexpected events such as earthquakes, fires, lawsuits and other mishaps. The one-month reserve also provides reserves to pay our staff in the event something happens. Many thanks to our General Managers, accounting staff and others for making this reserve possible.

However note that we live in a period that, while revenues are rising, so are expenses. Workers Comp is up 15 percent this year; medical expenses up 30 percent; new union contacts have increases; and insurance, litigation, elections, and By-Law related costs all add up to substantial sums. We need to control costs in all areas. As new Board members, job one is to control costs issuing from the Board itself. Executive Director Dan Coughlin and I have stated that every Board proposal, idea, suggestion or program ought not to be entertained by the full Board or finance committee unless accompanied by a financial impact statement such that we know how much that item will cost. The ED and I will insist that this rule be adopted by the new Board as well. A reserve is essential. It can be wiped with one bad drive, or one or several significant cost over-runs.

So one month is minimum to have in place. Common practice is to have three to six months operating reserves in place. To do less is risky.

But what happens if expenses do exceed revenue? For example, a dip in listener support can be devastating and immediate leaving little time to react or plan. What to do? We could:

1) Reduce costs to match any reduction in revenue

2) Identify new sustainable sources of revenue

3) Re-structure the unit or station to alter the over-all cost structure of that station

4) Re-conceptualize the cost structure to move expenses to a follow-on fiscal year.

5) Merge the unit with other units or stations

6) Fund-raise to match the new expenses

7) Obtain loans and other support from other sister stations

8) Obtain loans and other support from the National Office which often supports a given station, especially where funds are needed to meet payroll.

9) Finally, the Executive Director can ask for support from stations as a group to handle extraordinary expenses, or, he/she may allocate specific expenses to a station where it is clear that the station in question originated the expense (normally legal).


Reserves to Back Up Our Reserves

A last resort is to dip into the accumulated funds each station may have from years of operation or from drives from previous fiscal years. This figure can be found in the year-end audits which break out how much cash on hand each station has or has available in liquid or near liquid funds (i.e., money market funds). See the network audit available at Pacifica.org website. On the whole at September 30th, 2003, internal documents show that the network had $1.3 million cash on hand. As of January 2004, that figure had increased by $1.1 million. Again, this is excellent since it tells us that this “second reserve” is available “in the system” if needed. Moreover, it is 2nd source support if needed to handle very large, unexpected expenses.

So, by way of summary, the three documents we have examined are the Profit and Loss Statement (the Statement of Activities), and the truncated “Cash Flow and Capital Budget” statement alluded to above.

In addition, there is the network’s Balance Sheet which is normally published yearly or perhaps quarterly. Inventory counts are particularly difficult in the generation of a monthly Balance Sheet and, therefore, are not feasible on a monthly basis.


Budget Issues and Questions

Note the Annual Operating Budget is a plan of action and often changes from the moment it is written, and, given our fund-drive based revenue the budget ought properly to be seen as a rolling forecast. For example, a new grant or contract comes in unexpectedly, therefore, revenue and expense estimates change. Expenses may be higher than anticipated or lower than anticipated.

Normally, larger changes trigger forecast changes which are then presented to the Board for review with variances highlighted. Or, often, guidelines are created where latitude is given to make small adjustments internally as long as there is no variation to any line item by more that 10 percent of the original budgeted costs. This maximizes flexibility meaning that small changes do not trigger a multitude of budget changes.

Finance Budget Issues and Questions

1) How do I read the budget and the Financials?
The Chief Financial Officer will come to each station upon request and explain the budget, its production, and goals upon request. Ask your General Manager for details.

2) Who is responsible for the Budget?
The budget is a collective product involving the Local Station Boards who work with the General Manager, the station Business Manager, the Executive Director, and the Chief Financial Officer to produce an initial budget. Generally, the Chief Financial Officer reviews the budget to see if it conforms to commonly accepted practice, is in line with Board and National guidelines and is correct and achievable. This preliminary budget process begins in April of each year and culminates in Board approval of the final Budget document at it’s September meeting, in time for the beginning of the fiscal year October first.

3) What are the Financial Goals of the Network?
The Financial goals of the network are detailed in work plans yet to be presented to the Board. They include:

A two pronged goal structure of just two over-arching goals:

Transform Pacifica into a financially sound, multi-platform, multi-media organization, with the capacity to be effective locally and to have an impact nationally

Develop Pacifica to become internally a network which reflects its mission values, manifested in a how it treats staff, how it’s internal processes actually work, where peace, justice, and fair play actually describe our internal relationships.

4) What are the Financial Objectives of the Network this fiscal year?
Given the stated goals above, it is clear all of that cannot be done in a single year. Objectives are those sub-goals we think can and should be addressed in this fiscal year. They include:

a. Reduce our vulnerability to revenue swings in listener support by developing long term, sustainable, replicable sources of revenue diversity. This will include exploring the internet as a source of new revenue through special streams, enhanced multi-media offerings, strengthening the on-line presence of the archives and historic recordings, and making available premiums listeners might want to pay for.

b. Explore the prospect of marketing more effectively to Pacifica’s large number affiliates who have been clear with us around their needs and desires in the area of programming and support.

c. Develop internal goals aimed at supporting staff, reducing internal strife, developing employee individual growth plans, improve retention levels, benefits and organizing our considerable human resources to better support our mission values and goals. Specifically, I am exploring developing individual growth plans for each staff member where feasible to include:

-A written growth and development plan for each staff person.

-Information about home ownership and financial planning for each staff person where requested.

-Reviewing our various benefits to streamline them and make them more workable for each staff person. We have instituted voluntary direct deposit for staff wanting that convenience.

-Looking at the differing needs of older staff, volunteers, younger staff, single staff vs. partnered staff.

-Above all, looking at ways to improve the take home pay of staff.

d. Improving the administrative infrastructure of the network. Much work to be done in as regards payroll, benefits, phone systems, transmitters, technical quality all with an eye toward improvements within reasonable cost limits.

5) What are the legal and financial responsibilities of a new LSB or Board member?

This is a tremendously complicated area and I will address it in face to face meetings upon request. But please understand that as a Board member you and the network can be held collectively and individually responsible for each act, every word said in public and private. Such statements may be legally binding, actionable and may have enormous consequences. We must go to detail on how to proactively protect ourselves and the network.

Each LSB and Board member will get materials being developed by the National Office which will include essential source documents and information to include:

a. A job description and description of the duties of a LSB or Board member;

b. A copy of the latest network Budget, Forecasts, and Financials: (Income Statement & "unaudited" Balance Sheet) as of 12/31/03;

c. A copy of network By-Laws;

d. A copy of network Financial Polices under review;

e. A copy of network Employee Handbook under review;

f. A copy of network Communications Policy under review.

By way of summary: Much work is to yet to be done-Much to be achieved. Welcome aboard to all of you!

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