Low interest rates provide associations an alternative for funding new purchases, initiatives

Booming markets give associations greater flexibility in using reserves to achieve strategic goals, and many are consulting their financial advisers for options.

With variable interest-rate loans available in the 2 percent range, some advisers say associations can consider borrowing against their portfolios rather than selling assets.

When the $2.7 million-revenue NPES—The Association for Suppliers of Printing, Publishing and Converting Technologies bought out two other groups to take sole ownership of its two trade shows in April, the group borrowed half the money and tapped reserves for the rest.

Judy Durham, EVP of membership and operations for the Reston, Va.-based association, said the group obtained a 2.51 percent loan. NPES worked with Orion Investment Advisors on different scenarios based on a range of potential market returns for its portfolio versus the interest costs on the loan. The group considered different options, from borrowing 75 percent of the acquisition costs or borrowing just 25 percent.

"When we looked at the projections, it looked really good to take more in the form of a loan and leave more in investments, but we went the more conservative route of doing half and half," she told CEO Update. "Nobody knows what's going to happen to the market."

Durham declined to divulge the purchase price, saying only that it was in the millions of dollars. The association's reserves were about $17 million before the transaction.

With major changes afoot in the printing industry, NPES President Thayer Long wrote in the group's May-June newsletter that the group took sole control of the shows to gain more flexibility "to pursue new directions, new partnerships and new initiatives to benefit the industry and help solve for our attendees their ‘up at night' business challenges."

When to hit the piggy bank

Responding to strategic opportunities and addressing threats are prime examples of how associations should use reserves appropriately, said John Graham, CEO of ASAE, Charlie Tate, managing partner of accounting and advisory firm Tate & Tryon, and Dennis Gogarty, president of Raffa Wealth Management.

"Strategically using reserves to boost membership, add value to existing members or create future revenue is exactly what your association should be doing," said Gogarty. "There should always be an operational plan in place to replenish the reserves over a specified amount of time."

Such opportunities should be pursued only after reserves are equal to at least 50 percent of the association's operating budget, Graham said.

"Associations prior to 2008-09 got themselves into trouble when they started budgeting for investment gains in their operating budgets," he said. "We didn't have to lay off any staff or curtail any activities at that time because we had money in reserves."

The $36 million-revenue ASAE now has about $45 million in reserves, he said—more than 100 percent of the budgets of ASAE, the ASAE Foundation and ASAE Business Services combined. ASAE's board has authorized him to use up to $1 million from reserves—about equal to the association's current lobbying budget, Graham said—to meet legislative or regulatory challenges.

In fact, ASAE has tapped reserves to hire lobbyists in various states where laws that ASAE views as discriminatory based on sexual orientation have been passed or considered in the past year, such as so-called bathroom bills. ASAE also could use reserves for lobbying against bills that would threaten the tax-exempt status of associations.

The group has had operating surpluses of about $8 million over the past seven years, he said. Rather than pad an already generous reserve, ASAE has plowed about $7.5 million into projects such as new technology infrastructure and web site improvements.

A profitable discussion

Ahmed Farruk, deputy managing director of Orion Investment Advisors, said more associations are considering tapping reserves because the value of their portfolios has grown handsomely.

"There's been a lot of growth in reserve assets, perhaps even outstripping the growth of associations' revenue, so they are looking at opportunities to use some of those reserves to fund operations or for a new initiative or purchase," he said.

Borrowing to fund such needs is attractive with variable interest rates in the 2 percent range. Keeping loan terms short can mitigate the risk of rising rates.

"The cost of debt could be lower than what they earn on their reserves over the term of the debt," Farruk said.

"When we build portfolios, we project out as many as 10 years. We estimate equity returns in the 7 percent range and fixed income returns of about 3 percent. We are advising clients a balanced portfolio might return in the 6 percent range. But returns going forward are not going to be what we've seen in the past, particularly in the bond market," Farruk said.

Mind the risks

Tate said the appropriate level of reserves is highly dependent on an association's risk profile, on which Tate & Tryon helps clients measure and achieve board consensus.

Examples of risks include employment lawsuits, industry consolidation, commodity price declines, market disruptions and the departure of a CEO and the need to hire a search firm,
he said.

"Is the risk of something occurring 10 percent or 100 percent?" he said. "Is it imminent or 10 years down the road? The discussion of the risk helps boards get to a reserve number.

"When risks are discussed, it protects management," he said. "A CEO can say, ‘We identified the risk and we discussed the risk and we decided to fund it or didn't decide to fund it. We're all in this together. Don't come at me now, we told you about it.'"