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Pacifica Finance Report to the Community

by:
Lonnie Hicks
Chief Financial Officer
July 2003

Introduction

This is a preliminary financial report articulating a financial vision for the Pacifica Foundation over the next two years. The goal is to move the Foundation toward a sustainable financial future. A version of this report has been forwarded to the Pacifica National Board of Directors.

The quick summary is that despite record increases in revenues this year, Pacifica has also increased expenses by even higher levels. While we have substantially reduced legal debt, we have at each station also increased expenses (salaries, benefits, and other costs) to the point where next year the annualized costs will produce little - if any - surplus in the Foundation. We will, of course, move to prevent this. But, for now this is how it is looking.

To be specific: The Foundation will end this fiscal with 800k in surplus but next fiscal (FY-04) there will be deficit of 250 in the worse case scenario or, with our best efforts, a surplus of approximately 250k- depending upon what we do to manage costs between now and then. This means financial management of Foundation resources will be central in the next several years.

Outline:

The report contains three parts:

Part One looks at a two-year scenario for Pacifica and identifies ten crucial areas for financial management and growth.

Part Two describes current agency finances, budgets and projections of our financial position at the end of this fiscal year. Additionally I have included the preliminary budget for fiscal year 2004.

Part Three contains updates to the Board in a variety of areas, including audit, relocation costs, staffing etc., and ends with my recommendations for action.

Pacifica’s Finances--Ten Items Which Will Build our Financial Future

Overview:

While the war in Iraq provided most stations with record-high revenues, it is clear that most stations will have spent those funds by January of next year and cash will be in short supply in the system as a whole.

The reasons are foreseeable. We will have to absorb new expenses next year ranging from transmitter repair and installation, new programming, higher costs in health and benefits areas, higher salaries, the continuing need to retire legal debt, rehabilitation, deferred repair needs, the need to upgrade our technologies, and, not the least of all, is the need to invest in our capacity expand our fund development reach via the internet.

Funding these needs will require new revenue streams to be identified and new efficiencies instituted to meet the rising cost structure of the Foundation. Each station will have to adopt a financial management strategy to identify monies to match those increasing costs and to, simultaneously, build for the future.

For example: While it is clear that the system has the ability to mount revenue breaking drives this year and last, it also clear that the forces which have driven that revenue bonanza have a short life span of probably two years. In this time poor economic conditions in the United States keep people mindful of the need to hear alternative voices and alternative solutions. We have benefited from this.

In this same period the Bush administration will be gearing up for second term in the White House--mobilizing understandable resistance to that administration’s policies. Independent media like us will likely benefit from this as well.

We, therefore, have this unique two-year “window of opportunity” to move forward to meet this hunger for alternative views and to build Pacifica to its next level--that of The Source for Independent Media and to augment our status as a force for political and cultural change. (For background, see pacifica.org/news/030208_RebuildingPacifica.html)

Specifically we must:

1) Identify the resources needed to upgrade our signal capacity and to digitize each signal area where feasible and possible. Digital is not just new, and indeed might not even succeed, but it is a “technological place-holder” we need to pursue to maintain our share of the signal spectrum.

2) We must develop a detailed capital fund to modernize our plant and facilities, convergent with the above plan. “Feast and Famine” is not the way to run the network. A capital fund aimed toward replacing some transmitters, moving us into better situated areas, perhaps to build or buy new buildings and own properties rather than rent where possible. These needs should be bundled system-wide under a capital fund drive to meet all needs.

3) We must develop an endowment fund to sustain the Foundation against future years where listener support might flatten or reduce; where new legal threats might emerge, where rising costs (salary and health benefits especially) will occur, where we need to sustain or grow national programming capability. This means that we must accumulate adequate reserves (say two million dollars) to allow the system to be secure financially against future threats and shortfalls. Our future is tied up with the financial stability that an endowment fund provides. A two million dollar Foundation reserve will allow us to return benefits to our listeners (new listener programs) build an apprenticeship program, fund new web capabilities but also to ensure that our long-suffering staff people can be adequately rewarded.

4) Identify new cost reductions and efficiencies at stations and at the National level. (I have several proposals where I believe we can save money and increase our ability to support our listeners as they support us.

5) We must maintain our yearly on-air drives while also looking to increase our ability to raise funds nationally and internationally taking advantage of support we are gaining from our internet listeners including national and international supporters.

6) We must build a three month cash reserve (3.7 million) against that rainy day emergency which will surely arise. Each station’s reserve would be maintained at 10 percent of total revenue for any given year. This gives our staff the assurance that should disaster occur we will have the funds to ensure that they will be paid. The above includes having set aside one month’s operating costs and salaries for lean months and cash flow. Needless to say this fund will also be a hedge against new lawsuits, and other legal claims which may arise.

7) We must look to our major resource—our National Board, local boards, and staff members-over the next three year period. This precious gift should be empowered, not over used, burned out and taken for granted. Our paid and unpaid staff must be given individual growth plans and training to match both those individual needs and those skills required for the Foundation to grow into the future -confident that we have good people with high skills to get us there.

8) We must look to our internal structure which needs new controls against unplanned expenditures which can intervene at inopportune times when we are not prepared to meet these unbudgeted expenses. We should not mortgage our future to present unforeseen needs. The rule of thumb ought to be: “No expenditure without first identifying the funds to pay for it; no idea, goal or notion approved without identifying its financial impacts.”

9) Financial Management skills at the station level should have high priority. Some stations are well run financially and have done well with meager resources. Others need more support at this level. All stations, however, will have to improve their financial management procedures and skills. No station is where we need them to be-- all stations will have to improve because the need for new resources is never-ending and will be especially more difficult in this a recession era which seems to have no end. This same point applies, of course, on the national level and at the national office. Later in this report I will identify specific steps already taken in this regard and others being planned.

10) Finally, much of what we will be able to achieve in the next two years will depend up solidarity, an end to internal struggles and a period of stability to achieve vital goals. This can not be overly stressed--Internal Peace and Stability are needed to move the Foundation forward. My point isn’t that the Foundation will not survive over the next two-to-three period—we certainly will survive. It is that we will have missed the opportunity to meet the new emerging needs of our listeners and to move ourselves to a higher functioning level capitalizing on the hunger we have discovered exists for alternative information and insight.

BUT HOW TO GET THERE FROM HERE?

The first step is to look at where we currently stand financially and dream of what it will take to get us into our own future.

Pacifica - Where Do We Stand Now And How Does It Look For The Future?

On Pacifica’s June 2003 Financial Statement are the current projections of Revenue and Expense for the Foundation for this fiscal year. Note that Fiscal Year 2003 is projected to show a surplus of 811k. (This will likely decease by the end of the fiscal by about 100k) This represents a 6 percent savings rate—tantamount to saving 175 dollars per month on an annualized salary of 35,000 dollars per year.

Also note that this “financial glow” from the war-inspired revenue “bump” dissipates next fiscal year. There a deficit looms totaling 244k. This of course, could be over-come by increasing revenue targets at each station to last year’s levels. An additional 600k would be realized, putting the Foundation into the black again by about 356k.

Note, however, these budgets do not include the following “unbudgeted but vital items” outlined by the Executive Director in his February report and in subsequent memos:

But note below how the picture for next fiscal year is very different. Preliminary budgets show that system-wide we will experience a small surplus of 87k. This is can be offset by increasing revenues and by reducing expenses, but only if we make specific plans to do so. Ultimately both strategies will not succeed without a restructuring of the cost structure of the Foundation itself. Simply put, our expenses are increasing faster that our revenues—this even in record revenue years. It seems we anticipated those revenue increases and spent the funds in advance. We must work together to reverse the trend.

The detail of each station’s finances projected in this preliminary budget is detailed below.

1) KPFA — The Good News: The station will enter the fiscal year with reserves of about 200k and has been extremely supportive of the National Office in the relocation and in the debt retirement. “A” has contributed a staggering total of 467k and in support of the effort to reduce our legal debt and toward relocation! My hat’s off to KPFA. They could have doubled their reserve amount this year but contributed those funds to advance the Foundation. Our deep gratitude goes out KPFA.

The Bad News: Next year KPFA’s reserves are projected to dwindle to only 34k in additional revenue. Rehabilitation costs for a space next door to the station might total over 100k and drive this 34k into negative territory. This rehabilitation cost is currently an unbudgeted item. “A” will have to increase its revenue estimates, perhaps with a summer drive at least 200k. If successful it will increase its resources.

2) KPFK — in this initial budget, is projecting surplus in FY04 totaling 232k. However a new union contract may see that number dwindle. Over-all the station is sound for the next year but also new costs from the union side will be annualized next year and that cost is still under negotiation.

3) KPFT — will post a small surplus of 368 this next fiscal. It is a precarious financial situation where small dollars make a difference in this station where, comparatively revenues are not as large as those of other stations. “T” also has some deferred maintenance which over the course of the fiscal may require unbudgeted expenditures which will, of course, tip the precarious balance.

4) WBAI projects a small surplus of 55k after having cut expenses to balance it’s budget. Other financial controls are also being instituted at the station with management taking the lead. The upside for “I” is that new web-related projects can potentially increase revenues for next year substantially.

5) WPFW — operates on a very small margin and currently is operating with a 65k cash flow deficit. Next year is projected with a “breakeven” budget. Unbudgeted needs include the need for a transmitter upgrade, repair or replacement. The cost will vary of course from 5k to 25k. There will be a need to do a special fund-raiser for these purposes.

6) The National Office has the most severe financial cash flow deficit in the Foundation for the following reasons:

a. Funds are received in arrears thus the Central Service payments are a month behind at all times. This amounts to 223k per year. This is what is meant by “cash flow” deficit. These monies this year are being made up for by extensive fund raising.

b. Legal and professional services firm expenses fall to the National Office to pay. From a high figure of 2.6 million this financial obligation has been reduced to approximately 700k at this point. The plan is to remove all legal debt in six months-- a considerable achievement. However, new obligations are currently occurring and hamstring the National Office in its attempt to meet expenses. There is the need to rely heavily upon stations to pay off much, if not most of this debt, and most stations have been simply wonderful in responding to this need. Thank you all so much.

c. Past excesses has meant poor credit and poor credit means that many items cannot be financed and must be paid for in advance in cash. For example in moving the National Office to California, moving expenses (8k) had to be paid for in cash. There are similar examples in other areas.

d. Moving costs were expensive. Closing out the Washington office and bringing up the Berkeley office cost over 225k most of it coming from KPFA. (Thanks especially to the generosity of KPFA staff ,managers and Board members.

e. The National Office is up and running currently. But new staff will have to be added in order to fulfill the Board requirement that the finances of the Foundation be placed in order. Actual costs for the new staff will require an additional 20 percent increase in revenues or about 150k. Our plan is to expand our fund-raising efforts as we have this year. Next year the National Office will raise nearly 355k in listener supported funding and 800k over all. This is needed to fill the gap between Central Services income and actual costs.

f. See below the projected budget as of this date for FY-04

FOUNDATION UPDATES AND FINANCIAL REPORTS

Relocation Update: The National Office has relocated to Berkeley California.

Currently the staff includes:

a) Ben Garcia, Controller

b) Lynn Magno, Accounts Payable

c) Donna Gates, Payroll Manager

d) Lonnie Hicks, Chief Financial Officer

e) Pilar Gonzales, National Development Director

f) Dan Coughlin, Executive Director

g) Valerie Van Isler, Director of Administration

h) Human Resource Director, (TBA)

i) Assistant Controller, (TBA)

j) Pete Korakis, Web Master

k) Verna Avery-Brown, Washington Bureau Chief

The new Berkeley office is now up and running. We have the capacity now to pay bills out of that office and the Washington office will formally close on July 31st.

Foundation Audit

The FY02 Audit is finished. Many are to be thanked for this effort and needless to say this has not been an easy audit. Here is a sample of the problems which had to be overcome:

1) Initial data coming from several stations had not been updated, entered correctly and the like. That meant all data for several years had to be expunged from the system and new data created from source documents.

2) The previous administration had poor record-keeping or documents and certain expenses had no documentation all at.

3) Legal expenses never ceased. New attorneys called or made new claims and it was always uncertain which were legitimate claims and which were not. We, upon my strong recommendation, needed to settle all outstanding claims and wonderfully the Litigation Committee of the Board agreed. While this created a big drain on National and Station resources it will serve the Foundation much better to have eliminated this drain not rather that dragging the debt out in the next three to five years.

Financial Policies and Procedures and Monthly Reports

Financial Policies

Currently financial policies have been reviewed by the Board but need to be ratified and approved by the Board of Directors. I plan to submit these along with the final budget for next fiscal year.

The need for financial policies at each station and at the network level is clear. Uncertainty around legitimate expenditures, unbudgeted expenses, receipts and petty cash usage is needed. This is an area of high vulnerability for the Foundation.

The remedies I have thus far instituted include:

1) Site visits by my accounting staff at particular stations to work with accounting personnel in correcting accounting procedures and to give support as station personnel try to enforce correct accounting procedures. The duality between station managers trying to move the station forward and accounting personnel trying to hold to the budget is a system-wide issue. This requires procedures and face-to-face work in correction.

2) Reviewing each station’s expenditures, cash flow, petty cash, fund development and revenue projections--instituting policy where needed and instituting financial controls where needed.

3) Each of my staff (Controller, Payable Manager, and Payroll Manager) will work with each Business Manager and make site visits. Where appropriate and where necessary I am prepared to position staff at a given station to control costs directly if station managers are unable to do so. It is that important to us.

Huge costs can occur at a given station in a very short period of time. Often station personnel do not want to make the necessary changes needed to correct the finances of a given station.

4) Development of the “paperless” network. Currently we have developed the capacity to scan all documents to a web site which is located on our Berkeley office server. This means that accounting personnel (and others with appropriate security) can view current and archive documents (financial, Board documents, vendor documents) directly from anywhere in the world. This is part of the goal of transparency. We are testing scanning machines at the National and at KPFA before rolling out to the stations.

Monthly/Quarterly Reports

The quarterly financial report for the nine months ending June 30th has been posted on the web. Figures for stations will be estimates from budget because several stations are behind in their positing of their monthly expenses. No station at Pacifica does a close at the end of each month. This will be a goal for next fiscal. Each business manager will be given training toward that goal. It is necessary to ensure good financial numbers. (We will train each business manager in this area.)

Additionally, each must focus on financial management given that revenue and resources will be flat or reduced next fiscal year. “Ramping up” due to increased revenues is almost always accompanied by the need to “ramp down” due to shrinking revenues. Witness the state governments and what happened to the Federal government. We are, as a media organiation, subject to those same economic forces.

What to Do and What is to be Recommended?

Goal #1
All goals, ideas and programs must be presented, or explored with an accompanying budget or financial impact statement. This would be true at the Station, Board and National levels. This is prudent financial management.

Goals #2
Any program, idea or project must be given a priority, justify itself on some agreed upon basis such as “it is revenue generating” “it is a Board priority,” it is part of some given approved budget or expenditure.”

Goal #3
We need to increase the Fund Development capacity at each station aiming toward specific financial goals and targets.

Goal #4
We need to identify crucial goals, (Digitization, the Apprenticeship Program, National Programming, a Capital Campaign) as unbudgeted items and build fund-raising campaigns around them.

Goal #5
The Board should take upon itself the goal of managing its costs. Again I would point out that conference calls last month totaled 8k and we don’t as yet know the future costs of the By-Law.

Goal #6
Finally, the National and the Stations must institute additional financial management procedures aimed toward reducing costs. This, in a shrinking revenue scenario, is the only alternative.

Summary

The Foundation will, over the next several years, experience less revenue, more expenses and greater demands upon resources. In this kind of situation financial management of current resources is essential.

The Foundation will experience increasing pressure for more programming, much of it costly and increased pressure from newly-enfranchised listeners who most certainly want to see at least some programming changes at some stations. My goals for the Network: Management our resources such that surpluses are on hand to weather the storms and to seize the opportunities which exist over the next two years.

Have You Seen:

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