X-Message-Number: 1830
Date: Fri, 26 Feb 93 00:42:45 CST
From: Brian Wowk <>
Subject: CRYONICS Alcor Finances
I want to thank Ralph Whelan very much for taking the time to
tell us how difficult things really are at Alcor. I think it is clear
that a large part of the work at Alcor is already done by volunteers.
Those volunteers are of course the employees, who might as well be
volunteers for what they are paid. After reading Ralph's account I find
it unimaginable that costs could be cut further without unacceptable
loss of service. In fact, I hope something is done soon to raise
salaries so that we do not lose people like Ralph. Salary increases (as
well as a more open, competitive process for filling position
vacancies), will also be essential so we can continue to attract good
people, especially people with training in science, medicine, and
business administration. Do we really want Alcor perpetually staffed by
people who live on the edge poverty and personal ruin?
Where should the money come from? I agree with Allan Lopp's
proposal to transform the Jones Endowment Fund into the Jones
Continuancy Fund, and begin spending it in disciplined, controlled
amounts. In response to those who say this Fund's capital base should
be tapped for emergencies only, I say that the present financial
situation *is* an emergency. The only alternatives are to increase
membership dues and/or suspension minimums so much that continued growth
would be jeopardized.
The rationale for spending down the Jones fund is the
achievement of economies of scale. If by spending down the Fund we can
continue to bring members into the organization at the present rate,
then even a large spend-down will be justified. Each new member, paying
average annual dues of $200.00, brings wealth equivalent to a capital
base of $2000.00. Fifty new members would generate the same income as
$100,000 worth of the Fund. Two to three hundred more members would
replace the income from the Fund completely. Conservatively, we should
have this many more members within three years. After that we could
begin rebuilding the Endowment.
There are those who would say we should not arrange our finances
on the assumption of continued growth. But continued growth is a
*reality*, not an assumption. In fact growth (specifically the labor
associated with the high level of public interest, and sign-ups) is a
significant part of Alcor's expenses. If growth were to slow (and
thereby endanger our plan of replacing Jones Fund income with member
dues) we would be able to scale back operations accordingly.
If we really believe in economies of scale, we should be able to
"put our money where our mouths are." To allay concerns that tapping
the Jones Fund will lead to an orgy of uncontrolled spending, how about
this: We budget to spend $50,000 to $80,000 of the Jones fund annually
on operations. Then, we commit to put 80% of the dues for each new
member signed up from this day forward *back* into the Jones Fund. The
20% we do not put into the Fund is to cover marginal operating costs
associated with the greater member base. (This will be things like
greater magazine production costs, postage, and phone time, etc.)
Within three to four years the net outflow from the fund will be zero,
and it will only be half depleted. It only goes up from there.
It is essential to this plan that marginal costs be kept as low
as possible. One big cost that rises in direct proportion to the
membership base is the cost of doing suspensions. As more members join,
more and more suspensions will be happening all the time. It is
essential that suspension minimums be adequate to cover the labor and
hassles of a suspension. Suspension labor should be regarded as an
extraordinary item that is not funded by the operating budget. Rather,
enough money must be charged up front (i.e. not passed into the Patient
Care Fund) so that suspension labor (and extra people who will be hired
or contracted to do it) will not affect the operating
budget. If minimums need to be raised to do this, then raise the
minimums.
Finally, I look forward to the reformation of an investment
advisory committee (that will not be micromanaged by the Board) so that
Alcor can get a decent return and growth rate out of its capital base.
Some board members have expressed the sentiment that Alcor's Patient
Care Fund gets most of its growth from people being suspended, and that
"squeezing a few extra percent" out of investment performance therefore
does not matter. This overlooks the fact that as the PCF grows from
suspensions, so does the number of people it has to care for! Each
patient brings with them into a suspension an amount that *must* show a
real rate of return, or they are not going to stay in suspension. As
Perry Metzger has pointed out, the long-term real rate of return of debt
securities is near zero. Even if your PCF grows at 30% a year from new
people going into suspension, they are all going to eventually thaw
unless your earn a real return on your Fund.
It is a truism of finance that equities are far superior to debt
as a long-term investment. Pension funds are a classic example. No
company runs its pension fund by investing in T-bills and bonds.
Pension funds always have a strong equity component, and they may be a
good model for the kind of management Alcor's Patient Care Fund needs.
I personally have reservations about buying individual stocks with the
PCF (although in the future some stocks might be appropriate if the
companies have close ties to cryonics). Managing a stock portfolio is a
full time job, and managers who can consistently outperform the market
are exceedingly rare. Some of the best ones make money by managing
mutual funds, and this is where Alcor should look for safe long-term
equity investments. The choice and timing of mutual fund investments is
a matter for the advisory committee.
--- Brian Wowk
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