What SMART is and What SMART is NOT
By Bud Kempen, Director of Finance, United States Bowling Congress
Over the past few months, there have been a lot of misleading and inflammatory statements made about the Scholarship Management Accounting Reports for Tenpins (SMART) program that is run by the United States Bowling Congress. These comments have been a reaction to USBC’s recent rule and policy changes prompted by USBC's desire to protect youth athletes’ eligibility for interscholastic sports competition, the safeguarding and use of young bowlers' scholarship monies, USBC's National Governing Body status and athlete compliance issues with state high school athletic associations and the National Collegiate Athletic Association.
The reactions seem to imply that mandating the use of the SMART program for all scholarships awarded in USBC-certified competition is just a way for USBC to "pad its bank accounts," as was stated in a feature article in the November 2006 edition of Bowlers Journal International. Rest assured, this is as far away from the truth as you can get. Though we are required to consolidate the SMART operations as a part of USBC’s annual audited financial statements, the ongoing operations of SMART are kept and recognized as a totally separate operation. Any funds deposited and any related earnings stay within the program for scholarship use only.
What SMART is
The program was started back in the mid-1990s for one basic reason: to make sure that the individuals who won bowling scholarships would have their monies available to them when they needed them.
The then Young American Bowling Alliance (YABA) staff was being contacted frequently by scholarship recipients and parents with questions – where, from whom and how do I get my scholarship funds? When helping young bowlers and their parents get this information, far too often it was found that the funds were no longer available. Why? Either the original issuing organization no longer existed, the organization had changed hands or the funds had been misappropriated.
Obviously, these issues were not taken lightly by YABA's board of directors and executive staff. They resolved to establish a program that would be completely separate from all other operational activities and would guarantee scholarship recipients that their monies would be available to them when they needed them. Thus, the SMART program was formed.
The centralized source for the management of scholarship funds is another significant benefit of the program, one that has been greatly appreciated over the years by scholarship recipients and their parents. With SMART, they need to make only one contact to get any information on their scholarships and/or make use of those funds.
What SMART is NOT
As stated previously, the sole purpose of the program was to guarantee scholarship recipients the availability of their monies when they needed them. It was not intended to be a source of additional scholarship funds to either the then YABA (now USBC) or to the organizations with funds in the program.
The program was designed to be self-sustaining through the returns that could be made by investing the monies on deposit. That is, the investment returns would cover the administrative costs of managing the program.
Since all monies that are deposited with the program or that are earned through program investments stay in the program, it also was decided that any earnings over and above covering the administrative costs would be allocated back to all active provider accounts as unassigned funds for their use in awarding additional future scholarships. Done annually, the allocated amount is based on a percentage of the provider’s total account balance as compared to our total scholarship liability balance.
Return on Investment
In the November 2006 BJI article titled, "Ouch! That Smarts," Junior Bowlers Tour Director Chuck Pezzano was indirectly quoted as saying that "USBC has to deliver a similar ROI as he does… roughly a 5% return, while USBC reports investment returns of only 1.03%, .74%, .00%, .00% and .00% over the past five seasons" (2005 through 2001).
But let's compare apples to apples and oranges to oranges. The figures quoted were NOT the SMART program's investment returns for that five-year period. The actual SMART program investment returns (ROI) for 2005-2001 were 3.12%, 2.42%, 2.44%, 3.10% and 4.60%, respectively.
The USBC numbers quoted in the article actually represent each year's ratio of money allocated back to providers as unassigned funds compared to the total scholarship liability balance. These allocated funds, along with administrative expenses averaging 0.8%, plus a 1% contingency fund mandated by YABA/USBC directors, are paid from the SMART program's ROI. (See more on this in the Provider Distributions section below.)
Similar accuracy checks are needed for other figures quoted in the article. The "roughly 5%" return on "risk-free certificates of deposit" that was quoted is NOT representative of what was actually available over the five-year period. USBC asked several investment companies about levels of returns that money market/certificate of deposit investments averaged in those years. They provided information that shows average returns of 3.02%, 1.23%, 1.11%, 1.50% and 3.96%, respectively, for 2005-2001. SMART program investments were able to exceed these average returns because, in addition to CDs, SMART's portfolio included individual corporate bonds that were maturing over this five-year time frame.
Further comparisons in the November 2006 BJI article quoted an unnamed spokesperson of an unidentified "$500 million investment company," stating returns from a conservative portfolio of "short-term corporate bonds, treasury inflation-protected securities and intermediate bond funds." The article's quoted returns for the years of 2001-2004 – 8.24%, 12.16%, 8.88% and 8.12%, respectively – could not be substantiated by any of the investment companies contacted by USBC. The returns these companies quoted were vastly different from those stated in the article, especially for the latter years – 8.13%, 10.81%, 5.97% and 4.72% (1.99% in 2005).
The article's unnamed investment company spokesperson alleged that "even using a program with half the money in money markets and the rest in the strategy we used, the return would have been 6%." Again, this estimated return could not be substantiated for the full time frame stated in the article, 2001-2004. The annual returns quoted to USBC for this investment strategy in those years were 6.16%, 5.61%, 3.53% and 2.98% (2.74% for 2005), respectively.
It's tempting to be an armchair quarterback, interpreting results and suggesting what might have been done in the past. From this point in time, anyone can look back with perfect hindsight at a period that saw federal fund interest rates fall from 6.5% to 1%. Along with this unprecedented move, regular rates also dropped to lows not seen in a lifetime. To take advantage of these conditions would have taken the ability to predict these moves in advance, and not even the fed can do that.
Through the earlier years of the SMART program's existence, it allocated more than $750,000 back to scholarship providers as unassigned funds. This was accomplished during a very good fixed income investment climate period (5 to 6.5% returns), but was tempered by higher administrative costs, since everything was manual relative to deposits. Net return to providers was 2.5 to 4.5%.
So, what happened since then? There are a number of components in determining what gets allocated back to scholarship providers as unassigned funds:
As has been supported above, the returns (ROI) that the SMART program has had since 2000/01 would probably equal or exceed the returns of anyone investing in money market/CD types of investments.
These continued to rise because of the support needed to keep up with the rapidly increasing and almost completely manual workload. In the past couple of years we have managed to find ways to eliminate some of the costs, mostly through process automation. With the new online SMART system now fully functional, we feel there will be additional future savings.
- Unrealized Gains (Losses) (+ or-)
This has been the SMART program's Achilles' heel in why the amounts that have been allocated to providers over this period of time have been minimal, if allocations were made at all in a particular year. Most people measure their investment performance at the point when they make their purchase (for example, if investing in a five-year certificate of deposit at a 5% rate, in five years their yield is 5%). Accounting rules require that the SMART program "mark to market." This means that we have to value our investments at market rates or for what we would get for our portfolio if it sold at a particular time. With the very negative conservative investment market in 2001-2005, our book losses have continually had a significant negative effect on the actual income from those same investments. We've had a favorable market so far this year and, unless we see a complete reversal going forward, this area should give a welcome boost to what will be allocated to the providers.
We also held in reserve 1% of the total scholarship liability to assure that at all times our cash and investments equaled or exceeded the total scholarship liability. This was started in the year 2000, mainly due to a Fixed Income Mutual Fund problem that occurred. The USBC Finance Committee just recently dropped this requirement, which will increase the allocated return to our providers.
As previously documented, we were getting a good return on our investments. With the settling of the volatile market experienced in 2001-2005, the removal of the 1% reserve and our continuing efforts to minimize administrative costs, future allocations to our providers should equate very favorably to what our providers could or would be earning on their own CD investments.
The SMART program financials have been and always will be an open book. The current year-to-date financial statements (fiscal year 2006/07), as well as the last three years' financials, can be viewed here.
Service has value
The administrative tasks provided by the SMART program save scholarship providers a lot of time and expense. Thousands of scholarship recipients contact SMART each semester to arrange college tuition payments using their earned scholarship awards. SMART maintains contact with all scholarship recipients, providing them ample reminders when their awards are nearing their expiration dates. If scholarships aren't used by their expiration, these funds are delivered back to the original scholarship providers as unassigned funds. Printed statements are provided to scholarship providers annually. With the new online SMART program, providers and recipients may review their accounts and specify assignments or payments at any time of the day or night.
Scholarship recipients and their parents are especially pleased with the SMART program, since they may access the funds earned from a variety of scholarship providers with a single phone call or e-mail to SMART.
More than 105,000 scholarship recipients and 2,500 scholarship provider organizations are served by the SMART program.
Some scholarship providers have been fortunate to have dedicated and trusted volunteers who, in the past, could take on scholarship management responsibilities if their scholarship funds were not managed through SMART. Hopefully these volunteers can redirect their efforts to do other good works for the sport, perhaps securing additional scholarship sources and sponsors or providing other needed member services, such as coaching. USBC leaders and headquarters personnel realize and appreciate the vital roles volunteers play in providing opportunities and services to bowlers of all ages