THE PERFECT STORM
MAJOR CONTRIBUTORS TO THE FINANCIAL LOSSES OF 2002 – 2004
Issues Briefing Paper presented to Board of Trustees – March 2006
After a decade of healthy surpluses, the early 2000’s were hampered by large operating deficits. The
question our Trustees have asked is, “What exactly happened during this period of time and why?” While a
certain percentage of our current operation deficit was forecasted and expected based on several decisions,
there were several other major contributors to the operating deficit.
Below is a graph that summarizes the operational forecast (excluding non-operational revenue) that was
completed in 1999 in preparation for the Garden Court construction project along with the actual results.
Some of these operating deficits resulted from Board decisions with the Trustees fully understanding and
accepting these operating deficits in the short-term. There were also unplanned and unbudgeted losses.
Annual
Surplus/Deficit
Dorwart Andrew 5 Year Projection
$1,000,000
$0
-$1,000,000
-$2,000,000
-$3,000,000
1999
2000
2001
2002
2003
2004
2005
Projected Years
Projected
Actual
The actual operational loss for 2003 was $1.4 million greater than projected. The actual loss for 2004 was
$500,000 greater than projected.
Prepared by: David Swartley
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The graph below shows the same projections as listed on the previous page with total surplus/deficit
(including non-operating) versus the actual total deficit. It is clear in comparing the two graphs that the
Dorwart Andrew projection anticipated significant non-operating revenue to offset the additional expense
associated with the project.
Annual Total
Surplus/Deficit
Dorwart Andrew 5 Year Projection
$1,000,000
$500,000
$0
-$500,000
-$1,000,000
-$1,500,000
2000
2001
2002
2003
2004
Projected Years
Projected
Actual
The following is a summary of the events of early 2000 that led to the “perfect storm”.
 Stock market crash of 2001 & 2002
Moravian Manor’s five-year projection was “created” during 1999. The Manor’s interest and
dividend earnings were significantly impacted during 2001 and 2002 when the stock market bubble
“burst.” This loss of principal (unrealized losses) continued to impact us through the subsequent
years. Unrealized losses of $424,003 in 2001 were followed by unrealized losses of $773,779 in
2002. This resulted in reduced interest earnings of $60,000 annually, which created an ongoing loss
to the bottom line by having reduced principal funds. During 2003, $800,000 of these unrealized
losses was recovered.
 Option agreement on Biemesderfer farm
During 2001, the Manor signed an option agreement to buy the Biemesderfer farm for $2.88 million.
This was not part of the Dorwart Andrew five-year projection and resulted in two different impacts to
the Manor. Borrowing for this land purchase created an additional $1 million of long-term debt.
This also created an additional $50,000 of interest expense per year that had not been forecast.
Option payments that were not funded from borrowing money were funded from the P.W. McCloud
Fund (board-designated development fund).
While this investment in land should serve us well in the future, the immediate impact was additional
debt and reduced Endowment Funds that, in turn, reduced interest and dividend earnings. At the time
of this writing, an additional $1.152 million has been paid on the property from the P.W. McCloud
Fund. This has resulted in an additional $58,000 per year of reduced earnings (5% of which would
have historically been transferred to operations). The bottom line reduction is $110,000 per year due
to the Beamesderfer purchase. This was not forecast as part of the five-year projection.
Prepared by: David Swartley
Last Edit: 2/16/2016
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 Captive Insurance Group
Moravian Manor joined the CARE (Communities Advancing Retirement Excellence) captive
insurance group in 2003 due to the liability crisis that was devastating Pennsylvania facilities. This
required an upfront capital contribution of almost $50,000. The Manor was also required to move its
Workers’ Compensation Insurance into the captive. Prior to this change the Manor had been selfinsured for Workers’ Compensation.
One financial reality with leaving self-insurance is that current premiums that are determined by your
insurance carrier, plus any “tail” or “open claims” left from being self- insured, must be paid. During
2004, Moravian Manor had approximately $130,000 in additional expense from “prior insurance.”
The Manor had few options at the time other than to join the captive, as the previous coverage
through GuideOne was not renewed due to high underwriting risk (the Manor had too many health
care beds). The staff has found that the captive has assisted the Manor with controlling professional
and general liability costs. Our costs have decreased while costs of other facilities outside of the
captive have increased. Assuming the captive continues to perform well, the Manor should
experience dividends or reduced premiums for being owners of this insurance company.
 Additional depreciation & interest from new project
The Garden Court project first affected the Manor’s bottom line in the last six months of 2003 and all
of fiscal year 2004 with additional interest expense of $800,000 and additional depreciation expense
of $500,000. Adding these two expenses back to the bottom line would have single-handedly
resulted in 2004’s operating bottom line being $0.00. A critical reminder to the Board is that these
two expenses, while large, were anticipated and projected. The project was never expected to pay for
itself in the first two years.
 Rapidly growing Medicare population
Beds were attempted to be filled as soon as possible as the Manor emerged from renovations and all
beds were brought back on line. This resulted in a rapidly increased Medicaid population.
During the third quarter of 2004, the Health Center experienced an unprecedented amount of resident
deaths, which plunged census to 101 residents (out of 127 beds) at one point. Multiplying the
number of unoccupied beds by reduced revenue of $7,000 per unoccupied bed per month shows the
resulting loss that the Manor experienced. This “topped” off the perfect storm of 2004.
 Historic record of strong balance sheet followed by major construction
For long-term Board members, the results of 2003 and 2004 were very unsettling, as the Manor had a
strong balance sheet throughout the 1990’s. At that time, of the Manor was not building when many
other facilities were building, and, in many ways, that resulted in these stronger than average balance
sheets. Other facility boards that were accustomed to new buildings coming “on-line” with some
regularity were more understanding of the initial impact to the balance sheet as well as the income
statement.
 2005 Financials begin turnaround
2005’s financial audited statements show that operations lost $25,000 opposed to the budgeted loss of
$721,000. Operating revenues exceeded the budget by $900,000 and operating expenses exceeded
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budgeted expenses by $195,000, resulting in the operating bottom line exceeding the budget by
$700,000.
The total surplus for the year was over $800,000. The $800,000 surplus consisted of interest and
dividends, unrealized gains, contributions and the Manor’s largest bequest ever ($530,000 from the
Stella Davis Estate). This is the first year that census in all areas was “steady” since the Garden
Court project was completed. This is a $2 million improvement from the results of 2003.
Prepared by: David Swartley
Last Edit: 2/16/2016