Amy Robinson:
Today's SWAPA Number is $37.5 million. That's the total expenses in the 2024 budget, which will be voted on by the membership this month in the fall general election. Today, we're going to talk to SWAPA's Second Vice President Tom Nekouei, Executive Operating Committee member Hank Ketchum, and Director of Finance Brian Hickman about the next year's budget and what changes might be included and how the money is being spent.
I'm Amy Robinson.
Kurt Heidemann:
And I'm Kurt Heidemann. And here's our interview with Hank, Tom, and Brian.
Amy Robinson:
Okay. So Brian, why don't you go ahead and give us some of the headline numbers for 2024. Cover expected dues, income, some high level spending, things of that nature.
Brian Hickman:
Yeah, absolutely. So the proposed budget for 2024 remains at the 1.31% temporary dues increase, which will result in approximately $33.5 million of membership dues. This is offset by committee and leadership and departments, expenses of nearly 37.5. So factoring in some other sources, that will put the 2024 budget at a net deficit of 3.75 million.
Kurt Heidemann:
Hank, add to that. Describe a little bit how that budget process works. How do you get to that $37 million budget?
Hank Ketchum:
Okay. Well, we start in June. And Brian and I will look at the expenses of the association. And we'll go committee by committee, department by department, and we get very granular at what we call the account level. So travel would be your hotel spending, your Uber rides, all those sort of things, meals and entertainment. We have a lot of trip loss, a lot of per diem, conference fees, expenses. We'll go through that. We'll see how the budget performed during 2022 and years prior. We'll also look at current accruals in '23. And then we'll sit down and we'll have a conversation with the chair or department head and discuss what does 2024 look like? What are your needs? We'll have that conversation. We'll build a budget shell. That'll be distributed. And then they'll go ahead and assemble their budget based on the conversation we had.
They'll submit that to us. We'll do another scrub once we get it in. We'll review it, make sure everything makes sense and is adhering to our financial priorities and strategic priorities of the association. And we'll have another conversation, or at least we'll offer one. And we'll do another scrub, another phase of that. So there's some cutting that's already done in that process. Once that's done, we'll take it to Tom. At Tom's level, he'll review. And we're always talking to Tom throughout the entire process as well and he's giving us guidance. Once Tom gives his approval, we send that up to the EOC for review and approval. The EOC gets the budgets in advance and they go through literally each individual budget, look at all of our notes that we've made, look at the different planned spending, and then we have a meeting.
And the meeting this year was 10 hours long. And we actually go through and do a heavy duty scrub. There's a lot of cutting that's done. Based on the budget request this year we cut $1.1 million between the departments and the committees. Once we're done with that process and the EOC approves the five voting members, we then advance that to the board of directors. And then the board of directors gets that two weeks in advance of the board meeting. They are also given an opportunity to review every individual budget. Those are posted for them. And they're also given a lot of detail as to what went into assembling those budgets. And then they vote. And if they vote to approve that going to the membership, it's sent to the membership for ratification.
Amy Robinson:
And we've talked about this in the past, Hank, but just for our members who haven't listened to a podcast from us before, but explain who the EOC is and who's involved in that particular process.
Hank Ketchum:
Okay. So the executive operating committee is made up of the three executives. So Casey Murray is president, is the chairman. And then of course Tom McCoy and Mike Santoro are on the committee. And then we have other individuals. So myself as the internal audit committee chair, I run the agenda for the meeting and help coordinate all the EOC activities when votes are required and that type of thing. The other people on the committee are of course Brian, director of finance. We have Stella, who's our general counsel, Pat the department head for IT, and then we have our executive director, Matt Redding. The two board members are Matt Wright and Kevin Hornburg. So we meet monthly outside of board meeting months and we discuss the operations of the association. We also review the financials of the association. And we make corrections along the way, make sure that the budget is accruing according to plan. And then we also have to of course make modifications as needed.
And then we're also looking at the operational side and looking at legal issues, insurance issues, benefit plans. We look at a lot of different things within the committee. And as far as the budget review process goes, that's really a very critical function where we're developing that financial plan for the next year. But we're not just looking at the next year, we're looking three and four years out. Right now, we're already starting to talk about what does the next negotiating cycle look like? And where do we need to get our balance sheet back to?
Because of what we've done, we aren't like traditional unions where they, like APA steps up to 1.5%, or applicators that are always at 1.85. We were at this 1% for eight months. Year-to-date we've been at the 1.31. But what that does is it's enough to cover our spending when we develop the plan, but it isn't enough to continue to accrue our targets for our reserve fund to meet our 12 months of expenses. So we're meeting our basic needs, but we're not doing what we should do in terms of maintaining that balance sheet. And that's something we have to focus on as we leave negotiations and rebuild the balance sheet and prepare for the next negotiating cycle.
Tom Nekouei:
I'll add to that with regards to the EOC. When we talk about the budget now at SWAPA being a live document versus what we used to do in years past, but the EOC is a very important part of that because we end up looking at the budget on a monthly basis and see where we're overspending or underspending and we adjust the budget accordingly. And it brings all three executives and the board into that live document where everybody's got visibility on it and it's tangible for us. And it's going to be really important going forward when we talk about coming out of the negotiation cycles and going into the next one where we look at three, four years down the road. So the EOC is a really, really important part of how we revamped everything at SWAPA in terms of not just budgeting, but also finance and our financial statements, so...
Hank Ketchum:
And that's a great point, Tom. I'll add to that, that it gives our board of directors a seat at the table. And that was one of the things we really wanted to do when we implemented the EOC. So they had a seat at the table and visibility on everything that's happening within the association in terms of spending and the higher level decisions within the operation.
Amy Robinson:
I would think too that going through this full budget cycle with this sort of shift, but also all the way through negotiations, including the Strike Committee and all these other things that are involved, will give us a much better baseline for the next go round. Because I know in 2016 when we went through this the first time, we didn't necessarily have this kind of eyes on budget, right? Is that...
Tom Nekouei:
Yeah. And I'll touch on that, not just finance, but also organizationally what we're trying to do is if the proverbial bus hit the three of us tomorrow, we're no longer here with what we're documenting with the EOC and the way we're doing the budgeting, the finances of the organization. When we're gone back out flying the line, we're no longer here in the building, it should be a seamless transition for whoever comes in behind us. And we've never done that organizationally in the past where everybody that comes into a new position, especially in finance, and in my position especially, has to start from the beginning.
Because there is institutional knowledge in this building, but it leaves with that person. And it happens on the committee level too. So you look at RNC's been with us now since 2016, but at some point, whether we retire or we go back to the line. So we're starting to do that on the finance side of the house so we can transition that and make it just kind of a philosophical way of how we run the association. So there's always a document left behind, and I think the EOC is a integral part of that.
Hank Ketchum:
And the other thing we're trying to do there too is capture that within the accounting department. So Brian and his team, the work we do within the general ledger, they're going to go back and try to recapture a lot of the event spending that is associated with the Strike Committee and outreach and all the things that your department does, Amy, and be able to have a good look and know exactly what these things cost so that we can do even better forecasting in the future during the next negotiating cycle.
Amy Robinson:
Brian put together this really great tool tool this year for those of us who create budgets, and it was pretty incredible in terms of being able to just go through and add into the things. It was really well done. I did want to give him a little bit of a shout-out for his team and the put together of that, because that was really so easy to navigate compared to what we've done in the past.
Brian Hickman:
Yeah. Thank you, Amy. Yeah, huge kudos to my team, Nia, contractors, internet, et cetera. It's a different basis of approach to budgeting than in years past. When Hank and I and Tom came in in 2021, it was really copy, paste, inflate right or wrong. But we really take the approach on the department side and the committee side of zero-based budgeting. So exactly what you just talked about that tool, it just walked you through start to finish. What are your prompts? Are you going to go to professional development, yes or no? Are you going to travel to it, yes or no? And you just kind of fill it out. And again, budgets are estimates. So there's a lot of estimates, there's assumptions. Budgets never 100% hit their target. So as Tom just mentioned, we constantly look at the budget every single month. Opportunity cost, we do reallocations, we go back to the board or the EOC for more budget approval or cuts. So it's a great tool. And yeah, we used it for the departments. We're looking at expanding that to the committees next year for some fashion of that tool.
Amy Robinson:
It was just a really good drill down into everything that you're spending money on. And you had to really think about what you were spending your money on and how that was being allocated. So it was a very good thing for us to go through as department heads to figure out where are we spending this money? And it was a good, I think, gauge for us as an organization to realize where are we spending our money and how are we spending it? And what's the best opportunity to do that?
Tom Nekouei:
This work has been a culmination of about three years' worth of work that mostly this team has done. And I've watched them do it and just really get to a point where we're... We always say we're an analytical organization. We've become so analytical now internally too with the work that Brian and Hank have done. And it's going to be an institutional move going forward where we do everything very, very detailed on the budget side.
Kurt Heidemann:
I want to get back to what Brian was saying about it being a living document. And obviously the elephant in the room right now is negotiations, getting a deal. We're not getting a deal. Regardless, we have to budget for both possibilities. So walk us through that process. And what does that mean in this budget and what should our pilots expect from that?
Hank Ketchum:
During this budget cycle, we had to look at two different paths. So we had to look at a path where remain in negotiations with that footprint for an entire year, and then we had to look at a path where we go back to what we call peace time. And when we look at the budget cycle, you have to then take a step back and look at, organizationally, what are we doing in terms of the cycle throughout an entire negotiating process. So you start with preparation, you go through the negotiating part. When the negotiating part is completed, we get a ratified agreement. Post-DOR, the contract has to be implemented. So you have an implementation phase and then you have the phase where we go back to status quo. And then the process starts all over again. So right now, we're obviously in that footprint where we're still prepared for negotiations, but we also are hopeful that we're closer to the end. And so we had to also devise an alternative path.
So everybody was asked this year to prepare two different budgets and we had to analyze those. So the one obviously we're presenting to the membership is the remaining negotiations budget and what that footprint looks like for the entire year so we're adequately funded. But what that did do, and when you're comparing our 2024 budget to 2023, it's very important that, when our members are looking at it, that they adjust for one-time items. And our one-time items for '24 that we've planned, increased spending with a Strike Committee, we have to budget for a TA roadshow, we have increased TA voting expenses, we have to plan for a BOD special meeting. We have to plan for our BOD members to attend their roadshows and their respective domiciles. And then we have a little additional capital expenditures that we've planned for over '23.
All in all, that's almost $2 million. So when we adjust those out and we compare more on an apples to apples basis to '23, the budget's up 4.4%. So it's important to look at it in those terms versus all these things, what I would term we've thrown everything in there but the kitchen sink, right? So we have to remove some of those items to really be able to look at it analytically and say, "How much is our spending increasing? And is it justified?"
Kurt Heidemann:
So Tom, as a union member, as a guy that pays my dues, can I expect that the budget will go down, for lack of a better term? Does this have a plan that we get a deal in the first half of the year that the dues increase will go down?
Tom Nekouei:
Yeah. So the original dues increase that we did last year for this year's budget was up to 1.31 to help fund our negotiating effort. And in the resolution that we wrote and put it on the fall ballot, which we'll do again this year because it's now we're voting on the '24 budget, we did put a provision in there that, upon ratification, two pay periods past ratification will automatically snap back down to the traditional historic 1%. And really, that two pay periods was for Southwest IT to be able to adjust the payroll deductions. There wasn't anything that we want. We didn't want extra two pay periods, but we just had to give them that.
And so looking at the '24 budget too, there was decisions that were made and scenarios that Hank will probably touch on later on. And I was pretty adamant so you can blame me later, Hank, for saying that I will not oversee a dues increase beyond the 1.31. So whatever we had to do going into '24, we had to do it with the 1.31 and adjust based on withdrawals from the long-term reserve fund going forward. And so we're going to keep it at 1.31. And then going into a post-ratification period, we'll go right back down to 1%.
Hank Ketchum:
Yeah. And to add onto that, Tom touched on how do we arrive at the 1.31 and his not wanting to go above that. So we looked at, how do we approach it? So we approach it the same as we did last year. Where would dues have to go? Dues would've had to go to 1.46%. Still below where APA is at 1.5, the lowest in the industry next to us. We are the lowest. Tom didn't want to do that. And we looked at different options, 1%, 1.28, 1.31. And 1.31 was the most conservative. Our members are paying that today.
And we thought that the most fair thing to do is a combination of maintaining the 1.31 and then using the reserve fund where we need to if that spending actually accrues per the plan in 2024. And we also did analytics looking at what is the impact of the reserve fund? And then over the next few years, can we get back to where we need to in order to have the balance sheet repaired as we enter the next negotiating cycle? And under one scenario we get very close, and in another scenario we're actually ahead. So the picture looks good as we look down the road. So we felt like the best option for the membership was to keep it at the 1.31% level.
Tom Nekouei:
And I'll touch on one more thing, which is pretty critical when you talk about withdrawing. This is a pretty big deal. We don't take that lightly when we say we're going to go take money out of the reserve fund. It's always an authorization that the membership gives us to be able to go do that. If you remember in 2016, we took a very blanket $3 million, I think it was, out of the reserve fund to fund our negotiating effort. That was done with no proforma calculation. There was no analytics ran on it. It was just that decision was made by a few people that said, "Hey, $3 million. Sounds good today."
And that was an authorization. So when we have that on the ballot, which we'll do, we did last year as well, that's for the membership to authorize us to tap into the reserve fund for extraordinary expenses that we showed the membership what those are for. It doesn't mean that we're going to go withdraw $7.1 million or $3 million or $4 million out of the reserve fund right away post-election. That's an authorization for us to be able to use that for the negotiating effort or for Strike Committee efforts, whatever the case is. So I just wanted to reiterate that, that we're not going to go withdraw millions of dollars out of the reserve fund just because we have the authorization.
Kurt Heidemann:
So you said that's an authorization. So back in July, the board approved a $7.1 million withdrawal from the reserve fund. But have we taken that money out as of today?
Hank Ketchum:
Okay. So of the $7.1 million authorization, this year there'll be $1.4 million that'll be used of that authorization that'll be deficit spending because we've had increased costs in both negotiating traveling for mediated sessions that occurred earlier in the year than we originally anticipated, and then also increased spending within the Strike Committee, and then other areas where we've had to increase spending. But those were the two main areas with the NC and the SC. For 2024, we're looking at $3.75 million of deficit spending. The total of those two are 5.15 million over the two years, if you want to compare that to how much would be used out of that $7.1 million authorization.
Kurt Heidemann:
Okay. So I think what you're saying is that the 7.1 that we took out back in July covers this year and any deficit spending next year if we need it.
Hank Ketchum:
Yes. Because the authorization wasn't just for 2023, it didn't have an expiration date on it. Is that correct, Tom?
Tom Nekouei:
That's right.
Hank Ketchum:
Okay.
Tom Nekouei:
So if we accrue those costs, it's there for us to use it authorized by the membership.
Kurt Heidemann:
But again, that's only if necessary-
Tom Nekouei:
Correct.
Kurt Heidemann:
... and that money's there in the reserve fund.
Tom Nekouei:
It's a strategic move that we make just looking forward with what Hank and Brian do, projecting cost, and what we do in terms of the strategy that we employ to support the negotiating team, whether it's escalation from the Strike Committee or just what the NC has to do. We didn't plan on doing as many meetings. Well, Kurt's right here, but we didn't have as many meetings planned for 2023. And luckily, with the NMB and now what we're doing with this new meeting structure with management, we're traveling every week to meet and to progress this forward. So we do that as a strategic move to be able to make those moves based on what the membership allows us to do out of the reserve fund to fund those negotiating efforts.
Amy Robinson:
So let's talk about the reserve fund. Obviously we have authority to withdraw up to the 7.1. What do we have plans in place to replace it? How much should be in there? What is our targets currently?
Hank Ketchum:
Well, the target for the reserve fund is set annually. And per the policy manual, it has to be 12 months of expenses current year or 12 months of expenses for the next year if we already have that budget in place. Like right now, we know what that number is for '24. We take that and then we subtract out Strike Committee spending. And that becomes the target for the long-term reserve fund. But then we also have the Strike Preparedness Committee reserve fund that we have capped at $2.5 million. So you have to take those two and add them together. And when you do that, that becomes the target for the reserve fund. So as we look out to 2024, our target would be 35.8 million. And right now, we're currently sitting at around 25 million. So you can see it's over a $10 million deficit of where we should be in the reserve fund. But when we run our analytics and look forward, it shows that, based on certain accruals, that we should be able to get back to where we need to be in terms of our net assets.
Kurt Heidemann:
And that'll happen even with this snap back to a 1% dues structure, although I guess we'll be on a higher rate of pay that'll be on those dues.
Tom Nekouei:
Correct.
Kurt Heidemann:
So that'll help. That's all factored in, I assume.
Tom Nekouei:
And it's really important to reiterate something is that this, in 2016, we did what we did and it was on a wing and a prayer, basically, the way we did the budgeting. We revamped SWAPA, hired the new NC, and we ended up with TA2. I've talked about that in the past where the ROI, the return on investment on TA2 with even the $3 million that we ended up authorizing out of the reserve fund was exponential. And it will be that for this contract and even moreso. But what I want to reiterate is that this is going to be a really, really good beta test for us and generations to come at SWAPA and the negotiating team and the budgeting team going forward to take contract 2020 and the way we and this team budgeted for it and did the analytics to run the budget to be able to enable the NC to do what you all do is going to be a case study for, hopefully, historically going forward, how SWAPA does business.
And this is going to be precedent-setting for what we do things internally going forward. Now, our membership's going to grow in numbers to 12, 13,000 pilots. We're going to be up 30, 40, $50 million operation by probably 2030 and beyond. But I think this is really important to see what we're doing now and what this team, Hank and Brian and the rest of the team has done for the next generation of SWAPA committees and executives and board members for the next cycle and the cycle after that. This is a really good beta and really, like I said, a case study of how to budget for these things, especially if they become prolonged, which, in our history with Southwest, we can pretty much count on prolonged negotiation cycles.
Hank Ketchum:
So what we're planning for, if you look at our net asset targets as we enter the next negotiating cycle, would be to have that long-term reserve fund adequately filled with the 12 months of expenditures minus the Strike Committee. Why do we subtract Strike Committee? Because we have a separate reserve fund for them. We have the Strike Preparedness Committee reserve fund with a $2.5 million target. So if that is filled with the 2.5 Million, the LTRF is filled with 12 months of expenses less that spend. Add those two together. If we have that number going into the next cycle, we're in great shape, as Tom said.
Kurt Heidemann:
Thank you to Tom, Hank, and Brian for coming on the podcast to explain the budgeting process and how our dues are being spent. Remember that you can find all of SWAPA's financial data on swapa.org under your union, financial, and budget. There you can find scorecards, annual reports, trip pull data, and other financial data.
Amy Robinson:
And as always, if you have any feedback for us, please drop us a line at [email protected].
Kurt Heidemann:
And finally, today's bonus number is $24.8 million. That's the total combined amount of the two reserve funds. While that number is less than the target, as Tom mentioned, those monies are being spent under the EOC's close watch to achieve the contract that you deserve.