Financially Sustainable Schools Six Steps to Re-engineering Your School’s Financial Future Corey McIntyre, NAIS Chief Financial Officer Your Financial Challenges ? 2 Independent School Goals Sustainable, Excellent, and Affordable? NAIS school tuitions increasing faster than cost of living – Average of CPI +3% 1995 - 2005 Parents demand highest quality Improve quality = add cost Add cost = raise tuition Accessibility threatened John Maynard Keynes: “Animal Spirits” of uninformed optimism or pessimism 3 Cost Disease Model – W. Baumol1 Activity Industries Characteristics Annual productivity improvement averages General inflation Market wage increases Less: productivity improvement Price increases required 1 1966 William Dilemma Productivity stagnant Theater, Heath care, Legal Services, Fine Dining, Education Labor intense Hands-on commitment Personal attention Independent schools: 0% Productivity enhancing Manufacturing, Technology, rest of economy Automated production Economies of scale Consistency US economy: 2% 3% 3% 0% 3% 3% -2% 5% 1% Baumol, William Bowen. Performing Arts: Economic 4 Group Problem-Solving Approaches Less formal Inputs Processing Speculation Hear-say Reaction Emotional response Potential Outcomes No new info Treatment of symptoms “Rinse and repeat” More formal Opinions Anecdote Facts Data Casual analysis Systematic analysis Judgment Analytic rigor Style preference & “Clean slate” assumptions framing Modified views Course New views Complete adjustments overhaul Measurable plans 5 Data-driven Decision Making 19th century Rx: Leeches Pierre-Charles-Alexandre Louis (1830) Mortality Rates for Treatment of pneumonia 77 patients: – Leeches used early: 44% – Leeches used late: 25% 6 RIGOROUS ANALYSIS & INFORMED DEBATE DATA STRATEGY & Other Sources FEEDBACK 7 Truth “Truth never damages a cause that is just.” Mahatma Ghandi 8 The Six Steps 1. Trend analysis 2. Ratio analysis 3. Ten financial planning assumptions 4. Data markers of school success 5. Re-engineering strategies 6. Projecting alternative & preferred financial futures 9 Step 1: Trend Analysis Where have you come from, where are you going? Key questions: – – – – 5 and 10 year trends Projection of trends into future Defining benchmark group External trends Tasks: – Run your numbers – Compare to others – Collect environmental data 10 Core Sample Trends 25% * Dollars adjusted for inflation. 20% 15% 10% 5% Average Total financial aid headcount grant 0% Median teacher salaries Median tuition day % Chg 2000-2005 18% 18% 7% 20% % Chg 1995-2000 22% 10% 4% 17% 11 National Admissions Trends 350 300 250 Apps Accepted Enrolled Log. (Apps) Log. (Enrolled) Count 200 150 100 50 0 2002 2003 2004 StatsOnline Survey Year 2005 2006 12 Shifting Aid Applicant Pool 10 12.5 12.6 18.1 17.1 17.2 17.9 17.6 22.5 21.3 20.3 19.8 11.8 12.4 15 10.8 10.3 10.2 10.1 20 18.7 18.4 25 20.2 21.7 30 15.4 00-01 01-02 02-03 03-04 21 22.2 35 5 0 0-20K 20-40K 40-60K 60-80K 80-100K 100K+ Income Range Source: School and Student Service for Financial Aid (SSS) processing system data 13 Sample Trend Analysis NAIS Trends understood What about your school Extending StatsOnline with Excel 14 Long Term Trends Annual giving average up 24% 2002 to 2005 Average gift and participation rates: – Current parents $1,000 – Trustees 5,150 – Alumni 358 – Grandparents 705 63% 93% 16% 0.3% 15 Sample NAIS School 16 17 Step 2: Ratio Analysis Snapshot of ratios vs. benchmarks Key questions – Establishing benchmark measures – Understanding differences – Strengths/weaknesses Tasks – Run reports - Online Financing Schools Calculator – Pursue resulting lines of inquiry 18 19 20 21 Honor success with caution “Even if you're on the right track, you'll get run over if you just sit there.” Will Rodgers 1879-1935 22 Data-informed questions Tuition and financial aid lower than peers – Charging too little? – Charge more and increase the number of students receiving aid and the aid amounts? Annual giving per and special events income lower than peers – Opportunity? “Other income" better than peers – Why? Can this continue? Salaries and benefits expenses competitive even with smaller budget – How. Can this continue? 23 Data-informed questions Higher student per faculty ratio than your benchmark schools. – Sustainable? How do you know? Efficient student to teacher ratios and lower average salaries. – Why? Younger faculty? Clever scheduling? Faculty morale and recruiting time-bomb? Lower student to administrator ratios – Why? Advantage or inefficiency? Annual giving participation for parents and trustees favorable, but average gifts are lower. Why? Improving? Alumni participation rate is extremely low. Opportunity? 24 Data-informed questions Admissions funnel less competitive; student attrition is slightly higher. – External and internal surveying and marketing needs? Non-compensation expense per student (i.e., program and instruction-related budgets) is nearly 25 percent lower. Concern or strength? Endowment per student is significantly lower. Improvable? 25 Step 3: Ten Financial Planning Options Objective assessment of your position on ten key continua Key questions: – Where do you fit in the market? – Where to want to be? – What fits your mission and inherent strengths and opportunities? Tasks: – Study, interpret and debate all of the above 26 Ten Planning Assumptions 1. Market position and pricing 2. Affordability 6. Class size 7. Facilities, equipment & technology 3. Tuition dependency 8. Debt 4. Staff salaries 9. Giving 5. Program and staff 10. Alternative revenue streams 27 Market Position and Pricing • Factors to understand: • Demand, demographics, family incomes • Attrition, signs of pushback on price • Mission imperative relative to tuitions • Pricing strategy options: • Higher: 5% and above • Moderate: 3 to 5% • Low: Less and 3% 28 Affordability Tuition “Full pay” Income* % of Families in US at income Level % of Income for tuition Lower $13,635 $99,390 13.7 Middle $15,675 $106,112 14.8 17 – 18% Upper $17,450 $111,963 15.6 *Minimum income to pay tuition at amount listed. Assumptions: Using SSS Methodology for a family of four, two parents, two children, parents age 45, both work, no assets - parent or student, DC state/other taxes, no COLA 29 Selected Planning Assumptions Faculty salaries – – – – – Market trend, future expectations Competition from public schools Climate advantage Attrition, age of faculty Hiring practices Class size – Scheduling options – Faculty load – False perceptions and sacred cows 30 Selected Planning Assumptions Facilities, equipment, technology – Age, deferred maintenance – Maintenance cost – Technology integration Giving – Capacity – Friend raising, seed planting – Expectations and objections 31 Step 4: Ten Data Markers of Success Define numerical markers to measure progress toward goals. Key questions: – Measures of educational success – Alignment of budget to those measures – Proxies from successful schools Tasks: – Determine where you stand relative to markers – Define your basic assumptions 32 NAIS Data Marker Guidance Use to provide context Indicators that inform, not goals themselves Understand inter-relationships Learn to reconcile adjust accordingly – – – – Mission Location Endowment Market position Avoid ratio envy 33 Ten Data Markers of Success 1. Market demand – Greater than 2.5 applications per opening 2. Annual attrition – < 7% day students; < 10% boarding 3. Giving – Parents: > 65% participation, $1,000 average gift – Alumni: > 20% participation, $300 average gift – Trustees: > 95% participation, $5,000 average gift 34 Ten Data Markers of Success 4. Competitive faculty salaries 5. Affordable tuition, moderate increases 6. Financial aid 20% to 25% students receiving aid Average award 50% of tuition 7. Students ratios > 10:1 to faculty > 6:1 total staff 35 Ten Data Markers of Success 8. Professional development and technology > 1% of budget for professional development > 2% for technology 9. Value of endowment > $25,000 per day student > $250,000 per boarding student 10. Student outcomes > 95% matriculate to college > 95% graduate from college, less than 6 years 36 Step 5: Re-engineering Strategies Develop plans to pursue the objectives you have set Key questions – Priorities, biggest vulnerabilities – Communication strategies Tasks – Team or task force formation – Entrepreneurial opportunities 37 Possible Strategies Grow enrollment (without growing staff) Capitalize upon intellectual property Full utilization of physical assets Enhanced fundraising to build endowment Increase “productivity” Moderate the arms race for new facilities Sunset programs. Undertake periodic “sacred cow” hunts. 38 Revenue Enhancement Grow enrollment (without growing staff) Capitalize upon intellectual property Calvert School (MD): curriculum for home-schoolers (net $1.5m/yr). Now one version of website in Russian. Elmwood Franklin (NY): Achieve! Storefront Tutorials (projected $100K/yr.) St. Richard's School (Indianapolis): auxiliary education center for tutoring, technology, adult education, testing preparation (SAT), GED 39 Revenue Enhancement Capitalize upon intellectual property (con’t) The Norman Howard School (NY) -- EnCompass: Resources for Learning, struggling learner assessment, coaching, tutoring, college LD assessment & guidance; training/consultation for schools; community workshops and seminars. San Francisco School (CA): Kids Battle the Grown-Ups trivia game co-authored by 6th graders. Net $70K royalties so far. 2nd game, Kids Rule, now carried by Wal-Mart and Toys “R” Us. 40 Revenue Enhancement Full utilization of physical assets: Lake Forest Academy (IL): Outsourcing to Sodexho weddings ($500K/yr); sale of adjoining property to high-end developer for endowment Shattuck-St. Mary’s (MN): Building a golf course on adjacent property and selling lots (Net $2M in first year). Also rentals of ropes course for corporate outings. Many schools: adult ed in evening; sports clubs during class time & weekends (See the “Money” issue of Independent School-Fall 2003.) Georgetown Prep (MD): Luxury apartments on 3 acres of leased property (Income = $1.3M year on 99-yr lease.) Hilton Head Prep (SC): Women's wellness Retreat (Summer Session for Moms and their teenage daughters); also: homeschoolers can take one course at the school for 1/5th tuition. 41 2006 Non-Tuition Revenue Survey Key Findings – Most common: summer programs (78%), auctions (72%), and extended day programs (63%) – Least common: adult learning (5%), intellectual property (1%) and franchising (0.6%) – 36% cited auctions as most significant source of income – Only 2% exhibited net loss from operating the program(s) – 75% cited “operations” as the program financed by the revenue; 2nd most frequent was “financial aid” (23%) Full report www.nais.org. More research to follow. 42 Revenue Enhancement Enhanced fundraising to build endowment Serious deferred giving programs: e.g., most boarding schools. Grow endowment via a combination of allocating to endowment 1/3rd of all capital campaign, annual giving, and special event proceeds to endowment and/or a commitment of 1-3% of annual budget contribution to endowment. 43 Step 6: Projecting Preferred Scenarios Project financial alternatives; quantify impact of various strategies. Key questions: – Impact of plans to bottom line – Likely, possible, and preferred financial futures – Decisions required to reach preferred financial future Tasks: – Run numbers using NAIS Financing Schools Calculator 44 Step 6: Projecting Preferred Scenarios Different assumptions for different projection runs: First: Change nothing. Last five years' budgetary trends for the next five years. Second: Reflecting all your goals from step 4 (Data markers of success) Third: Balancing and making choices 45 Sample NAIS School, Anywhere, USA 46 47 Sample NAIS School, Anywhere, USA 48 49 50 51 First sample projection based on preliminary assumptions. 52 53 Sample NAIS School, Anywhere, USA 54 55 Deficits in Year 3? Typical Response: Hit the “back button” to increase tuition more. 56 Sample NAIS School, Anywhere, USA Results: Higher tuition income stream… 57 …and good surpluses for five years. But falling back into the same pattern of high tuition increases. The challenge: create surpluses by changing other variables. 58 The End Appendix: Related Slides Moody’s Update 2005 • “Moody’s continues to believe that the majority of independent schools in our portfolio retain pricing flexibility and will continue to grow total net tuition revenue and net tuition revenue per student. However, this pricing flexibility is finite, and already you have heard some cases where pricing is becoming more sensitive as parents consider lower cost day schools and church-related institutions as an alternate to the more expensive boarding schools. Tuition flexibility is greatest at highly rated schools which typically hold premier academic reputations nationally and increasingly internationally.” • NAIS: Price is related to demand which is driven by PAVS factors: • Prestige (i.e., perceived “rank” and “status” of school) • Affordability (i.e., perceived affordability) • Value (i.e., perceived outcomes) • Sacrifice (i.e., willingness to use discretionary dollars on education Often schools price themselves by their desired market position rather than the real market position—and therefore “discount” more heavily. 61 Financial Equilibrium Revenues equal or exceed expenses. Year after year, the rate of growth in revenues equals or exceeds the rate of growth in expenses. The value of financial capital is preserved or augmented over time. The value and functional efficiency of physical capital (i.e., plant, equipment, and technology) is preserved or augmented over time. 62 Financial Equilibrium The effectiveness of human capital is preserved or augmented over time. The ability to maintain or improve delivery of the school's stated mission is preserved. Resource allocation is aligned with mission imperatives 63 35 10 12.5 12.6 18.1 17.1 17.2 17.9 17.6 22.5 21.3 20.3 19.8 11.8 12.4 15 10.8 10.3 10.2 10.1 20 18.7 18.4 25 20.2 21.7 30 15.4 00-01 01-02 02-03 03-04 21 22.2 Shifting Aid Applicant Pool 5 0 0-20K 20-40K 40-60K 60-80K 80-100K 100K+ Income Range Source: School and Student Service for Financial Aid (SSS) processing system data 64 Middle Income Perspectives: Income Distribution of US Family Quintiles 2003 Lowest 5th up to $24,117 Second 5th $24,118 - $42,057 Third 5th $42,058 - $65,000 Fourth 5th $65,001- $98,200 Highest 5th $98,201+ Top 5% $170,082+ Source: U.S. Census Bureau web page, http://www.census.gov/hhes/www/income/histinc/f01ar.html 65 Affordability Index Tuition “Full Pay” Income* % of Families in US at That Income Level % of Income for Tuition Lower $13,635 $99,390 13.7 Middle $15,675 $106,112 14.8 Upper $17,450 $111,963 17 – 18% 15.6 *Minimum income to pay tuition at amount listed. Assumptions: Using SSS Methodology for a Family of four, two parents, two children, parents age 45, both work, no assets - parent or student, DC state/other taxes, no COLA 66 Income Demographics from 19972020 The rich getting richer, the poor poorer… and the middle class losing ground 120000 over 150 125 to 150 100 to 125 75 to 100 60 to 75 50 to 60 40 to 50 30 to 40 20 to 30 10 to 20 0-10 100000 80000 60000 40000 20000 0 1997 2000 2005 2010 2015 2020 Impact on Independent Schools? Is this good news or bad news for us? Bad News: trend is for fewer kids at higher income levels—so plan for lower prices…or rightsizing for lower enrollments. 67 The Disappearing Middle Class If independent school tuition is still “the price of a Ford,” why is everyone feeling so pinched now rather than 30 years ago? The Middle Class: Dual Income Family @$75,000 (Source: Harvard Magazine, Feb, 2006 “The Middle Class on the Precipice”) The Ford Analogy - a “crime of logic”: one payment every 3-5 years vs. 13 consecutive annual payments for each of two kids. 68 Should Tuition = “Cost of a Ford”? Day Tuitions vs. Cost of a Domestic Car 1981-2005 (adjusted for inflation) $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 1981 1984 1987 1990 Day Tuitions 1993 1996 1999 2002 Domestic Car The problem: Pay for the Ford one time over five years; pay for 69 tuition for 2 kids, for 13 consecutive years. Costs of Losing the Middle Class? Resource: “Accreditation & Class Issues” ~Ruby K. Payne Loss of the value set that the middle class brings to the mix: drivers of work ethic, achievement orientation, and sacrifice for material security. Absence of balancing tonic for ills of affluence: over- involvement of the parents; intense academic and social competition; misguided parental intervention in student consequences. Potential barrier to attracting young, idealistic “Teach for America” talent who seek diversity. 70 The Data on Class Size Preschool K-5 6-8 9-12 All Student: Fac Ratio All NAIS Schools 15.5 17.5 16.0 14.2 16.3 8.6 Catholic NAIS Schools 17.0 17.0 18.0 16.0 17.7 9 .3 Public Schools – Now 21.1 23.6 15.6 Parochial Schools 23.6 23.2 17.2 Public Schools 1950s 30.0 22.0 71 Shattuck-St. Mary’s – Supplemental Sources of Income (SSI) Analysis SSI Traditional Revenue Impact? Facility Development Ropes Course YES NOT YET YES Weddings/Banquets YES NO NO Golf Course Development YES NOT YET YES YES YES YES Sports Complex Facility YES YES YES English Language Institute YES YES NO YES YES NO YES YES NO Summer Theater/Dance Workshops Learning Differences Symposium Sports Camps 72 Shattuck-St. Mary’s – SSI Details Was Facility built (B) or Enhanced (E)? Financed (F) or Donated (D) Program Impact? Ropes Course B D Leadership Development Weddings/Banquets E D - E&B F&D Golf E D Recruitment E&B F&D Athletics English Language Institute - - Recruitment Learning Differences Institute - - Faculty Training Sports Camps - - Recruitment Golf Course Development Summer Theater/Dance Wisps Sports Complex Facility 73 SSI’s: Inspiring Donors to Fund Facilities Design the program and SSI that a new facility will provide the school. (Soccer development program; lease revenue; Dane Family Field House) Prepare presentations for donors that show both the program for the students and the SSI. Fund the program and facility through donations and SSI revenue. (Dane Family Field House: $1.2 mm in donations, $1.6 mm in financing) 74 Shattuck-St. Mary’s – Looking Ahead Under Consideration Existing Asset Fiber Optic Substation Location, Available Space Wind Turbines Location, Electrical Usage International Summer Travel Faculty, H of S relations. Alumni Hotel Stay Rebates School visitation Summer Film Festival for students Alumni body Independent School Credit Card Program Staff credentials Non Profit Accounting Services CFO experience Faculty Placement Service Administration’s experience Incubator for Start Up Businesses Parent body, State interests, HS program, campus, alumni body 75 The Demographics of Charitable Giving Source: NewTithing Group, from IRS 2003 Tax Returns Adjusted Gross Income (AGI) Avg Total Giving Under $50,000 $ 277 $50,000 - $74,999 $ 1,336 $75,000 - $99,999 $ 2,153 $100,000 - $199,999 $ 3,471 $200,000 - $499,999 $ 8,236 $500,000 - $999,999 $ 20,790 $1,000,000 - $1,499,999 $ 39,817 $1,500,000 - $1,999,999 $ 58,376 $2,000,000 - $4,999,999 $ 100,345 $5,000,000 - $9,999,999 $ 288,540 $10,000,000 or more $ 1,744,229 76 Title Testing Hypotheses Source: The McKinsey Quarterly: 4/20/2006 Which pair would you choose given an opportunity to flip over just two cards to test the assertion, "If a card has a vowel on one side, then there must be an odd number on the other side"? Confirmation Bias: Most incorrectly choose U & 7; 7 offers no new info with a vowel on the back: answer is U & 8. Related to “possession bias”: people 2 to 3 times more likely to prefer what they have to what they may get: coffee mug vs. 77 chocolate experiment: charge $7 to switch, would offer $3.50 to buy. Data-driven Decision Making 19th century Rx: Leeches Pierre-Charles-Alexandre Louis (1830) Mortality Rates for Treatment of Tuberculosis : – Leeches: 44% – No leeches: 25% 78 Grounding Principles of “Six Steps” Data-driven rather than subjective Ongoing rather than start-and-finish Interactive among school constituencies, board, and staff Flexible in process, structure, and language Separates what an organization does (strategy) from how it is structured (design)… …so that re-design is possible to achieve financial sustainability 79 Markers of Success: 5 – 7* Albuquerque Academy Iolani School Sidwell Friends School Belmont Hill School John Burroughs School Springside School Breck School Lakeside School St. Albans School Brunswick School Lick-Wilmerding High School St. Paul's School Buckingham Browne & Nichols School Marin Academy St. Sebastian's School Chadwick School Mary Institute & St. Louis Country Day Tenacre Country Day School Christ Church Episcopal School Memphis University School The Brearley School Cistercian Preparatory School Milton Academy The Buckley School Convent of the Sacred Heart New Canaan Country School The Columbus Academy Dana Hall School Newton Country Day Sacred Heart The Dalton School Episcopal High School Noble and Greenough School The Head-Royce School Flintridge Preparatory School Pace Academy The John Thomas Dye School French-American International School Phillips Academy The McCallie School Gilman School Phillips Exeter Academy The Pingry School Girls Preparatory School Polytechnic School The Potomac School Greenwich Academy Princeton Day School The Roxbury Latin School Harbor Day School Punahou School The Taft School Hathaway Brown School Saint Mark's School of Texas The Westminster Schools Hawken School San Francisco Day School The Winsor School Horace Mann School Sidwell Friends School University School of Nashville 80 *0 schools with 8-10 markers; 60 schools with 5-7 markers; 968 schools with 1 – 4 markers (98%) Truth “Truth never damages a cause that is just.” Mahatma Ghandi 81