McIntyre2007

Slide1 : Financially Sustainable Schools Six Steps to Re-engineering Your School’s Financial Future Corey McIntyre, NAIS Chief Financial Officer


Your Financial Challenges : Your Financial Challenges ?


Independent School Goals : 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


Cost Disease Model – W. Baumol1 : Cost Disease Model – W. Baumol1 1 1966 William Baumol, William Bowen. Performing Arts: Economic Dilemma


Group Problem-Solving Approaches : Group Problem-Solving Approaches


Data-driven Decision Making : 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%


Slide7 : DATA & Other Sources STRATEGY RIGOROUS ANALYSIS & INFORMED DEBATE FEEDBACK


Truth : Truth “Truth never damages a cause that is just.” Mahatma Ghandi


The Six Steps : The Six Steps Trend analysis Ratio analysis Ten financial planning assumptions Data markers of school success Re-engineering strategies Projecting alternative & preferred financial futures


Step 1: Trend Analysis : 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


Core Sample Trends : Core Sample Trends * Dollars adjusted for inflation.


Slide12 : National Admissions Trends


Shifting Aid Applicant Pool : Shifting Aid Applicant Pool


Sample Trend Analysis : Sample Trend Analysis NAIS Trends understood What about your school Extending StatsOnline with Excel


Long Term Trends : Long Term Trends Annual giving average up 24% 2002 to 2005 Average gift and participation rates: Current parents $1,000 63% Trustees 5,150 93% Alumni 358 16% Grandparents 705 0.3%


Slide16 : Sample NAIS School


Step 2: Ratio Analysis : 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


Honor success with caution : 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


Data-informed questions : 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?


Data-informed questions : 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?


Data-informed questions : 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?


Step 3: Ten Financial Planning Options : 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


Ten Planning Assumptions : Ten Planning Assumptions Market position and pricing Affordability Tuition dependency Staff salaries Program and staff Class size Facilities, equipment & technology Debt Giving Alternative revenue streams


Market Position and Pricing : 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%


Affordability : Affordability *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


Selected Planning Assumptions : 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


Selected Planning Assumptions : Selected Planning Assumptions Facilities, equipment, technology Age, deferred maintenance Maintenance cost Technology integration Giving Capacity Friend raising, seed planting Expectations and objections


Step 4: Ten Data Markers of Success : 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


NAIS Data Marker Guidance : 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


Ten Data Markers of Success : Ten Data Markers of Success Market demand Greater than 2.5 applications per opening Annual attrition < 7% day students; < 10% boarding Giving Parents: > 65% participation, $1,000 average gift Alumni: > 20% participation, $300 average gift Trustees: > 95% participation, $5,000 average gift


Ten Data Markers of Success : Ten Data Markers of Success Competitive faculty salaries Affordable tuition, moderate increases Financial aid 20% to 25% students receiving aid Average award 50% of tuition Students ratios > 10:1 to faculty > 6:1 total staff


Ten Data Markers of Success : Ten Data Markers of Success Professional development and technology > 1% of budget for professional development > 2% for technology Value of endowment > $25,000 per day student > $250,000 per boarding student Student outcomes > 95% matriculate to college > 95% graduate from college, less than 6 years


Step 5: Re-engineering Strategies : 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


Possible Strategies : 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.


Revenue Enhancement : 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


Revenue Enhancement : 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.


Slide41 : 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. Revenue Enhancement


2006 Non-Tuition Revenue Survey : 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.


Slide43 : 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. Revenue Enhancement


Step 6: Projecting Preferred Scenarios : 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


Step 6: Projecting Preferred Scenarios : 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


Slide46 : Sample NAIS School, Anywhere, USA


Slide48 : Sample NAIS School, Anywhere, USA


Slide52 : First sample projection based on preliminary assumptions.


Slide54 : Sample NAIS School, Anywhere, USA


Slide55 : Deficits in Year 3?


Slide56 : Deficits in Year 3? Typical Response: Hit the “back button” to increase tuition more.


Slide57 : Results: Higher tuition income stream… Sample NAIS School, Anywhere, USA


Slide58 : …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.


The End : The End


Appendix: Related Slides : Appendix: Related Slides


Moody’s Update 2005 : 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.


Financial Equilibrium : 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.


Financial Equilibrium : 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


Shifting Aid Applicant Pool : Shifting Aid Applicant Pool


Middle Income Perspectives:Income Distribution of US Family Quintiles : Middle Income Perspectives: Income Distribution of US Family Quintiles Source: U.S. Census Bureau web page, http://www.census.gov/hhes/www/income/histinc/f01ar.html


Affordability Index : Affordability Index *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


Income Demographics from 1997-2020 : Income Demographics from 1997-2020 The rich getting richer, the poor poorer… and the middle class losing ground 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.


The Middle Class: Dual Income Family @$75,000 (Source: Harvard Magazine, Feb, 2006 “The Middle Class on the Precipice”) : The Middle Class: Dual Income Family @$75,000 (Source: Harvard Magazine, Feb, 2006 “The Middle Class on the Precipice”) If independent school tuition is still “the price of a Ford,” why is everyone feeling so pinched now rather than 30 years ago? The Disappearing Middle Class The Ford Analogy - a “crime of logic”: one payment every 3-5 years vs. 13 consecutive annual payments for each of two kids.


Should Tuition = “Cost of a Ford”? : Should Tuition = “Cost of a Ford”? The problem: Pay for the Ford one time over five years; pay for tuition for 2 kids, for 13 consecutive years.


Costs of Losing the Middle Class? Resource: “Accreditation & Class Issues” ~Ruby K. Payne : 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.


The Data on Class Size : The Data on Class Size


Shattuck-St. Mary’s – Supplemental Sources of Income (SSI) Analysis : Shattuck-St. Mary’s – Supplemental Sources of Income (SSI) Analysis


Shattuck-St. Mary’s – SSI Details : Shattuck-St. Mary’s – SSI Details


SSI’s: Inspiring Donors to Fund Facilities : 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)


Shattuck-St. Mary’s – Looking Ahead : Shattuck-St. Mary’s – Looking Ahead


The Demographics of Charitable Giving Source: NewTithing Group, from IRS 2003 Tax Returns  : The Demographics of Charitable Giving Source: NewTithing Group, from IRS 2003 Tax Returns


Title : 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. chocolate experiment: charge $7 to switch, would offer $3.50 to buy.


Data-driven Decision Making : Data-driven Decision Making 19th century Rx: Leeches Pierre-Charles-Alexandre Louis (1830) Mortality Rates for Treatment of Tuberculosis : Leeches: 44% No leeches: 25%


Grounding Principles of “Six Steps” : 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


Markers of Success: 5 – 7* : Markers of Success: 5 – 7* *0 schools with 8-10 markers; 60 schools with 5-7 markers; 968 schools with 1 – 4 markers (98%)


Truth : Truth “Truth never damages a cause that is just.” Mahatma Ghandi