Financially Sustainable Schools

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Financially Sustainable Schools Six Steps to
Re-engineering Your Schools Financial Future
Corey McIntyre, NAIS Chief Financial Officer
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Your Financial Challenges

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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

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Cost Disease Model W. Baumol1
1 1966 William Baumol, William Bowen. Performing
Arts Economic Dilemma
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Group Problem-Solving Approaches
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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

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RIGOROUS ANALYSIS INFORMED DEBATE
DATA Other Sources
STRATEGY
FEEDBACK
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Truth

• Truth never damages a cause that is just.
• Mahatma Ghandi

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The Six Steps

• Trend analysis
• Ratio analysis
• Ten financial planning assumptions
• Data markers of school success
• Re-engineering strategies
• Projecting alternative preferred financial
  futures

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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

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Core Sample Trends
Dollars adjusted for inflation.
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National Admissions Trends
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Shifting Aid Applicant Pool
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Sample Trend Analysis

• NAIS Trends understood
• What about your school
• Extending StatsOnline with Excel

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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

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Sample NAIS School
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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

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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

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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?

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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?

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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?

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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

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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

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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

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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
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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

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Selected Planning Assumptions

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

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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

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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

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Ten Data Markers of Success

• Market demand
• Greater than 2.5 applications per opening
• Annual attrition
• lt 7 day students lt 10 boarding
• Giving
• Parents gt 65 participation, 1,000 average gift
• Alumni gt 20 participation, 300 average gift
• Trustees gt 95 participation, 5,000 average
  gift

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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
• gt 101 to faculty gt 61 total staff

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Ten Data Markers of Success

• Professional development and technology
• gt 1 of budget for professional development
• gt 2 for technology
• Value of endowment
• gt 25,000 per day student
• gt 250,000 per boarding student
• Student outcomes
• gt 95 matriculate to college
• gt 95 graduate from college, less than 6 years

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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

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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.

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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

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Revenue Enhancement

• Capitalize upon intellectual property (cont)
• 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.

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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. Marys (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.

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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.

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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.

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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

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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

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Sample NAIS School, Anywhere, USA
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Sample NAIS School, Anywhere, USA
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First sample projection based on preliminary
assumptions.
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Sample NAIS School, Anywhere, USA
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Deficits in Year 3?
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Deficits in Year 3? Typical Response Hit the
back button to increase tuition more.
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Sample NAIS School, Anywhere, USA
Results Higher tuition income stream
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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.
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The End
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Appendix Related Slides
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Moodys Update 2005

• Moodys 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
  positionand therefore discount more heavily.

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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.

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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

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Shifting Aid Applicant Pool
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Middle Income PerspectivesIncome Distribution
of US Family Quintiles
Source U.S. Census Bureau web page,
http//www.census.gov/hhes/www/income/histinc/f01a
r.html
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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
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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 levelsso plan for lower
pricesor rightsizing for lower enrollments.
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The Middle Class Dual Income Family _at_75,000
(Source Harvard Magazine, Feb, 2006 The Middle
Class on the Precipice)
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 Ford Analogy - a crime of logic one
payment every 3-5 years vs. 13 consecutive annual
payments for each of two kids.
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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.
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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.

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The Data on Class Size
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Shattuck-St. Marys Supplemental Sources of
Income (SSI) Analysis
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Shattuck-St. Marys SSI Details
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SSIs 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)

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Shattuck-St. Marys Looking Ahead
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The Demographics of Charitable Giving Source
NewTithing Group, from IRS 2003 Tax Returns
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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.
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Data-driven Decision Making

• 19th century Rx Leeches
• Pierre-Charles-Alexandre Louis (1830)
• Mortality Rates for Treatment of Tuberculosis
• Leeches 44
• No leeches 25

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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

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Markers of Success 5 7
0 schools with 8-10 markers 60 schools with 5-7
markers 968 schools with 1 4 markers (98)
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Truth

• Truth never damages a cause that is just.
• Mahatma Ghandi