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					    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                 Productivity stagnant        Productivity enhancing
Industries                        Theater, Heath care,            Manufacturing,
                                  Legal Services, Fine          Technology, rest of
                                   Dining, Education                economy
Characteristics                      Labor intense            Automated production
                                Hands-on commitment             Economies of scale
                                   Personal attention              Consistency
Annual productivity              Independent schools:             US economy:
improvement averages                       0%                          2%

General inflation                           3%                          3%
Market wage increases                       3%                          3%
Less: productivity                          0%                         -2%
improvement
Price increases required                    5%                         1%
  1 1966 William   Baumol,William Bowen. Performing Arts: Economic
  Dilemma                                                                              4
             Group Problem-Solving Approaches
              Less formal                                 More formal
 Inputs       Speculation            Opinions                Facts
                Hear-say            Anecdote                 Data

Processing      Reaction        Casual analysis Systematic analysis
               Emotional             Judgment        Analytic rigor
                 response    Style preference &        “Clean slate”
                                   assumptions                framing

Potential    No new info       Modified views          New views
Outcomes     Treatment of             Course            Complete
                symptoms            adjustments            overhaul
               “Rinse and                         Measurable plans
                   repeat”

                                                                     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
* Dollars    adjusted
for inflation.




                                             11
National Admissions Trends




                             12
         Shifting Aid Applicant Pool




                             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    63%
   – Trustees                         5,150   93%
   – Alumni                             358   16%
   – Grandparents                       705    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           6. Class size
   pricing
                                 7. Facilities, equipment &
2. Affordability                    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”     % of Families in   % of Income
                                Income*         US at income       for tuition
                                                    Level
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
         Shifting Aid Applicant Pool




                             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


                                        “Full Pay”         % of Families in      % of Income for
                                         Income*              US at That             Tuition
                   Tuition                                  Income Level
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




                                                                                                    66
                    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
                                                                        67
lower prices…or rightsizing for lower enrollments.
                        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”?




The problem: Pay for the Ford one time over five years; pay for
tuition for 2 kids, for 13 consecutive years.                   69
              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      15.5        17.5   16.0   14.2     16.3      8.6
Schools
Catholic      17.0        17.0   18.0   16.0     17.7     9 .3
NAIS
Schools
Public                    21.1          23.6              15.6
Schools –
Now
Parochial                 23.6          23.2              17.2
Schools
Public                    30.0          22.0
Schools -
1950s

                                                                 71
               Shattuck-St. Mary’s – Supplemental
               Sources of Income (SSI) Analysis

                                          Traditional
                                                           Facility
                                    SSI    Revenue
                                                        Development
                                           Impact?



                 Ropes Course       YES   NOT YET          YES

           Weddings/Banquets        YES      NO            NO

      Golf Course Development       YES   NOT YET          YES

Summer Theater/Dance Workshops      YES      YES           YES

       Sports Complex Facility      YES      YES           YES

     English Language Institute     YES      YES           NO

 Learning Differences Symposium     YES      YES           NO

                     Sports Camps   YES      YES           NO
                                                                 72
                     Shattuck-St. Mary’s – SSI Details
                                 Was Facility   Financed   Program
                                 built (B) or   (F) or     Impact?
                                 Enhanced       Donated
                                 (E)?           (D)
Ropes Course                          B             D       Leadership
                                                           Development

Weddings/Banquets                      E            D             -

Golf Course Development              E& B          F&D          Golf


Summer Theater/Dance Wisps             E            D       Recruitment


Sports Complex Facility              E& B          F&D        Athletics


English Language Institute             -            -       Recruitment


Learning Differences Institute         -            -      Faculty Training


Sports Camps                           -            -       Recruitment



                                                                              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 Hypotheses
                     Testing
                      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.         77
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

				
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