Financially Sustainable Schools: Six Steps to Re-engineering Your School’s Financial Future

1. Financially Sustainable Schools: Six Steps to Re-engineering Your School’s Financial Future Patrick F. Bassett, NAIS President, Mark Mitchell, VP for School Information Services, and Corey McIntyre, Chief Financial Officer

3. 6-Steps: Financially Sustainable Schools: “Birthing” of Next Generation Model Preliminary Steps: Form a Task Force! Meet 3 Times with an NAIS facilitator: Create and test hypotheses. • Trend Analysis: What are your school’s five- and 10-year trends? • Ratio Analysis: How do your school's "dashboard indicators" benchmark against those of comparable schools? • Financial Planning Assumptions: What are the basic assumptions your school makes about its position in the marketplace (“elasticity” of demand and pricing), mission imperatives, and expectations for the future?

4. 6-Steps: Financially Sustainable Schools: High Stakes Planning • Data Markers of School Success: How does your school measure success? What are the budget-related factors that function as "proxies" for success? • Re-engineering Strategies: What are the "brutal facts" about your current financial position? Where are you vulnerable now or potentially in the future? What strengths can you capitalize upon? What are your means for diversifying income and containing costs? • Projecting Alternative and Preferred Financial Futures: What are the likely, possible, and preferred financial futures for your school, and what decisions will you have to make to achieve your objectives?

5. 6-Steps: Financially Sustainable Schools: High Stakes Planning The Charge: • Mine data to project from trends and set goals for shaping your future. • Make decisions that less “opinion-rich” and more “data-rich.” • Right-brained thinking (A Whole New Mind ~Daniel Pink): out of box creativity, pattern recognition, cross-platform applications.

6. Step 1: Trend Analysis Step One provides a statistical base for assessing where the school has come from financially and what the trends might suggest about the school's financial future. Goal: To determine your school's financial trends in comparison to NAIS industry-wide comparison groups. Questions To Ask: • What are the five- and 10-year trends of your school in terms of the key financial factors: admissions and enrollment; staffing size and compensation; giving and endowment; overall income and expense streams? • What do your school's trends suggest about the future? • To what other schools should you compare yourselves and why? • How do your school's trends compare to your benchmark group trends? How might external, community-wide trends impact your future and goals? Tasks To Undertake: • Give your CFO/Business Manager the assignment, using your own school's financial, enrollment, staff size, faculty compensation and giving data from the benchmarking section of StatsOnline, to determine your school'sfive-year and 10-year trends, compared to those of your benchmark group and NAIS's national data.

7. NAIS Data: 10-Year Trends • Tuitions Up Dramatically: Median NAIS tuition • Up 30% in real dollars = CPI +3 (vs. college tuitions, where net cost is stable) • Inelasticity of pricing? Moody’s Report. Some schools haven’t hit the break point where increased price dampens demand. Question: For one’s mission OR market, are you seeing a price break point in the near future? • Enrollment Stable or Up (on average but not everywhere): For schools that are full, enrollment growth not an option to fund budget growth. But Katrina made us wonder, “What is ‘full’”?

8. NAIS Data: 10-Year Trends • Salaries Up Modestly (11.1% adjusted for inflation): Question: What would market-competitive salaries be based on public school averages to recruit nationally? • $35K starting; $50K median; $75K high (and 1/3 higher in high-cost urban markets) • Attrition: 10.1% NAIS; 11% US Businesses; Schools: 16% public; 22.8% small privates.

9. NAIS Data: 10-Year Trends • What’s Driving Increased Tuitions? Overall staff up 31.8%. Student:Faculty Ratio = 8.6:1 Day and 7.1:1 Boarding. Class size conundrums. Question: If you add a program, what program will you sunset? • Diversity up: Students of color to an average of 20%; faculty of color to an avg. of 10.0 %; 20% of faculty of color seems to be the “tipping point” for schools.

10. NAIS Data: 10-Year Trends • Financial Aid--Grants Up but Numbers Flat: SSS Applicants from families under $60K declining; over $100K skyrocketing. Where is the middle class? “Have Not”s vs. “Have a Lot”s vs. “Don’t Have Nearly Enough”s • Giving up Significantly (22%): Averaging about $1200 gift from parents (65%), $6000 from trustees (95%), $350 from alumni (20%), $750 from Grandparents (15%).How much more giving capacity does your constituency have?

11. Sample Trend & Analysis Sample NAIS School

13. Data-informed Questions To Answer • If this were your school, would this growth rate (80% vs. benchmark schools 40%) be sustainable over the next five or ten years? If not, how will you explain slower growth in the upcoming near future to faculty? • What is funding the rapid rate of increase? Has tuition or another revenue source risen as rapidly? Have other budget lines taken a temporary backseat to the teacher salary priority of the early 2000's? • Has teacher efficiency (average class size, student-teacher ratios, course load, etc.) grown as well? Has the school increased enrollment significantly without significantly increasing faculty? • What does the local or national labor market indicate as the outlook for future faculty? Will the characteristics of the labor pool show the need for even more aggressive or more moderate growth in teacher salaries?

14. Step 2: Ratio & Variance Analysis Step Two provides a snapshot of current key ratios as a basis for posing the principal strategic financial planning questions. Goal: To benchmark your school's key ratios against those of comparable schools to determine where you exceed the norm and can use your relative position advantageously, where you fall below the norm and can improve, or where you deliberately ignore the norm and can articulate why. Questions To Ask: • How do your school's "dashboard indicators" compare to those of similar schools? • In a variance analysis, where and why do your ratios look different? • What are you doing that gives you a financially sustainable advantage? • What are others doing that give them better ratios and better results? How can you emulate them? Tasks To Undertake: • Give your CFO/Business Manager the assignment to develop a Dashboard Indicators Report using NAIS's School Indicators /Financial Calculator

18. Data-informed Questions To Answer • If this were your school’s data and your tuition and financial aid per student is lower than your benchmark schools, are you charging too little? If you charged more, could you increase the number of students receiving aid and the aid amounts? • Since your annual giving per student and special events income per student are lower than your benchmark schools, how can you raise the bar among your constituents? • While your "other income" outperforms your benchmark schools, can you continue to grow in non-tuition, non-giving sources of income? • Even with a smaller budget, your salaries and benefits expenses per student are competitive: Can you continue to be so?

19. Data-informed Questions To Answer • Since at the faculty level you are significantly more efficient (higher student per faculty ratio) than your benchmark schools, can you sustain this? • While your faculty members have higher work load ratios, they have lower average salaries. Is there a demographic reason for this (e.g., a younger than average faculty)? Or is this a time-bomb for you in terms of faculty morale and competitiveness in attracting and keeping faculty? • While you are overall more efficient in faculty, you are less efficient in administrators and overall staff (fewer students-to-administrators and students-to-staff): Why is this the case? Is it an advantage for you or a potential area to seek greater efficiencies? • Your giving profile shows good participation among parents and trustees, but lower average gifts, and your alumni participation rate is extremely low: What's your plan to improve on your performance in this arena?

20. Data-informed Questions To Answer • Your admissions funnel is slightly less competitive than that of your benchmark group, and your student attrition is slightly higher: What does this suggest regarding external and internal surveying and marketing? • Your non-compensation expense per student (i.e., program and instruction-related budgets) is nearly 25 percent lower than your benchmark group. Why? Is this a concern or an opportunity? • Your endowment per student is significantly lower than your benchmark group. Can you improve this ratio?

21. Step 3: Ten Financial Planning Assumptions • Step 3 helps a school to identify frankly its current financial picture and prospects and then make the tough policy and strategy choices to ensure a strong future financial position. • Goals: To assess your school’s trend lines and benchmark variances, determine “the brutal facts,” and make the necessary policy choices to improve one’s particular market / mission position and placement along a financial continuum (from financial vulnerability to financial equilibrium). • Questions To Ask: What are the basic assumptions your school makes about the school's position in the marketplace, mission imperatives, and expectations for future budget-related growth? How do you bring these assumptions to light and examine them? • Tasks To Undertake: Discuss and determine where your school now finds itself on each of the following 10 financial planning assumption continua. Where along each continuum you would like to position the school in the future?

22. 1. Market Position & Pricing: Do you have high demand, an affluent base, little sign of pushback on price, and no mission imperative to keep tuitions low? Or, are you seeing a softening of demand, attrition because of high pricing and tuition hyper-inflation, a shrinking market of families who can afford your school, or a change in mission-determined clientele? Somewhere in between? Should your tuition increases be high, (>CPI +2), moderate (<CPI +2), or low tuition (CPI or +1)? 2. Affordability: Is your tuition affordable by NAIS’s “15%” definition of affordability (i.e., families in the top 15% of family incomes in your region can, according to SSS formulas adjusted for local cost of living, afford at least one child at full pay in your school? Does a 15% band include the middle class, and if not, does that matter to your mission? Financing Sustainable Schools: Ten Planning Assumptions

23. 3. Tuition Dependency: Should your goal be to “charge what it costs” so tuition pays for operations (and make giving dedicated for capital purposes)? Or should your goal be to diversify income to reduce your dependency on tuition as primary income stream? • 4. Staff Salaries: Do you believe that you must benchmark compensation against the high end of NAIS and suburban public school salaries? Or do you believe the historic “climate advantage” independent schools have enjoyed will allow us to attract and keep high quality faculty at 10-20% “below market”? Will the generation shift in teachers be a financial boon or challenge? Financing Sustainable Schools: Ten Planning Assumptions

24. 5. Program and Staff: Should you add services, program, and staff as demand for additional programming increases? Or, should you freeze the growth of staff (since it is the primary factor in driving increased costs and tuitions)? Consider reducing staff through attrition or “right”-sizing? • 6. Class Size: Can you increase class size moderately (and thereby increase productivity) without jeopardizing your market position, the effectiveness of the program, and the morale of the faculty? Are their other means by which to increase productivity without increasing class size? Or is class size limited by factors you can’t touch? Financing Affordable Schools: Ten Planning Assumptions

25. 7. Facilities, Equipment & Technology: Should you declare a truce? Retro-fit current facilities so that they conserve energy? Adopt a “green” posture regarding all future building and renovation? Or expand and renovate at will to secure market advantage? 8. Debt vs. Endowment: Should you mortgage the future via attractive bond financing options (yielding immediate market benefits, costs amortized over time, and expenses paid by those benefiting from new facilities)? Or do you forgo building until pent-up demand helps you build via fundraising? What is your debt-to-endowment ratio, and how does it impact your liquidity and financial strength? (<1:1?) What should your budget –to- endowment:budget ratio be? (<1:1, after debt?) What’s the long-term financial sustainability strategy to reach the preferred budget:endowment ratio? Financing Affordable Schools: Ten Planning Assumptions

26. 9. Giving: Do you have the capacity to expand annual and endowment giving significantly? Or are you seeing the rate of increased giving flatten or decline? Should you adopt policies on giving and budgeting that would contribute annually to the growth of the endowment? • 10. Alternative Revenue Streams: Do you have additional capacities to exploit your physical and intellectual capital to generate significant new revenues? Or do you think offering services to other audiences will dilute focus and mission? Financing Affordable Schools: Ten Planning Assumptions

27. Step 4: Ten Data Markers of Success(NAIS’s “Stake in the Ground” Approach) • Step Four will help you identify and set goals for success. • Goal: In the context of strategic sustainability the two most important goals are achieving outstandingstudent outcomes combined with institutional financial equilibrium. • Questions To Ask: How does your school measure success? What are the budget-related factors that contribute to this success? By these measures, how is your school doing relative to other schools? What are the measurable proxies for successful schools? • Tasks To Undertake: Utilizing StatsOnline and the school's own other data collection mechanisms, determine your school's position in the arenas listed below, since each of these categories can be seen as data equivalents or proxies for school success. What percentile are you? Where do you want to be? It’s likely you’ll be at the a 25th percentile in some variables and aspire to be at the median percentile for those, and at the median percentile in others and aspire to be at the 75th percentile for those, and at the 75% percentile in others and aspire to be at the 90+ percentile for those.

28. Markers of Success: 2008-09 Defining “Greatness” for your Schools by Using Data Proxies

29. Ten Markers of Success: Market Demand • Market demand: number of applications per acceptances measure the market’s perception of the school’s success (high ratio a proxy for reputational value). The higher the ratio, the greater the pricing (tuition) flexibility. • Day Schools Boarding Schools

30. 2. Low annual student attrition: measures stability of school and satisfaction of parents (low percent a proxy for high stability and satisfaction. Ten Markers of Success: Low Attrition Attrition @ Day Schools: Attrition @ Boarding Schools:

31. Ten Markers of Success: Giving 3. Generous giving: measures constituent loyalty (generosity as a proxy for high support and attributed effectiveness). Day Schools

32. Ten Markers of Success: Giving 3. Generous giving: measures constituent loyalty (generosity as a proxy for high support and attributed effectiveness). Boarding Schools

33. Ten Markers of Success: Faculty Salaries 4. Competitive Faculty Salaries: measures a school’s capacity to attract, keep, and reward high quality faculty (salaries a proxy for competitiveness in recruitment and high quality teachers) Day Schools

34. Ten Markers of Success: Faculty Salaries 4. Competitive Faculty Salaries: measures a school’s capacity to attract, keep, and reward high quality faculty (salaries a proxy for competitiveness in recruitment and high quality teachers) Boarding Schools

35. Markers of Success: Moderate Tuitions 5. Relatively moderate tuitionandmoderated annual tuitionincreases: measure value in the value proposition (a proxy for comparative “affordability” and moderated inflationary pricing).

36. 6. A substantial, stable, and sustainable proportion of students receiving financial aid measures a school’s commitment to diversity (financial aid a proxy for socio-economic diversity) balanced byfinancial prudence. Markers of Success: Financial Aid Day Schools:

37. 6. A substantial, stable, and sustainable proportion of students receiving financial aid measures a school’s commitment to diversity (financial aid a proxy for socio-economic diversity) balanced byfinancial prudence. Markers of Success: Financial Aid Boarding Schools:

38. 7. Comparatively high student:faculty and student:totalstaff ratios: measure workload productivity (a proxy for institutional efficiency): Markers of Success: High Productivity Day Schools:

39. Markers of Success: High Productivity Boarding Schools:

40. 8. Significant budget forprofessional development and technology: measures commitment to human resources and innovation (a proxy for investment in supporting a high-quality learning environment). Markers of Success: Funding Professional Development & Technology Day Schools:

41. 8. Significant budget forprofessional development and technology: measures commitment to human resources and innovation (a proxy for investment in supporting a high-quality learning environment). Markers of Success: Funding Professional Development & Technology Boarding Schools:

42. 9. Growingendowment: measures commitment to financial security (a proxy for inter-generational equity and long-term stability). Markers of Success: Grow Endowment Day Schools:

43. Markers of Success: Grow Endowment Boarding Schools

44. 10. Student outcomes measure overall success of mission (persistence and graduation rates a proxy for effective preparation academically and constitutionally to succeed in future competitive academic environments): Note: Student outcomes can be determined on a more extensive basis by results on the NAIS Alumni Survey (and benchmarked in part against other independent schools and against public school results from the Annual College Freshmen Survey). Markers of Success: Student Outcomes

45. Step 5: Re-engineering Strategies • Step Five entertains means by which to pursue your strategic financial objectives. • Goal: Based on the school’s planning assumptions and target markers for success, determine which strategies are the most likely to succeed for your school. • Questions To Ask: What are the "brutal facts" about your current financial position and your current or potential financial vulnerability in the future? How do you develop, adopt, communicate, and "sell" strategies that will ensure an optimal financial future for the school? What strategies should you adopt to secure financial equilibrium? • Tasks To Undertake: Create a task force of entrepreneurial board members, faculty, and administrators to consider options to recommend regarding developing additional or enhanced revenue streams and curtailing the growth in expenses.

46. Strategies – 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 • 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. (See WSJ 1/20/05 “Extracurricular Business”)

47. Strategies – 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; • 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. • Shattuck-St. Mary’s (MN): Building a golf course on adjacent property and selling lots (Net $2M in first year). Development of five “centers of excellence”: Hockey, soccer, the creative arts, etc.

48. Strategies – 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.

49. Endowment Growth To Neutralize CPI+2(Peter Aitken chapter in NAIS’s book on Affordability and Demand) • Minimum Starting Point: school’s endowment the same size or larger as its (balanced) annual operating budget. [1] • Use a 3.5 percent endowment spending rule so from year one of the new approach, the endowment draw initially contributes 3.5 percent of total operating revenue. [2] • Expect the endowment managers to achieve an average 8 percent annual appreciation over the long term. • Set the development goal of adding 3 percent annually to its endowment through capital gifts. [3] • Assume general inflation averages 3 percent. • Keep the school’s budgetary inflation to 5 percent (CPI + 2)

50. Endowment Growth To Neutralize CPI+2(Peter Aitken chapter in NAIS’s book on Affordability and Demand) • Results: endowment draw as a percentage of total operating revenue will increase by about 2.4 percent annually. • Over twenty years it would raise the endowment contribution from 3.5 percent of total operating revenue to 5.6 percent • Over 50 years the endowment contribution would increase to 11.3 percent of total operating revenue • Over 100 years the endowment contribution would increase to 35 percent. • These increases represent relief for tuitions. Over time, the school grows less tuition dependent and more affordable.