Patrick F. Bassett, NAIS Presidentbassett@nais.org

Financial Survivability

http://www.nais.org/resources/movie.cfm?ItemNumber=151365

http://www.nais.org/resources/movie.cfm?ItemNumber=151365

Film Clip

Financial Sustainability?

Patrick F. Bassett, NAIS President

The Economic Meltdown –Brutal Facts vs. Unshakeable

Beliefs

1. Enrollment Shaky: Higher than usual summer attrition and lower than usual enrollments resulting in a shortfall of students, in some cases up to fifty off budget.

2. Financial Aid Demand Growing: Current families of higher incomes starting to demand and qualify for financial aid as tuitions have skyrocketed while family salaries remain flat and equity in homes and investments tanks.

The “Perfect Storm”: Six Factors in Confluence.What Shape is your Strategic Plan in?

3. Debt Service Rising/Endowment Income Falling: Variable bond rates that have soared, in some cases, from 3% to 10%, impacting heavily and unexpectedly the current year budget’s debt service obligations. Debt:Endowment ratios under water. Income from endowment plummeting.

4. Demographics Changing: In the number of school-age children in many locales where independent schools are located as housing stock and cost of living become prohibitively expensive for young families.

The “Perfect Storm”

5. Affordability Disappearing as Tuitions Skyrocket: A climate of caution where even families with substantial dual incomes fear a job loss could bring financial catastrophe, making independent school tuition, heretofore considered a necessity, all of a sudden considered a discretionary luxury.

6. Wealth Declining: A chilling zephyr on feelings about one’s wealth and capacity for eleemosynary giving.

Harbor during the storm…. Lessons from the past.

The “Perfect Storm”

NAIS Schools Holding on during Recessions

Recession Years (in Red)

Avg Enrollment Annual Giving per Student

1968-69 339 $ 170

1969-70 345 $ 147

1970-71 337 $ 150

1972-73 347 $ 203

1973-74 359 $ 220

1974-75 361 $ 203

1975-76 360 $ 173

NAIS Schools Holding on during Recessions

Recession Years (in Red)

Avg Enrollment Annual Giving per Student

1979-80 387 $ 267

1980-81 390 $ 420

1981-82 397 $ 313

1989-90 403 $ 862

1990-91 408 $ 875

1991-92 414 $ 907

NAIS Schools Holding on during Recessions

Recession Years (in Red)

Avg Enrollment Annual Giving per Student

2000-01 487 $ 1,248

2001-02 485 $ 1,273

2002-03 482 $ 1,343

 Prior Year Number Number Average Average Average Funnel Schools Inquiries Applicants Accept Enrollees2009-09 1129 724 278 143 962007-08 996 714 287 146 972006-07 965 754 282 145 992005-06 967 797 280 147 992004-05 951 819 278 149 982003-04 916 856 285 150 982002-03 805 929 311 155 1032001-02 899 975 318 151 1032000-01 835 1061 329 153 1041999-00 809 1038 319 154 1061998-99 855 991 296 148 1031997-98 869 998 296 147 102

Early Indicators: SSS & SSATs tracking

Enrollments in StatsOnline Reporting Schools

Year # Schools

Totl Enrolment Avg Enrolment

2001 1,218 551,944 453

2002 1,688 744,342 441

2003 1,534 627,230 409

2004 1,523 606,551 398

2005 1,656 660,479 399

2006 1,492 645,916 433

2007 1,491 650,895 437

2008 1,468 670,139 456

2009 1,493 681,762 457

An NAIS Overview Framework

There are no “one-handed” economists: Acknowledge and reconcile yourself functioning in a climate of uncertainty.

Recognize that each school faces many unique circumstances, so no generalities will apply to all.

Hope for the best but plan for the worst: Create three financial contingency plans: best case, worst case, most likely case.

An NAIS Overview Framework

There are no “one-handed” economists: Acknowledge and reconcile yourself functioning in a climate of uncertainty.

Recognize that each school faces many unique circumstances, so no generalities will apply to all.

Hope for the best but plan for the worst: Create three financial contingency plans: best case, worst case, most likely case.

An NAIS Overview Framework

Don’t waste the motivation of crisis to fast-forward to a more financially sustainable future: trim fat and waste; dry-dock programs that no longer are viable; go green fast; moderate tuition increases and spike financial aid; grow school in down market by aggressive net tuition discounting or merit aid.

Communicate to your constituents about school finances, the value proposition, and the importance of giving.

The Financial Crisis - Immediate First Steps

1. Endowment: Sit tight and ride out the storm. Financial Consultant: "Investments have historically yielded

positive results to investors who bought when others were fearful, sold when most others were euphoric, and stood their ground when the situation was unclear. While past performance does not guarantee future results, one defense against short-term fear is long-term confidence."

2. Cash: “Trust in God…but tie your camel.” Consider putting cash in FDIC-insured savings or brokerage accounts

The Financial Crisis - Immediate First Steps3. Debt-Financed Bonds: Hearing some talk of school bonds not

being marketable and banks calling in the loans. Jeff Lewis (lewis@icemiller.com) Not a great time to begin a bond-financed campaign…. (If you do—go with a strong bank’s letter of credit.) For those that are already impacted by the credit crunch and related fall-out, there is not a single source of guidance: Remain in close contact with banking partners, bond counsel, and government regulators.

4. Financial Scenario-Planning: A.) Contingency Plan: Income Down 5% - 10%

B.) Disaster Plan: Income Down 20%

Scenario 1: A Contingency Financial Plan - Income Down 5% - 10%: Recommendations from the field.

Cut Expenses (Except Increases for Financial Aid):

1. Freeze “non-defense spending”: i.e., put a hold on discretionary expenditures.

2. Postpone capital expenditures: e.g., capital renovations and replacements.

3. Double up assignments to cover staff attrition rather than hiring replacements.

Scenario 1: A Contingency Financial Plan: Income Down 5% - 10%

Cut Expenses (continued):4. Go Green FAST: Recommendations from the NBOA and

NAIS listserves and the field… implement dramatic conservation strategies (the 3 Rs of

reduce, re-use, and recycle); re-structure athletic and field trip travel schedules; adopt policies to reduce electricity and oil/gas

consumption; incentivize use of public transportation and ride-sharing;

Scenario 1: A Contingency Financial Plan: Income Down 5% - 10%

Go Green FAST (continued): listen to your business manager and maintenance

director and environmental science faculty on other savings possibilities;

see NAIS’s piece on “100 Ways To Go Green and Global”).

5. Cut deeply enough to spend less overall while… Expanding financial aid budgets (to meet increased need

of current and future families) Maintaining or increasing admissions, marketing &

development budgets.

Scenario 1: A Contingency Financial Plan: Income Down 5% - 10%

Cut Expenses (continued):

6. If you anticipate being down for longer than the current year, beyond steps 1 -5, considera) Moderating tuition increasesb) Moderating salary increases (e.g., making COL+ raises

contingent upon achieving balanced budget enrollment projections)

Scenario 1: A Contingency Financial Plan: Income Down 5% - 10%

Increase Income:7. Use net tuition discounting to grow enrollment

without adding staff.8. Strengthen advancement messaging and

cultivation to raise more money.9. Fully utilize the school’s physical capital

(expanding use of campus)10.Exploit the schools intellectual capital (creating

related businesses-online courses, tutoring services, boarding program for international students, etc.)

Scenario 1: A Contingency Financial Plan: Income Down 5% - 10%

Higher risk options (to avoid if possible): 11.Borrowing more (risking exacerbating debt service demands:

if necessary, “borrow from yourself,” using reserves and endowment with a formal payback schedule).

12.Abandoning your spending policy, taking a larger draw from the endowment that invades principal, (risking jeopardizing standing with donors)

13.Committing publicly now to very ambitious capital campaign goals (risking timing and attainability issues)

Scenario 1: A Contingency Financial Plan: Income Down 5% - 10%

What are what Harvard’s Jim Honan invites, the “deeper conversations” and "beyond the usual" responses? Or James Surowiecki’s “wisdom of the crowd?”

1. ?2. ?3. ?4. ?

One school’s plan: rather than cut back, spend endowment and use aggressive merit aid to grow school enrollment and program as competitors contract.

Scenario 2: A Financial Disaster Plan

Disaster Plan: Income down 20% or more.1. Make a heroic commitment to maintain full services, to

the extent possible, the Katrina model of being the one safe harbor in the storm for kids and parents.

2. “Right-size” the school: Downsize staffing = “rightsizing”: toward a more financially sustainable ratio of students:staff, a one-time opportunity to prune the shrub so it can grow back strongly.

3. Necessity being the mother of invention, under dire circumstances the idea of merging neighboring independent schools together begins to look more attractive and less impossible.

“Unshakeable Beliefs” Counter “Brutal Facts”1. We have the freedom to act quickly and decisively when

needed, since we are effectively independent of government or church in our governance and finance.

2. We have the capacity to act with resources behind us since we have intellectual, physical, and social capital, unmatched by any other PS-12 segment.

3. Industry leaders have confidence our schools “will not only endure but prevail,” since history is on our side: If any institutions are “built to last,” it is independent schools. (Faculty, trustees, and parents need reassurance: high anxiety levels.)

“Unshakeable Beliefs” Counter “Brutal Facts”Within challenges, lie opportunities to make…1.A dramatic commitment school by school to

sustainability financially, environmentally, demographically, programmatically, and globally.

2.A transition from our truculent insistence on independence to a more efficient openness to interdependence as we collaborate with other schools and other sectors to market ourselves, to share resources, and to co-create 21st. C. schools.

“Unshakeable Beliefs” Counter “Brutal Facts”

Within challenges, lie opportunities to make…3.A paradigm shift (“Scarcity and Privilege” –

Peter Cobb): What’s “required" in the architecture of our schools and in the architecture of our lives”? To recognize that “to live life abundantly, this generation of young people does not need to live” wastefully, and “to live life richly, this generation of young people does not have to consume” ceaselessly.

The Leadership Part:

Many of the people we need to make all of his happen are in the room. Let’s get to work.

Financial Sustainability/Survivability

The End!

Benchmark Schools (2008-

2009)

Grade K Tuition

Grade 3 Tuition

Grade 6 Tuition

Grade 8 Tuition

Starting Teacher Salary

Highest Teacher Salary

Mean Salary

Median Salary

School 1 $15,382 $15,382 $16,082 $16,082 $31,662 $75,625 $58,693 $55,739

School 2 $10,350 $10,650 $10,950 $11,150 $28,000 $48,045 $39,286 $40,565

School 3 $14,500 $14,500 $14,700 $15,000 $33,391 $65,755 $51,518 $51,239

School 4 $13,640 $13,640 $13,640 $13,640 N/A $58,275 $42,271 $42,790

School 5 $15,800 $15,800 N/A N/A $31,600 $44,400 $38,720 $42,800

School 6 $9,475 $9,750 $9,750 $9,750 $20,000 $40,000 $30,000 $31,929

Our School $12,980 (5/7)*

$12,980 (5/7)

$13,680 (3/6)

$13,680 (3/6)

$30,500 (4/6)

$47,950 (5/7)

$37,081 (6/7)

$36,400 (6/7)

Benchmark School Comparison: 2008-2009

*( our school/pool) = Our School Rank

Small School Case Study

Our School: Enrollment Scenarios 2009-2010

Enrollment 190 (Worst Case)

210 (Most Likely)

225 (Best Case)

Grade Sections # Students Grade Sections # Students Grade Sections # Students

PK 1 18 PK 1 18 PK 2 22

K 2 26 K 2 28 K 2 30

1 2 24 1 2 28 1 2 30

2 1 18 2 2 22 2 2 25

3 2 24 3 2 28 3 2 29

4 1 18 4 2 20 4 2 20

5 1 18 5 2 20 5 2 20

6 1 18 6 1 20 6 1 21

7 1 11 7 1 11 7 1 13

8 1 15 8 1 15 8 1 15

190 210 225

Forecast Budget Scenarios 2009-2010

TOTAL STUDENTS 190 210 225Lower School:Middle School 145:45 155:55 168:57% Tuition Increase 7% 7% 7%$ Tuition Increase +$920:$990 +$920:$990 +$920:$990LS Tuition 13900 13900 13900MS Tuition 14850 14850 14850

REVENUETotal Tuition Revenue 2683750 2971250 3181650Tuition Discount -47500 -47500 -47500Sibling Discount @$500/child -55500 -55500 -55500Financial Aid 15%/Total Revenue

-402563 -445688 -540880

Other Revenue 710730 710730 710730Total Revenue 2888917 3133292 3248499

EXPENSESGeneral (+3%) 1164052 1164052 1164052Salary (+3%) 1824187 1824187 1824187Medical Benefit (+15%) 273700 273700 273700Insurance (+5%) 28350 28350 28350Mortgage Interest -24250 -24250 -24250Total Expenses -3266039 -3266039 -3266039

Net -377122 -132747 -17539Depreciation 208727 208727 208727

Mortgage Principal -185634 -185634 -185634PPRSM 14000 14000 14000Lease -15000 -15000 -15000Med Plan Capitalization -10000 -10000 -10000Asset -20000 -20000 -20000

CASH FLOW +/- -385029 -140654 -25446

Mitigation Options:

Expense Cuts:

•Professional Development 50K •Leadership Stipends 25K •TIAA Contribution 35K•Marketing 15K•Salary

@ 210 2x35K = 70K

@ 190 5x35K = 175K

• Close 1 Building: @190 55K

TOTAL: 195 to 355K

Revenue Enhancement:

•Summer Camp +15K•Fundraising