Is Financial Sustainability a Pipe Dream? Lessons Learned from an - - PDF document

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Presentation Notes Is Financial Sustainability a Pipe Dream?

Lessons Learned from an E.E. Ford-Funded Study presented by David S. Lourie, Head of School

• St. Anne’s-Belfjeld School

VAIS Business Offjcers Institute April 10, 2015

There’s no silver bullet, only silver buckshot.

From the Darden School Case Study

Schools we interviewed were less worried about the quality of the product they ofgered; their concern was having the fjnancial backing to sustain the educational experience they ofgered. “Most of our governance is not about the academic programs and their soundness,” one board member remarked, “but fjnancial management.” All of the school leaders we interviewed expressed concern about the sustainability of their schools’ fjnancial models. They believed the 2008 recession represented a turning point for the independent school industry- it seriously afgected the fjnancial condition of many independent schools and some had not yet fully recovered from it. “From the moment I stepped into the classroom until 2008, it had been the Golden Age of independent schools in the United States,” one school leader said, “And then it all changed.” They also believed that the prevailing economic model of independent schools had really depended on a booming economy; changing economic conditions meant independent schools would have to change with the times.

Purpose

E.E. Ford Grant Proposal: “What school has fundamentally changed its fjnancial model to ensure long-term fjscal strength so that

• ur schools are healthy and delivering on their mission for the next 50 years? Many have made changes

at the margins, cutting a program or stafg, but none have actually changed the model. Furthermore, many

• f the schools that have made marginal change have done so in response to the recent crisis, not from a

position of strength.”

Sweet Briar: A Case Study

The Dangers of Tuition Discounting How Sweet Briar’s Board Decided to Close the College

So, the suggestion that the problem at a school like Sweet Briar is one of “pricing strategy” only holds up if the school is ofgering most of its tuition discounts on the basis of “merit” - or, theoretically, to win students

• therwise fully capable of paying higher tuition away from other schools. However, to the degree that

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this is the case, then the real underlying problem is the quality of the product the school is ofgering (and possibly trading area demographics if you are a regional school). If you can’t win students to your product

• n a tuition-neutral basis, then ofgering fewer discounts certainly won’t increase net tuition revenue
• either. The march down the tuition discount curve, in this case, just refmects the reality of the school’s

price/value infmection point. Where the discounting is provided on the basis of economic need, the pricing strategy argument is obviously moot. The assertion in the article that the college should have considered ofgering lower nameplate tuition and lower discounts belies the notion that these two levers are ofg-setting, unless one believes that the school doesn’t know the value of its product in the marketplace and is simply underpricing it for a given capacity

• level. And given that the negotiation around each student represents an independent market test, and

the fact that Sweet Briar was not fjlling all its capacity notwithstanding its discounting, I doubt that this is the case. I think this is another article that wants to whistle past the graveyard on the real question – has the cost structure of many schools simply grown to exceed the value proposition they ofger?

E.E. Ford Workshop Participants

Collegiate School, Richmond, VA Hawken School, Gates Mills, OH Lovett School, Atlanta, GA Norfolk Academy, Norfolk, VA North Cross School, Roanoke, VA Savannah Country Day School, Savannah, GA

• St. Anne’s-Belfjeld School, Charlottesville, VA
• St. Catherine’s School, Richmond, VA
• St. Stephen’s & St. Agnes School,

Alexandria, VA

Essential Questions

• Is our school on a sustainable fjnancial path?
• What are the greatest threats to our fjnancial sustainability?
• What structures exist in our school that make systemic fjnancial change diffjcult?
• What diffjcult decisions must be made to ensure our school is thriving in 10 years? 20 years?
• What can we learn from peer schools?
• Is there a tuition “price point?” ~or~ When does the value proposition run out?
• How high can fjnancial aid go? ~or~ Is there a limit to how much can we discount tuition?
• What is the sustainable role of philanthropy?
• Are we prepared to weather another recession?
• When is the next recession coming?

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Enrollment & Attrition

• Maintain enrollment (at most, modest, incremental growth)
• Continued (hyper)focus on maintaining small class sizes and student:teacher ratios
• Tuition increases in the low- to middle-single digits
• Reducing attrition is essential
• Various reasons for attrition: moving, public schools, fjnancial concerns are most prominent

Financial Aid

• Financial aid applications and awards have increased
• Net tuition growth vs. gross tuition growth
• Average tuition paid per student: 85%

Compensation

• Mean and median faculty salaries have increased*
• Percentage of overall operating budget dedicated to salaries and benefjts: ~75%
• Barbell efgect of faculty tenure emerging
• Millennial generation => compensation philosophy and expectations

Debt & Endowment

• All participating schools are carrying long-term debt
• Endowments are growing
• Average cost of debt: 3.5%

Non-Tuition Revenue

• Decrease in and less dependence on unrestricted annual giving (<5% of operating)
• Changing expectations of key donors, i.e. “venture philanthropists”
• Auxiliary income is < 7% of operating
• Endowment income is < 5% of operating

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Marketing

• All participating schools compete, at least in part, on the basis of “brand.”
• What distinguished your school from your competitor schools?

Character development 7 Academic ofgerings 5 Large size 5 Student/teacher relationships 5 Arts program 4 Athletics 4 Higher tuition 3 National merit candidates 3 Community service 2 Extracurricular activities 2 Chapel 1 College counseling program 1 Other 1

What are your school’s “untouchables,” i.e. those items that your school is unwilling to change?

Class size 1 Student/teacher ratio 2 Enrollment 3 % of students receiving fjnancial aid 2 Under-enrolled courses 1 Athletic ofgerings 3 Arts ofgerings 3 Employee medical benefjts Employee non-medical benefjts None 3

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What are the most signifjcant threats to your school’s fjnancial sustainability?

Demographics 4 Rising tuition 7 % of students receiving fjnancial aid 1 Competitive salaries & benefjts 2 Ability to attract, hire, retain faculty 1 Deferred maintenance 2 Public school competition 4 Private school competition 1 Students leaving for boarding schools High attrition None Other

Summit Takeaways

• Maintain enrollment, not grow
• Resistance to growing class size
• Tuition increases continue to outpace CPI
• Net tuition increasing
• Faculty well-compensated
• Barbell efgect with faculty tenure (new generation of teachers)
• Long-term debt service
• Inconclusive fjndings re: giving
• Inconsistent value-added distinguishing features
• Non-negotiables vary . . . except faculty
• Non-tuition revenue is modest

The Big Debate

Do we raise tuition to ensure that our wealthiest families are paying what they can afgord (i.e. charge what it really costs) and increase fjnancial aid? ~or~ Do we address afgordability with more modest tuition increases in the hope of attracting more full-pay families?

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Essential Exercise

• Complete the following: We are . . .

the _________________ for _________________ that _________________ because _________________

• List 5 objective metrics that measure the success of an alumnus/a ten years after graduation
• If _[Our School]_ closed tomorrow, _________________________________ would be missing from

the educational landscape of our community.

To Discuss

• What is the single most compelling objective metric that proves your school’s success?
• What one program w/c/should we eliminate that would result in impactful cost savings with no/

minimal/+ impact on mission delivery?

• What is the one element of our fjnancial model that, if improved or changed, would have the most

positive impact on our ability to deliver our mission?

• Is there a price point at which our fjnancial model breaks: Yes or No?
• What is the single most distinctive feature of our schools?
• Who is our target consumer?

To Share

• What single element in your fjnancial model, if compromised, would be the greatest threat to your

ability to deliver on your mission?

• Complete the following: Our school is worth $250,000 because we __________________.
• Hearing from our peer schools yesterday, what one observation worries you most about their programs

and fjnancial models?

• Regardless of cost and/or resistance, what is your dream program that, if implemented, c/would be a

game-changer for your school?

• What is the single greatest obstacle to making the dream program a reality?

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Objective Metrics

• The “right” schools in your college list
• College success by GPA; admission funnel/demand/selectivity
• Graduate success (defjned by school)

That “One” Program

• Phys Ed.; Annual Giving; special event fundraising
• Buses; LS co-teachers
• None

+ Aspect of Financial Model

• Enrollment demand, major gifts, cost control
• Funding FA—not discounting, but $$--through giving
• FA $$

Price Point

• No, Yes, No (net vs. list, net tuition as key indicator)
• Up or down, impacts the mission
• Yes

Most Distinctive Feature

• Individual/extra attention; better teachers
• Consistency of + experience and outcomes
• Strong academics + citizenship/character

Target Consumer

• Upper middle class family, unaware of FA opportunity ($200K with x-kids)

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$250K because we . . . Concern about our peers Dream Game-Changer Program Greatest Obstacle to Change My Silver Buckshot

• Anxiety about the economic recovery
• Risk-aversion
• Simple problem, complex process
• It’s (almost all) about the “value-added”
• Challenge of objective metrics
• Education of constituents
• Short- vs. long-term planning
• Philanthropy, enrollment management, tuition levels and discounting
• Net tuition revenue

• St. Anne’s-Belfield School

2132 Ivy Road | 799 Faulconer Drive Charlottesville, VA 22903 (434) 296-5106 | www.stab.org