Financial Sustainability: Both Sides of the SPECTRUM Research Project ISACS Head of School Conference Chicago, Illinois January 2015 With generous support from:

Jeffrey Shields, FASAE, CAE Brief Introduction More than 15 years of experience working with business officers in higher education and independent schools Has served as NBOA President and CEO since 2010 NBOA serves 1,150 independent schools nationwide, 13 FTE, $4 million budget, headquartered in Washington, DC Previously Senior Vice President, National Association of College and University Business Officers (NACUBO) Certified Association Executive (CAE) Fellow, American Society of Association Executives (FASAE) Trustee, Online School for Girls Trustee, Georgetown Day School

Program Goals Discuss the financial climate for independent schools leading up to, and including, the economic downturn in 2008 and 2009 Explore the prominent models promulgated throughout the community to address independent school financial sustainability Share insights on the methodology, definition and initial findings from the Spectrum Research Project along with other considerations to secure your school’s financial health

Before the economic “winds” changed Tuitions up 30% (real dollars) over 10 years Overall staff up 32% over 10 years Student: teacher ratios getting smaller Financial aid grant dollars up 38% Enrollment up 20% 4

Prevalent Models “New Normal” Charge only what people can pay Design your program to that revenue number “Full Steam Ahead” Charge what it costs CPI + 2 or more when needed

: The New Normal Increase enrollment without increasing staff “Sunset” an old program for every new one Right size: re-think class size, workload, # of teacher specialists, assistants, school size Devote 1/3rd of each fundraising dollar raised to endowment

: 21st Century Model Decide whether you are a price, product, or process school (you can’t be all 3!) Acknowledge that the 20th century “factory” model of education will not prepare students for the 21st century Design a 21st century school that individualizes learning using technology Dedicate 2% of your budget to faculty professional development

Most popular strategies 2013 NBOA Business Officer Survey In response to the economic decline, what strategies did you implement? % of Respondents Who Implemented Strategy by Survey Year 2013 2012 2011 2010 2009 Increase average number of students per classroom 9.9% 11.6% 10.7% 11.7% 5.5% Increase teaching load 9.1% 8.1% 10.9% 12.8% 3.2% Eliminate student programs 1.6% 2.2.% 1.4% 2.7% 1.0% Reduce the number of faculty FTEs 7.4% 7.9% 11.5% 18.0% 4.9% Reduce the number of staff/administrative FTEs 8.0% 11.0% 14.4% 17.8% 6.7% Decreased planned salary increases 6.2% 9.3% 14.0% 32.3% 7.8% Reduce salaries 0.6% 2.0% 2.3% 4.0% 0.7% Reduce benefits 3.4% 12.2% 2.1% Increase the employee contribution for benefits 8.3% 13.2% 12.7% 4.4% Most popular strategies Increase average class size Increase teaching loads Increase employee contributions for benefits 26.4% were going to increase the average class size, but only 11.7% did 58.8% were going to decrease planned salary increases, but only 32.3% did

Strategic Reactions Increase Number of Students Per Classroom Planned Implemented 2010 Survey 26.4% 11.7% 2011 Survey 19.9% 10.7% 2012 Survey 16.2% 11.6% 2013 Survey 17.9% 9.9%

Strategic Reactions Increase Teaching Load Planned Implemented 2010 Survey 26.6% 12.8% 2011 Survey 18.4% 10.9% 2012 Survey 14.2% 8.1% 2013 Survey 14.8% 9.1%

Strategic Reactions Increase Employee Contribution for Benefits Planned Implemented 2010 Survey 17.5% 11.7% 2011 Survey 20.7% 12.7% 2012 Survey 13.5% 13.2% 2013 Survey 18.1% 8.3%

Strategic Reactions Same goes for: - Reduce Faculty FTE - Reduce Staff / Admin FTE - Decrease Planned Salary Increases - Reduce Salaries - Reduce Benefits Source: NBOA Business Office Survey 2009-12

13 Years of Tuition or…?

There is NO Silver Bullet

The Future…?

Tuition Increases: CPI versus Reality ● Average yearly CPI increase for the past 12 years is 1.96%. ● Has your school had a tuition increase in any given year that was less than 2%? ● It’s not just about affordability, but about managing expectations. Source: NAIS and US Bureau of Labor Statistics

We’re Adding Employees Source: NBOA Business Office Surveys 2008-13

Independent School Revenue Streams In general, all operating revenues fall into one of four buckets, and you only have direct control over one of them - tuition. Auxiliary Services Fundraising Tuition Endowment

Independent School Expenses Greatest % of your budget, in descending order (typical school) Compensation and Benefits Facilities Financial Aid (actually a revenue offset, but for our purposes we will discuss it here) Technology Equipment and Supplies

SPECTRUM Project Overview Objectives and Methodology Definition of Financial Health Identification of High Performing Schools Common Traits Among High Performing Schools in the Project With generous support from:

Objectives Learn what great schools are doing that sets them apart. Investigate best practices in financial management of independent schools. Approach Jim Collins “Good to Great” matched pair research. Compare high-performers to typical to learn what separates them apart. Our objectives for the study were to do two things. First and foremost, we wanted to learn what great schools are doing that sets them apart. Second, but as a component of that, we wanted to learn whether there were some best practices in financial management of independent schools that could be understood through that. This effort was inspired by Jim Collins “Good to Great” matched pair research design. Which I know many of you are aware of, the nature of the research is to find some really great performers and then to compare them against another group...not poor performers, but typical...your typical business, or non-profit, or in this case, independent school. Our research had its own methodology. Which I have laid-out in sequence on a graphic here...(switch to next chart)

Quantitative data collection Background research Background research Quantitative data collection Qualitative data collection 1 3 5 There are six main phases to our research. The first thing we did was to do background research into the things that might impact financial performance from a business standpoint, as well as environmental. We looked into financial management practices, organizational processes, and into feedback and evaluation. We also looked into financial metrics and normative ranges for those metrics...all of this included information from textbooks, to bond rating agencies, to white papers and other publications. We needed this information in order to determine how to compare schools and what to look for when comparing them. Our next step was to actually define the financial health of independent schools. We did this because we needed some guiding principals for when we said one school was a high performer and another wasn’t. What do we mean when we say “hi performer?” By the time we were at phase 3, the third red dot, we knew something about what the experts said could impact financial health, we knew how we wanted to define financial health, then we were left with the core steps of the research. So in phase three we took the Financial Position Survey, made our own survey and collected our own data to supplement that, and we created a quantitative dataset of a large number of independent schools. After that, we cut our data to identify a group of high-performers and typical schools. Finally, we set-out to analyze the information which takes us to this point. I cover each one of these phases as I move through in more detail. 2 4 6 Define financial health of independent schools Identify high-performing school group & “others” Analysis

Process to Develop Definition of Financial Health Background Research NBOA Panel of Experts Financial Health of Independent Schools Defined Presented at Annual Meeting Spring 14’ Can you tell I like arrows? Here’s another graphic. These are how we defined financial health for independent schools. We conducted a background lit review for comparable definitions and anything else that might inform our task. Then, a group of NBOA experts convened several times in the fall to debate and discuss a definition- one was created- and then we presented it to an audience at the NBOA Annual meeting this past Spring.

NBOA SPECTRUM Research Project: Definition of Financial Health Financially healthy schools have the resources to sustain their operations for the long term, relative to their individual missions. These schools have successfully developed and implemented financial plans for both operations and facilities. These plans, funded in part with tuition and fees, also maintain financial reserves which adequately cover all current and projected future obligations.

SAMPLE Data Points to Distinguish HPS From Others Operating Cash Flow Margin Financial Aid/Gross Tuition Annual Giving Philanthropic Support Primary Selectivity Debt Burden Calculated Age of Facility Days Cash on Hand

Identifying High-performing Schools Definition of financial health used as criteria in selecting 12 schools for “high- performing schools” (HPS) group Eight “typical” schools selected for comparison group (others) And, once we had collected all of the data and merged the data sets, we were able to make our groupings. We started with about 60 schools, 30 that more or less reflected the make-up of your typical school in our dataset. And, 30 which we identified as high performers. These were selected based on their having favorable ratings on several key financial metrics, but they weren’t necessarily enormous outliers. We intentionally avoided, for example, schools that had great financial indicators because of a very large historic endowment. The logic being that we wanted to understand process and policy that leads to financial health....not historic funds. Ultimately, 20 out of 60 of our schools elected to participate in our qualitative research...which is the number we had targeted. We had 12 high-performing schools and 10 typical schools. One important thing that I’d like to point-out is that many of our high-performers had very favorable financial metrics in a couple of areas, but not all. This is because taking the financial measures as a whole doesn’t tell the whole story. It’s better to have a younger age of plant statistic from the standpoint of replacement costs, but you don’t need to have new facilities to be a high-performer, for example. So, each school was vetted in that way across a number of metrics that I’ll show on the next slide...that link into our conceptual definition of financial health.

Common Traits Among High-Performing Schools in SPECTRUM Lean Collaborative and focused on clarity and outcomes Academically rigorous Guided (not governed by strategic plan) Debt-averse

Common Traits Among High-Performing Schools in SPECTRUM Disciplined endowment draw Focused on benchmarking Top-down decision-making Quality, not quantity, in budget training

IMHO: Other Considerations to Help Secure Your School’s Financial Future “Know where the mission lives in your budget” Elevate and integrate the role of the business officer at your school Increase classroom capacity without increasing cost…how? Use of Technology Classroom size Faculty professional development and support Provide financial aid to support your mission and within your school’s resources Reduce or eliminate dependency on annual giving and endowment…how? Charge what it costs or reduce your program or both? Fundraise for following year

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