KlingShare:#13 - Independent School Financial Toolkit for COVID-19

KLINGSHARE:#13 FINANCIAL TOOLKIT FOR COVID-19 ESSENTIAL QUESTIONS & TOOLS FOR INDEPENDENT SCHOOLS FINANCIAL PLANNING This toolkit was created by the Klingenstein Center in response to questions and concerns shared in a KlingChat for independent school CFO's and Advancement professionals. KlingShare:#9 outlines the takeaways from this conversation.

TOOLKIT CONTENTS

The steps below guide school leaders through an iterative approach to assess the financial position of their school, consider possible actions and policies, run scenarios, and communicate with constituents about the financial realities of the school. This toolkit includes links to some components of the tool set generated by the team at the Nonprofit Finance Fund.

Step 1: Systems Questions & Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Assess your school's situation using these questions to guide their thinking.

Step 2: Financial Levers Tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Consider your financial landscape through the lens of key financial levers available to schools.

Step 3: Cash Flow Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Use this tool from the Nonprofit Finance Fund to understand your financial situation.

Step 4: Explore Scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Compare possible options side-by-side.

Step 5: Communicate with Constituents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Create a dialog with internal and external audiences using financial storytelling to connect financial realities with your school's mission, context, actions, and needs.

CONTRIBUTORS

The Klingenstein Center thanks Pat Burns and Michel de Konkoly Thege for developing Step 2: Financial Levers and Sarah Daignault, Nicole Furlonge, Chris Harper, Peter Hendel, and Jodi Scheurenbrand for developing Step 1: Systems Questions & Considerations. Learn more about these authors on page 10.

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STEP 1: SYSTEMS THINKING QUESTIONS TO CONSIDER IN THE FACE OF SCHOOL FINANCIAL DISRUPTION MISSION

Mission should inform the program and not the other way around. Once the mission is clarified, consider whether there are better, safer ways to deliver the mission. For example, if the mission focuses on close interaction between students and mentors, are there alternatives to traditional classrooms that achieve that collaboration?

What is our school’s mission?

Is the mission still relevant in this era?

Is our school in a place of strength with respect to actualizing its mission?

Are there better, safer ways to deliver the mission?

Does our school feel like it is connecting with and attracting families whose core values are aligned with the school and its mission?

PROGRAM

Remember: Mission should inform the program and not the other way around.

Is our program aligned with our mission?

If not, where are we falling short?

Are there aspects of our program that are not aligned with diversity, equity, and inclusion efforts?

What changes - short-term and long-term - can we/should we be thinking about making in how we deliver our program going forward?

What incremental investments could be made to create or enhance programs that are mission aligned and match the core values of our students and families?

Do community members feel deeply connected to programs that we offer?

How might we coordinate financial planning efforts across and within various departments of the school?

NIMBLE BUDGETING

The past 2 months have revealed that change is happening rapidly. In budgeting for the next 2 years, consider at least three budget scenarios: 1. Return to near normalcy. What does this look like for our school?

2. Significant modification in program delivery. How might, for instance, we still hold a major arts or athletic event while eliminating the “social” aspects of that event (i.e. team housing, banquets, awards ceremonies)?

3. Worst-case scenario: continued, full social distancing.

Above all, remain nimble so as to respond to inevitable changes that will be needed. Try this Financial Scenario Template and the accompanying video walkthrough of the tool.

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STEP 1: SYSTEMS THINKING QUESTIONS - CON'T TUITION LEVELS

Does our tuition level match the value we are providing?

What is our goal/strategy? (High tuition with a strong focus on financial aid? Support the middle class by offsetting loss in revenue with a robust development/advancement program?)

What tuition payment plans and options are available to minimize reliance on increased financial aid and/or tuition discounts?

ENROLLMENT

What is our enrollment funnel?

What has the trend been in applications? Are we low on applications in any particular grades?

What has our yield been over time and during challenging economic times?

Are we yielding mission- and core-value-aligned families/students?

What are our school’s retention/attrition trends and norms? How do we track numbers of and reasons for withdrawals? Do we conduct exit interviews?

How might we fully understand what level of net tuition is needed to balance/support the budget?

How might we enhance the understanding of financial aid within the constituent base?

(Are we turning away a full-pay family for this spot? If not, financial aid is fungible.

Financial aid only becomes an “expense” if we knowingly forego revenue in offering the spot to a family receiving financial aid.)

How does international recruiting figure into our financial ecosystem?

FINANCIAL AID

Do we have a Financial Aid Policy? If so, how is it supporting our efforts under duress?

Should we introduce an addendum to the policy based on economic circumstance?

ENDOWMENT

Do we have enough cash available to support short-term needs?

Are there opportunities that are coming about based on the volatility of the market?

This is a moment to explore possible opportunities to "upgrade" the endowment portfolio.

Based on market volatility, are any of our endowed funds underwater?

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STEP 1: SYSTEMS THINKING QUESTIONS - CON'T DEBT SERVICE

How might we fully understand and track debt covenants to actual financial metrics pertinent to the covenants?

What multiple of our debt service can we cover with operating income?

FUNDRAISING

How well are our institutional priorities aligned with donor objectives?

How well are we performing in terms of cultivating relationships with possible donors that then lead to a paid contribution?

How do our cash-paid gifts compare with our documented or verbal pledges? Look at fundraising and donations in the two years before the financial crisis in FY07/08 and two years after to get a sense of how much these contributions could fall off and how quickly they may come back.

In what ways do we cultivate a culture of philanthropy?

Should we create a fund to support families in need impacted by contemporary events like COVID-19?

Are we staffed appropriately to drive the fundraising processes and enhance alumni participation?

BOARDING STUDENTS

Can students return to our campus?

What is our plan to keep international students safe in case there is another surge?

Do our financial models account for remote or hybrid learning?

Do we have tuition insurance or policies regarding reimbursement or discounting to account for impactful changes in program (For instance, the inability to house students?

To run a full athletic or arts program?)

STAFFING

What are our school’s student-to-teacher ratios by grade? Do these ratios indicate that we are appropriately staffed?

Do we anticipate retirements? Should we offer an early retirement incentive?

In what ways does our professional learning budget need to shift to account for new adult learning needs as aligned with school needs? What funding needs to be decreased?

How might we continue to support adult learning and growth in the face of potential budget cuts?

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STEP 1: SYSTEMS THINKING QUESTIONS - CON'T LOCATION

What are the local and federal laws and short- and long-term policies and decisions that impact the school?

MEETING AND INSTRUCTIONAL SPACE - ON CAMPUS AND ONLINE

What are the implications of this pandemic on our campuses in the immediate term, near term, and long term?

Do we need more space to enable increased distancing?

Should we reduce or increase class sizes? How do we accomplish this?

What investments are needed to ensure effective online spaces in which learning can occur? (LMS, bandwidth, technology tools, staffing, training)

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STEP 2: CRITICAL FINANCIAL LEVERS FOR INDEPENDENT SCHOOLS DUE TO THE COVID-19 CRISIS THE FIRST CRITICAL FINANCIAL LEVER: GROSS TUTION, FINANCIAL AID & NET TUITION REVENUE

Enrollment at many independent schools has been on a downward trend due to the continued decline in the school-aged population. There is also continued erosion of lower school enrollment given perceived value relative to cost and alternatives like universal pre-K. Add to this the impact of the coronavirus crisis. Consequently, independent schools are reevaluating enrollment and planning for serious change: A sizable number of families may opt out of enrollment in 2020-2021 because they can't afford tuition or are fearful of placing their children in a communal setting, especially if subsequent waves of contagion hit the United States.

Schools may need to cut back on their tuition levels, in order to stem enrollment bleeding by enticing families with a better "value proposition."

Consequently, gross tuition revenue could decrease substantially, due to a combination of enrollment drops and lower tuition levels.

Many schools may simply not be able to deal with significantly increased requests for financial aid, but, all the same, will be forced to increase their financial aid budgets to some degree as an enrollment tactic.

The result is likely to be a significant downward pressure on net tuition revenues.

Issues to consider: The value of an independent school education has become more pronounced during the crisis. Independent schools were quick to move to learning online and were able to establish the concept that school was “open.” Many public school districts experienced significant lag times in rolling out online classrooms. Issues of inequity with respect to access to computers, necessary bandwidth at home, and other technological and pedagogical issues have led to perceived shortcomings in public school alternatives.

Schools may move enrollment decisions to June 1 and later to allow families time to consider their own personal and financial situations, increasing uncertainty about enrollment.

There may be a significant decline in the number of international students from countries like China who are more likely to fall in the full-pay category. Higher education institutions are projecting a 15% decline in overall enrollment, including a 25% drop in enrollment from international students.

Schools may be more interested in indexed tuition plans.

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STEP 2: CRITICAL FINANCIAL LEVERS - CON'T Schools are considering delaying in-person classes from September 2020 to January 2021.

Schools are also deciding whether to extend the current remote school year into the summer and/or to begin the remote school year earlier next fall.

There could be a move to “hybrid schools” that stagger the days that students are in school versus at home. Developments that undercut the “in-person” appeal of independent schools may result in pressure on tuition levels as parents say, “This is not what I signed up for.”

Table 1.1 below shows a downloadable Excel spreadsheet that allows for sensitivity analysis with respect to gross tuition, financial aid, and net tuition revenue.

THE SECOND CRITICAL FINANCIAL LEVER: ANNUAL FUNDRAISING

Fidelity recently published a report on donors that showed that 79% of donors plan to give at the same level or higher to the institutions they support if they have a solid relationship - not a transactional one - with the organization.

Some schools are relying on fundraising as a “collective” event in order to keep the school and its employees intact. Because families have reduced discretionary spending on dining out, entertainment, travel, fitness, gasoline, and other items, perhaps that money can be redirected to school giving. Still, the idea that donors will pick up the slack may be illusory, given the size of the expected hole in net tuition revenue and the impact of bad economic times on donors. Downward adjustments to annual fundraising would be an appropriate consideration.

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STEP 2: CRITICAL FINANCIAL LEVERS - CON'T THE THIRD CRITICAL FINANCIAL LEVER: STUDENT/TEACHER AND TOTAL STAFF RATIO

There will be pressure to increase the student/staff ratio to partially compensate for the financial impact of the trends noted above. This will inevitably increase class size, which may run counter to a school’s mission. Larger class sizes may increase teacher concerns about preparation time and the effort needed to manage more students.

THE FOURTH CRITICAL FINANCIAL LEVER: COMPENSATION AND BENEFITS

In most independent schools, compensation accounts for 65-80% of the schools' expenses. Schools will have to grapple with decisions related to cutbacks in both staff and salaries/benefits. Some options that schools may be currently considering: Across-the-board cuts in salaries Furloughing of non-instructional staff; providing lump-sum payments to noninstructional staff Hiring freezes Actual cuts in staff - maybe starting at administrative departments, but almost certainly going into instructional staff Reducing benefits, charging employees more for benefits, and/or decreasing retirement plan contributions Many schools are also filing claims for loans, which may be forgiven under certain circumstances, under the Paycheck Protection Plan through the SBA under the CARES Act. However, this one-time amount represents 2.5 times the monthly payroll expense amount, which is a short-term fix. Additionally, does receipt of such funding put independent schools at risk of federal regulation, specifically with respect to Title IX and FERPA?

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STEP 3: CASH FLOW ANALYSIS Download this detailed Cash Flow Tool from the Nonprofit Finance Fund to understand your school's projected monthly and weekly cash flow.

STEP 4: EXPLORE SCENARIOS Download this Scenario Template from the Nonprofit Finance Fund to create side-by-side views of the financial implications of two different scenarios.

STEP 5: COMMUNICATE WITH CONSTITUENTS Financial storytelling helps you create a dialogue with internal and external audiences to connect financial realities with your school's mission, context, actions, and needs. Use this guide from Nonprofit Finance Fund to develop your financial story.

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AUTHORS Pat Burns teaches in independent school finance in the Klingenstein Center's master's degree programs. Pat is a founder and member of the Board of Trustees of San Miguel Academy, an independent, middle school for underserved boys in Newburgh, NY. She advises schools on creation of business plans, financial analysis, securing investors, and human resource allocation. She holds an M.B.A. from NYU's Stern School of Business, and a Ed.D. in Mathematics Education from Teachers College, Columbia University.

Michel de Konkoly Thege is assistant head of school at Little Red School House & Elisabeth Irwin High School in New York City, where he previously served as director of finance and operations.

Prior to working in education, Michel worked in a variety of legal and business positions. Michel has served on NYSAIS’s Business Affairs Council and its Healthcare Consortium Advisory Committee.

He holds a master’s degree from Wesleyan University and a J.D. from the University of Pennsylvania Law School. He teaches independent school finance at in the Klingenstein Center's master's degree programs.

Nicole Furlonge serves as a professor and director of the Klingenstein Center at Teachers College, Columbia University. She served as a teacher and leader at Holderness School, St. Andrew's School (Delaware), Lawrenceville School, and Princeton Day School. She holds a Ph.D. and B.A. in English from the University of Pennsylvania and an M.A. from the University of Michigan. Nicole is the author of Race Sounds: The Art of Listening in African American Literature, which demonstrates listening as an interpretive and civic act that leads to deeper engagement with difference.

Sarah Daignault served for 12 years as the founding Executive Director of the National Business Officers Association (NBOA), an association dedicated to serving independent school business officers. She has served on the boards of the Madeira School in Virginia, the National Coalition of Girls’ Schools (NCGS), and the Association of Independent School Admission Professionals (AISAP).

Chris Harper is the Chief Financial Officer of Ethical Culture Fieldston School in New York. He previously served as Director of Finance and Operations at Lake Forest Country Day School and Director of Enrollment Management at Latin School of Chicago. Chris holds a B.S. in Economics from the Wharton School of Business at the University of Pennsylvania and an M.B.A. from Northwestern University’s Kellogg School of Management.

Peter Hendel is the Chief Financial Officer of the Holderness School, where he has also served as math teacher, Nordic coach, and dorm advisor. Peter holds a B.A. in biochemistry from Princeton University.

Jodi Scheurenbrand has worked in the financial planning and management sector for over 30 years, holding executive roles at a number of corporate and nonprofit organizations. Most recently, she served as Chief Financial Officer at Ethical Culture Fieldston School and Director of Business Operations at Mary McDowell Friends School. Prior to working in independent schools, she served as Vice President/Treasurer at Toys ‘R Us, and Senior Vice President/Controller at Atari. Jodi holds a B.S. in accounting from Florida State University and an M.B.A. from NYU’s Stern School of Business.

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