History has shown that during times of severe economic downturn, a number of independent schools existing on the margin will meet their demise. We are surely headed into a downturn, and many heads and boards of trustees may not have experienced what it’s like to manage schools under such challenging conditions. But it’s possible to work together in an effort to survive the current situation—and sustain and thrive well into the future.
I know there’s hope of coming out of an event such as the COVID-19 crisis because I found myself in a very daunting situation during my tenure as head of Miami Country Day School (FL). I gained perspective and strategies that informed my decision-making processes to navigate the school’s financial sustainability—and a framework that can be applicable for the heads and boards who find themselves in today’s uncharted waters.
Recession Recall
When the “Black Friday” stock market crash hit in 1987, I was head of MCDS, a K–12 school, which had 525 students, significant long-term debt, no cash reserves, and a $250,000 endowment. Most facilities were in need of replacement or totally inadequate.
The recession hit certain regions of the country harder than others. Miami’s economy went into a free fall. Much like today, the two- to three-year economic forecasts yielded little reassurance that the economy would soon correct itself. Given the school’s meager financial resources, debt, and almost exclusive dependence on annual tuition to cover operating expenses, reality required an immediate meeting with the board. Although the school was operating efficiently under a five-year financial plan and a campus master plan, we needed to realign priorities––and quickly.
We focused first on determining certain assumptions. Despite the potentially dire financial forecast, we made all decisions based on the belief that the school was sustainable and needed in the community. We prioritized our assumptions:
1. Mission
2. People
3. Program
4. Finances
5. Facilities
We agreed that the educational program had to continue to meet and advance the school’s mission––the integrity of the educational program would not be compromised. Central to ensuring that integrity was maintaining the quality and appropriate number of faculty and staff. As we looked at the budget, this became a daunting challenge. Personnel costs were more than 65% of the operating budget.
On the income side of the operating budget, we projected that net enrollment would drop 10%, which translated into 53 students and their tuition––$675,000 and 9% of the budget. Some of the student departures freed up financial aid. However, we understood that we would need to budget for more financial aid to prevent a greater increase in attrition. The large part of our financial aid budget, like many schools, was a line item in the operating budget. Endowment income funded a small portion of the financial aid offered.
Given our assumptions and projections, we knew a balanced budget would be austere. Our bank had two requirements––annual audit and balanced operating budget––for the school’s long-term note. Providing flexibility for tuition payments would require activating the school’s line of credit. A balanced budget was paramount.
As you can see, the challenges, dynamics, and complexities for sustainable school operation that the Black Friday market crash created has timely and relevant implications. The challenges that await schools in the aftermath of the COVID-19 crisis might not be exactly the same, but the need for proactive, positive, and decisive leadership in the weeks and months ahead is similarly paramount. As heads and trustees continue to navigate the economic turmoil, consider these key steps to develop a framework for your school’s strategic response:
● Identify assumptions.
● Define challenges and needed resources.
● Set realistic expectations.
● Get school community buy-in.
● Accomplish prioritized goals.
● Require and evaluate feedback.
● Communicate for reinforcement, accomplishments, and updates.
Strategic Reordering
Every leader has a model and a process that works best for them. But regardless, every leader should approach a strategic reordering process with some key concepts in mind.
People
School community
- Acknowledge the human condition (think Maslow’s Hierarchy of Needs). Remember that each person’s circumstances are different. The social, emotional, and economic pressures of a recession may magnify issues for individuals and their families. What resources, information, and discussions may be shared to heighten a sense of security, understanding, and skills to better cope?
- School messaging needs to be proactive, informative, strategic, and reassuring. Remember that bad news does not get better with time.
Students
- Students need to feel safe, secure, and cared for. School should be an oasis from the concerns in the other parts of their lives.
- If parents believe school is providing safety, stability, and growth for the child, most will sacrifice a lot to keep the child enrolled.
Faculty and staff
- The board chair should provide assurances and address faculty and staff directly to acknowledge their importance and key role in managing this crisis.
- Remind faculty and staff they are the face of the school and the school’s barometer. Publicly, the message should be positive and optimistic, and it should highlight the integrity of the program and confidence in the school’s strategies to confront the crisis.
Trustees
- Like faculty and staff, remind trustees that the school community carefully measures their individual comments about the school’s situation and strategy.
- Appeal to every trustee to accept and meet the board’s challenge. Call on trustees to increase, to the extent they can their time, talent, and treasure.
- Consider that there may be attrition; one or more trustees might resign for personal reasons or lack of commitment.
Parent association
- Focus on key targets and work to help accomplish goals for student retention, increased admission pool, fundraising, and educational program support.
Program
- Exercise a zero-based budgeting approach. Faculty and department heads (including admission, athletics, and advancement) should rank priorities understanding the school’s expected financial restraints. They should complete their ranking in three categories: essential (integrity of program), necessary (advance program), and enrichment (special enhancements). The purpose is to identify and fund all the essential and as many of the necessary items.
- Each individual, including department heads, should complete a zero-based budgeting form. Individual input goes to the department head and then, individual and department forms are submitted to the business manager for compilation, evaluation, and possible clarification before priorities go into the operating budget process.
- Clearly explain the school’s financial challenges. Many faculty and staff don’t have much insight into school finances or other people’s responsibilities. Faculty and staff should know to expect personal sacrifices, such as suspension of retirement contributions, salary freezes, and restrictions on school resources and programs.
Finances
- Tuition payment schedules may need to be adjusted. In the case of MCDS, two tuition payment schedules 60% (August) and 40% (January) did not work for all families, and we arranged more flexible payment schedules.
- Net tuition income should include a calculation for projected uncollected tuition at the end of the fiscal year.
- Payments need to be made to demonstrate school’s solvency and to activate a line of credit.
- With flex tuition payments, having a line of credit is critical.
- Temporarily postpone major facilities projects and educational program enhancements. Financial flexibility is critical.
- Business managers should be included in all budget discussions with the board.
- Because financial aid is an unfunded line item expense, it requires discussion. This decision will not result in just a one-year added expense.
- Salaries and benefits may need to be frozen or minimized; retirement contributions may have to be suspended or reduced for the first fiscal year to help balance the operating budget. Medical insurance should be the last benefits to consider cutting.
- Review and verify fixed costs.
- Include and use a contingency fund to meet unexpected needs or expenses that may occur.
- Continue fundraising efforts. There will be increased competition for charitable donations; solicitations should occur as soon as possible and outline specific needs and priorities. Reach out to leadership donors first.
Facilities
- Defer maintenance projects not related to health and safety.
- Scrutinize unfunded or underfunded construction programs and capital purchases. Liquidity is king.
In a crisis, leadership and flexibility are required. Heads and boards must agree to strategies to move the school forward—there should be no surprises between heads and boards. The goal is not just to make a difference, but to leave a legacy in these turbulent times.
