A PHILOSOPHICAL APPROACH TO BUDGETING Sorrel R Paskin CMA Presenter Resource Associates Inc. Professional Services to Independent Schools 737 Olive Way Suite 2405 Seattle WA 98101 (206) 453-4529

INTERGENERATIONAL EQUITY Maintain financial equilibrium Prepare a strategic financial plan and update the plan annually to reflect changing circumstances Annual budgets represent annual instantiations of the strategic financial plan Analyze the specific cost drivers operating in your school

INTERGENERATIONAL EQUITY Optimize faculty and administrative assignments to achieve optimal productivity to cost ratios Analyze planned additions to plant and enhancements of program services to determine future budgetary impact

INTERGENERATIONAL EQUITY Ensure that growth rates in tuition reflect the growth rates in total expenditures inclusive of reserves funding

FINANCIAL EQUILIBRIUM Annually, revenues equal or exceed expenditures inclusive of total operating expense, reserves funding, transfers to plant and reinvestment in endowment Year over year, the annual rate of growth in revenues equals or exceeds the annual rate of growth in total expenditures and reserves funding

FINANCIAL EQUILIBRIUM The value of financial capital is preserved or enhanced The value and functional adequacy of physical capital are preserved or enhanced The value of human capital is preserved or enhanced

FINANCIAL EQUILIBRIUM The quality of the curriculum, programs and services to students is preserved or enhanced

A PHILOSOPHICAL APPROACH TO BUDGETING Annual budget reveals the priorities and goals of the school – the financial commitments made to faculty support and professional development; to financial aid to maintain goals of access and affordability; and institutional outreach and development

A PHILOSOPHICAL APPROACH TO BUDGETING When viewed over a multi-year period, changes in allocations to the cost centers testifies to the school’s changing needs and the new priorities it develops to meet those needs Undertaken within the context and prescriptions of the strategic financial plan and its accompanying financial model

A PHILOSOPHICAL APPROACH TO BUDGETING The strategic financial plan and the included financial planning model covers the ensuing three to five years and prescribes the principal objectives to be achieved, the strategies sufficient to their accomplishment, and delineates the specific tasks and responsibility centers for their implementation

A PHILOSOPHICAL APPROACH TO BUDGETING Each year included within the plan represents an “installment” of objectives, strategies and tasks that must be accomplished to ensure that the overall plan is achieved; in this way the annual budget is informed of its responsibilities with respect to implementing the strategic financial plan

A PHILOSOPHICAL APPROACH TO BUDGETING Starting point for budgeting is forecasting the expenditures (inclusive of reserves funding) expected to be incurred in the fiscal year Planned expenditures are developed from the “ground up”: academic departments and administrative offices forecast needs in priority order

A PHILOSOPHICAL APPROACH TO BUDGETING Uses a variant of the zero-based approach to estimate costs Provides a significant opportunity to evaluate programs and services to determine quality and cost efficiency instead of merely confirming past decisions

A PHILOSOPHICAL APPROACH TO BUDGETING Asks: what resources will be required to accomplish our mission and achieve our priorities in the year to come? Then asks: what resources can be made available to support people and programs next year?

A PHILOSOPHICAL APPROACH TO BUDGETING Even if projected resources cannot support anticipated expenditures and reserves funding, the exercise has forced their identification, ranks them with respect to their importance, and in the case of those that must be deferred, “promises” their future realization

A PHILOSOPHICAL APPROACH TO BUDGETING Only after prioritized expenditures and appropriate levels of transfers have been considered are the projected revenues recognized Results in need for “negotiated compromise” to balance the budget

A PHILOSOPHICAL APPROACH TO BUDGETING Financial planning for 2011-2012 Expenditures and transfers: Personnel costs Salaries and wages Benefits expense Instructional supplies and expense Administration and general Development and fund raising Occupancy Auxiliary services

A PHILOSOPHICAL APPROACH TO BUDGETING Interfund transfers: Transfers to plant – equipment additions Transfers to plant – PPRRSM Transfers to endowment -- reinvestment Total Expenditures and transfers

A PHILOSOPHICAL APPROACH TO BUDGETING Revenue and Support Tuition and fees revenue Less: financial aid and remission Net tuition and fees Interest income Endowment investment income Net gains (losses) on endowment investment return Other programs fees revenue Annual fund contributions Foundation subventions Other income (net of expense)

A PHILOSOPHICAL APPROACH TO BUDGETING Net assets released from restriction (restricted gifts and endowment investment return for which the donors’ stipulations with respect to use have been satisfied) Total revenue and support Excess (deficiency) revenue and support over expenditures and transfers

A PHILOSOPHICAL APPROACH TO BUDGETING Fiscal equilibrium is present when, within a narrow range: The percentage of total revenue allocable to each revenue center remains fixed over time, and The percentage of total expenditures allocable to each cost center remains fixed over time Provided that there are no material changes in operating patterns

SETTING THE TUITION PRICE Science not art; relies on the strategic financial plan Examine the coverage ratios for the previous five years Establish targets for the coverage ratio of each component of the revenues stream Determine the target coverage ratio for tuition revenue net of financial aid Price tuition accordingly

SETTING THE TUITION PRICE Ensure that the tuition price provides for reserves funding including a stabilization reserve to mitigate fiscal distress in the event of a precipitate decline in enrollment Cost structure of a school is largely fixed, not variable, and thus not subject to material alteration during the school year Faculty contracts cover the academic year

SETTING THE TUITION PRICE Selling tuition increases Critical role of transparency and accountability Communications with parents Disclosure of prior year operating results and current year budget Explanation of factors driving the cost structure of the school Public relations initiatives

SETTING THE TUITION PRICE Tuition as a reflection of value received Financial aid achieves access and affordability goals Absent material improvement in family income, in the long run financial aid awards will increase 1% to 1-1/2% over the increase in the tuition price

SETTING THE TUITION PRICE Each student receives an “implicit scholarship” reflecting the fact that the tuition covers only a percentage of the cost of educating that student; the cost is subsidized by foundation subventions, investment income and other revenue streams

SETTING THE TUITION PRICE Role of perception of “entitlement” in setting the tuition price In the American economy, price is a reflection of value received Economic consequences of differential rates of productivity growth Projections of future cost growth in education, health care and other consumer expenditures

SETTING THE TUITION PRICE In future periods, households will need to allocate their total expenditures to the growing, disproportionate increases in education and health care