A Private School Finance Primer – A 10-Year Operations Model (Part 2)

Image courtesy of Monica Sedra on Unsplash

As we developed the 10-year operating projections for The McDonogh School, it was important to communicate and, in some cases, educate the Board members on the interrelationships between the various operating and financial components. A chart similar to this one was developed and used to illustrate those key components.

Without answering the question, “What comes first, the students or the faculty?”, we wanted to illustrate that all of the projections were based upon projections for student enrollments as well as the tuition generated from our private school students.

The number of faculty and staff positions were aligned with our student enrollment projections. Since our school was based on a physical campus, there were land and building assumptions that aligned with enrollment projections as well.

After aligning faculty, staff, and facility requirements with the projected student enrollments, we were able to create operating expense projections.

Although tuition revenues were a direct correlation to enrollment, they were not the only revenues that the school depended on to cover all operating expenses. The model provided the assumption and details, but these were the preliminary interdependencies.

Revenues, Enrollment Assumptions, and Enrollment Projections

One of the reasons given for McDonogh’s s decision to drop its semi-military school status was declining student applications and enrollments during the Vietnam War. The same information factored into the school’s decision to go from single-sex to coeducational.

The enrollment targets for each budget year were usually negotiated between the heads of the three McDonogh schools (Lower – 1st grade through 4th, Middle – 5th grade through 8th, and Upper – 9th grade through 12th), the Director of Admissions, and the CFO. As a student progressed from Lower School to Middle School to Upper School, each school’s tuition per student increased. Consequently, there was a jump in tuition beyond inflation when a student moved from one school to the next.

The three schools were organized differently based on the expected enrollment patterns for grade levels in the local private school market and McDonogh’s resources. First and second grades in the Lower School had two sections of 15 students each. Third and fourth grades had three sections of 15 students each.

The reason for the added section was that several schools in the area had a Pre-K – 2nd grade curriculum, which increased applications to McDonogh’s third grade. McDonogh wanted to accommodate student applications from those schools.

When the 60 fourth graders advanced to the fifth grade, the Middle School added another section of 15 to accommodate new student applications. Sixth grade continued with four sections, but seventh grade added another section of 15 students to accommodate increased applications from students attending private K-6 schools. Eighth grade continued with the five sections from seventh grade.

The Upper School was organized more like college with required courses and elective courses. Enrollment was modelled on an enrollment increase of 25-30 students, plus the returning eighth-grade students, given market demand and the larger number of courses available.

Based on these historic enrollment patterns, the theoretical enrollment in the late 1980s to 1991 looked like this table with 820 students.

Maryland passed a law mandating statewide kindergarten that became effective on July 1, 1992. McDonogh administration debated the question if adding a kindergarten would hurt its referrals from private kindergarten schools in the area.

The school’s administrators decided to add two sections of kindergarten students to the Lower School, starting in September 1992. Since the Lower School did not have extra classroom space, the CFO recommended that the school construct a separate building for our younger students.

With kindergarten construction underway in the spring of 1992, the demand for slots in the new kindergarten was so high, the school’s admissions director recommended adding an additional section. The CFO believed it was possible to build an additional classroom and have it open by the beginning of school in September. The Board voted to expand the kindergarten to three sections of 15 students.

The three newly added kindergarten sections meant that McDonogh would need to add sections and teachers for those sections as the 45 new kindergarten students flowed through the Lower School. The new enrollment capacity model looked like this one in theory.

The flow through impact of adding a kindergarten increased the need for an expanded Lower School, triggering an additional need for the strategic plan. However, in this case, the projected increase in overall enrollment from 820 to 1,095 students provided a revenue source to cover the staffing and other costs of expansion.

Ultimately, the first expansion model underestimated the student enrollments. The Lower School faculty recommended adding a pre-first section for kindergarten students who were not ready for first grade. Flowing that section through the model as well as expanding sections through the schools resulted in a model that looked like this one around the time that I retired from the Board after the 1999 school year.

In the time that it took for the initial kindergarten class to progress through 12th grade (13 years for most, 14 years for some), the school’s enrollment increased from 800 to 1,275 (it’s important to note that it did not increase that much overnight). Having an interactive enrollment model shared by the school’s leadership team, the Board’s Finance Committee, Buildings and Grounds Committee, Academic Committee, Development Committee, Strategic Planning Committee, and Executive Committee kept the lines of communication open so that no one was surprised when additional staffing was needed due to these enrollment increases.

For annual budgeting purposes, we estimated the tuition revenue budget based on conservative new student enrollment projections from the Director of Admissions on June 1. Our fiscal year ended on June 30. If we admitted a higher number of students over the summer, we could use some or all the incremental revenues to add staff necessary to teach the additional students.

Parents of students re-enrolling had to return their re-enrollment contracts with a non-refundable deposit by February 1 each year. The student re-enrollment contract numbers were used to determine how many new students could be admitted to each class. New student acceptance letters were sent out on March 1.

Enrollment planning and enrollments achieved became a major part of the planning process. It also changed some of the assumptions in our strategic plan.

Tuition Revenues Calculation

Once our enrollment projections were set, we calculated tuition revenue multiplying the tuition charged in each of the respective schools times the enrollment projections for the grades in each school. We also built in an ability to plan for annual tuition increases.

In schools with a steady or declining enrollment, the decision about the annual increase in tuition can be critical. We were fortunate during this period of increasing enrollments that our decisions were more aligned with answering the question “What should our tuition be relative to the market?” and with keeping tuition as low as possible for middle-class families in the community.

As far as forecasting annual tuition increases, there was a consensus among the Board’s Finance Committee that we should try to plan for annual increases in the 3% range. Each year, we would update the model for the rate approved by the Board when tuition increase notices were mailed to parents at the end of January. The rest of the rate increases would remain the same.

Over the years, a gap between the tuition of each of the three schools had developed such that when a student was promoted from the last year of one school to the first year of the next school, there was an increase in the base tuition that exceeded the traditional tuition increase. One of the school’s strategic objectives was to reduce that increase over the plan years from approximately $1,500 to $800. We built that assumption into the plan.

Annual Donation Revenues

In addition to tuition revenue projected using the previously discussed enrollment model including annual tuition increases, another component of school revenue comes from annual donations to the school.

The Board determined that a capital campaign would be necessary to raise money for almost all of the strategic projects. Based on the Finance Committee’s input, the Board agreed that maintaining or increasing annual giving funds would be critical to the stable operating budget projection.

Because most annual donations are unrestricted, they are useful for many purposes. The Headmaster, the CFO, and the Board Finance Committee were aligned that budgets should be conservative.

Using the actual funds raised for annual donations from the year prior to the first year of the projections, we assumed a 5% increase for each of the years in the model. The purpose of this assumption was to ask the development staff to not forget about annual giving when they were busy soliciting donors for the capital campaign.

Part 3 will discuss staffing and other expenditures involved in the 10-year operations model.