A PHILOSOPHICAL APPROACH TO BUDGETING

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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
• [phone]

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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

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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

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INTERGENERATIONAL EQUITY

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

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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

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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

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FINANCIAL EQUILIBRIUM

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

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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

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A PHILOSOPHICAL APPROACH TO BUDGETING

• When viewed over a multi-year period, changes in
  allocations to the cost centers testifies to the
  schools 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

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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

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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

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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

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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

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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?

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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

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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

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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

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A PHILOSOPHICAL APPROACH TO BUDGETING

• Interfund transfers
• Transfers to plant equipment additions
• Transfers to plant PPRRSM
• Transfers to endowment -- reinvestment
• Total Expenditures and transfers

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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)

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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

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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

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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

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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

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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

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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

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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

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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

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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