Klingenstein School Case Study #3
Tuition Setting Recommendation and Impact
As the new head of school of the Klingenstein School, you are thinking ahead to the 2022-2023 fiscal year. Because the Board of Trustees will meet at the end of January 2022 to establish the 2022-2023 operating budget, the chair of the School’s Board of Trustees has asked you to think about nominal tuition that should be established for the 2022-2023 school year.
The 2021-2022 fiscal year has been a tough one. The School experienced a drop in enrollment of 12 students, as well as $225,000 in incremental expenses related to the addition of counselors to address student wellness and nurses to deal with pandemic testing and protocols. In addition, the School was able to provide only a very modest compensation increase of 1.5% to teachers. These items are reflected in the form of the Operating Statement given to you by your CFO, Ernest Munny, which is referred to below.
In a round of emails to you, trustees have already set forth three distinct positions concerning nominal tuition. The first position, articulated by Lydia Soigné, a parent and a professor of French history at Columbia University, is that tuition should be maintained at its current level (which is $27,275), with zero increase in 2022-2023.
The second position, advocated by Cody Newcombe, a small-business owner and alum of the School, is that the School should cut its nominal tuition by 3%.
The third position, propounded by Jack Smack, also a parent and a senior executive at a quantitative hedge fund, is that tuition should be increased by 8%.
All three trustees acknowledged that the School’s tuition is considerably below the New York City market. However, both Soigné and Newcombe argued that concerns about affordability require the School to continue to make high-quality education accessible to families of modest incomes, in addition to continuing to offer significant amounts of financial aid. “The composition of the Klingenstein School community must reflect the socioeconomic diversity of New York City,” Soigné asserted. “Otherwise we will lose our identity and dilute the School’s mission.”
Newcombe additionally stated that the termination of pandemic-related federal support payments, the City’s relatively high unemployment rate of 6.4%, and the economic slowdown engineered by the Federal Reserve required the Klingenstein School to ease the financial burden on families by cutting tuition levels. “I am well aware,” said Newcombe, “those hard decisions will be required if we cut tuition, but we are in a time when difficult choices have to be made.”
Smack pointed out that the moderate level of current tuition at Klingenstein should allow the school to increase tuition while still remaining quite affordable in relation to competitor independent schools. “Don’t forget,” Smack stated in the email to you, “that our School’s reputation is built on human capital, which is the quality of our teachers. We should pay them fairly in order to retain them. Moreover, inflation is running at an annualized rate of more than 8%, which is cutting into our staff’s effective income. And we should also remember that annual fundraising represents a very considerable part of our revenue budget. It’s hard to raise that much money every year.”
The Board of Trustees will look to you, as head of school for a recommendation regarding the nominal tuition level for 2022-2023.
Working with the form of the Operating Statement spreadsheet provided to you by the School’s CFO, Ernest Munny, you will run a tuition scenario of your choosing, which can be one of the three proposed by Soigné, Newcombe, and Black or a different alternative decided by you. You must also then adjust the numbers for (1) financial aid, (2) compensation, and (3) annual fundraising. Finally, you must achieve a net surplus of at least 1%. Your spreadsheet must be submitted to the School’s Finance Committee for review and approval.
Among the considerations that you should keep in mind as you work on the Operating Statement spreadsheet are the following:
- What will be the impact of your recommendation concerning nominal tuition on the School’s enrollment, particularly in light of the drop in enrollment experienced in the current school year?
- What impact will your tuition recommendation have on the School’s level of financial aid? Keep in mind that the School’s mission is firmly focused on maintaining socioeconomic diversity in its student body.
- What will be the interaction between your tuition recommendation and the School’s most significant expense, which is its people, as represented by salary and benefits expense?
- Lastly, what effect is your tuition recommendation likely to have on the School’s other critical revenue line, which is fundraising? Is there a strategic vulnerability here that should be considered?