Grading Independent Schools 2.0

1. Grading Independent Schools 2.0 • How to Improve Your Standing Dirk A. ten GrotenhuisManaging Director, First Republic Bank Lisa Turchan Chief Financial Officer, The Buckley School Peter ChristianDirector of Finance, Windward School April 29, 2019

2. How well can my school perform? • Operationally • Managerially • Competitively • Financially

3. Summary of Key Metrics • Financial Profile is developed over time • Key Metrics are impacted by all constituencies at our school • The evolution of our school depends on our financial performance • What are the lessons learned about how to improve this profile?

4. Summary of Key Metrics • Gross Liquidity • Net Liquidity • Total Debt / Student • Total Investments / Total Debt • Debt Service Coverage Ratio • (Tuition + Fees) / (Operating Expense - Depreciation) • (Contributions - Capital Campaign) / Student • Avg. Acceptance Rate over 3 Years • Avg. Enrollment Yield over 3 Years • Collateral

5. 1. Gross Unrestricted Liquidity = • (Cash + Unrestricted Investments) / Total Funded Debt • Score Range • Ways to Improve • Surplus from Operations: funding reserves over time can take decades – East Coast vs West Coast • Major Gift Campaigns: Capital Campaign Funding on an Unrestricted Basis – is “arbitrage” an ugly word? • Culture of Giving: Major gifts still coming in without capital project stimulus? • De-leveraging to reduce the denominator • Weighting: 10%

6. 2. Net Unrestricted Liquidity = • (Cash + Tuition Receivable + Investments – Perm Restricted Investments – Restricted Cash – Deferred Revenue) / Annual Debt Service • Score Range • Ways to Improve • Similar to #1, focus on Unrestricted Giving • Educate Board on Deferred Revenue: Can be difficult to convince Board to generate surplus’ if it is just to grow out of negative deferred revenue situation • Structure Debt Services as Overall Level Debt Service if possible • May want to consider longer term debt without risk of refinancing or restructuring in higher rate environment • Want to borrow on fixed rate basis rather than variable rate given the predictability and ability to forecast • Weighting: 15%

7. 3. Total Debt / Student • Score Range • Ways to Improve • Can the school expand its student population? • Is the project and debt going to help with this expansion of students? • Does the size of the school lend itself to dramatic financial changes? i.e. If there is some large attrition or declines in enrollment, will that adversely impact the institution? • Does the school have ample liquidity to withstand a strategy to pay down debt? That is how these issues are linked. • Weighting: 10%

8. 4. Total Investments / Total Debt = • (Cash + Unrestricted Investments + Permanently Restricted Investments) • / Total Funded Debt • Score Range • Ways to Improve • Similar to #1 and #2 with fundraising strategies designed to provide maximum flexibility for the School • Endowment fundraising after campus development projects have been finished • This may help offset financial add expenses – especially as tuition continues to increase, again a key way that the balance sheet assists the income statement • Potentially raise funds for projects or use liquidity for this purpose • Weighting: 10%

9. 5. Average Debt Service Coverage over 3 Years: • Debt Service Coverage Ratio = • Net Unrestricted Change in Assets + Depreciation /Amortization + Interest Expense / Annual Debt Service (P&I) • Score Range • Ways to Improve • Income Statement focus: • Raise Tuition? Expand Enrollment? • Use bonus structure for merit payment to staff? • Budget for Depreciation • Annual Fund Requests – Culture of Giving • Weighting: 15%

10. 6. (Net Tuition and Program Fees) / (Operating Expenses – Depreciation and Interest Expense) • Score Range • Ways to Improve • Continue to review tuition levels, for the area and based on other comparable schools • Are other Program Fees appropriate for the school programs and its constituents – good to review • Are there other ways to provide benefits to faculty and staff beyond pure financial? • Budget for Depreciation – goal to build into it after large capital expansion • Interest expense – stretch out long-term and low cost fixed rate if possible • Weighting: 10%

11. 7. Annual Giving : (Contributions – Capital Campaign) / Student • Score Range • Ways to Improve • Culture of Annual Giving: • Don’t let it slip during a capital campaign • Tie it to a specific line item in the operating budget • Enrollment expansion? • Board Engagement on Fundraising • Goals of 100% participation often gets culture moving in the right direction rather than amount • Continue to go after large gifts outside of capital campaign timing • Weighting: 10%

12. 8. Average Acceptance Rate over Past 3 Years • Score Range • Ways to Improve • Know who you are and practice what you preach!!! • Stay active and treat each year as your first with admissions process • Encourage all of those interested to apply – no matter the odds, give the school admissions leverage • Get the entire school community to be giving the same “elevator pitch” • Weighting: 5%

13. 9. Average Enrollment Yield over Past 3 Years • Score Range • Ways to Improve • Stay active throughout the admissions process – focus on “closing the deal” • “Guide” those throughout the process as to what they are looking for and the fit you have for them • Weighting: 5%

14. 10. Collateral • Score Range • Ways to Improve • Stay as strong as possible on other financial metrics • This will make the collateral question easier for lenders • Know that this is important to banks, not so much for credit rating agencies • For property rich schools, look into ideas for optimal usage of campus: additional lease revenue? • Weighting: 10%

15. How do I measure my school’s financial performance?

16. What is the benchmark? How do we fare?

17. A few thoughts on working on your score: • Have a clear and articulated mission • Know which students do well in your program and who you are as a school • Market and brand your school to help the admissions process • Work on better acceptances and yields • Build a projected surplus in your annual budget to help grow your reserves • Budget to fund depreciation / grow unrestricted rainy day funds • Demonstrates your ability to fund future debt payments • Keep focus on annual tuition and FA increases that move tuition revenue positive every year • Focus on improving your fundraising process and gifts to the annual fund • Insure your IPS requires a high level of liquidity • Build a relationship with your banker keeping them advised of your plans and timing