Nirvana, a medium-sized city in the midwestern part of the United States, has experienced a significant change in the municipal work force of 1800 employees. Many more employees are responsible for caring for children than in the past. In a recent survey of city employees, over forty percent of employees said that affordable day care for children was important to them. Meanwhile, the Director of the Office of Personnel, Mary Lux, has become convinced that the lack of affordable day care is one of the main reasons for absenteeism and lateness among city employees. Mayor Petula Spark, some of the members of the city council and the leader of the major city employees union (Denardo Legado) have all agreed that something should be done. The question iswhat would it be?

Mayor Spark was in favor of doing something as long as it did not result in a major expense for the citys already strained budget. She told Legado, who was negotiating for day care on behalf of the city employees: Well cover the cost of renting space for the first year of the Centers operations. It is up to you to come up with a suitable day care center that conforms to state and federal law. The only state and federal requirements specific to day care centers are that they a) need to be licensed and inspected once a year (the cost of annual inspection is $500); b) that all new day care workers take part in a three-day state-certified training program (training costs are $1000 per employee); and c) that the child to day care giver ratio be no greater than 9 to 1.

Mary Lux was responsible for planning the details of the day care program for the children of city employees. With Mr. Legados support, Ms. Lux negotiated an arrangement with a local non-profit agency that was already providing day care services in the Nirvana metropolitan area. Tiny Tots Inc. has three locations; the contract with the city of Nirvana would be the fourth center. The Director of Tiny Tots, Klara Nemet, was enthusiastic about the new center. Ms. Nemet told Ms. Lux that we will not need any additional administrative staff since my administrative secretary Ms. Perfekt and I could handle the additional administrative work. Ms. Perfekt earns $4000 per month, while Ms. Nemets salary is $6000 per month. Tiny Tots, Inc. also must pay 7.65 percent of all salaries in the form of Social Security and Medicare contributions, 8 percent for unemployment and disability benefits, 6 percent of salaries into a pension fund, and $400 per month for health insurance for each employee.

The additional details of the contract are as follows:

1. The day care center will be open 20 days every month.

2. Parents will pay a monthly fee based on an 8 hour day (9:00 a.m. to 5:00 p.m.). Fees do not vary if less than a full day or less than a month of day care is used by the parents.

3. The city and Ms. Nemet agreed that the center would have a 6:1 ratio of children to day care workers for the first year of operation.

4. Day care workers earn $16.00 per hour. They work from 9 to 5 and get paid for 8 hours.

5. Children get a snack and lunch. The food cost is $20.00 per child per day.
6. The cost of supplies is $10.00 per child per day.

7. The city of Nirvana has purchased certain equipment (such as cots and desks) for the first 120 children. These costs are expected to increase by $200 per child for each child over 120.

There are several other relevant facts that will affect the budget of the day care center. When it opens in January of 2019 it is projected to have 120 children. Beginning in February, it is expected that the number of children will grow by 10 percent per month through May 2018. Beginning in June the monthly growth is expected to slow to only 5 percent. Parents will pay $800 per month per child. The monthly cost of space and utilities for the center is estimated to be $4,000 per month. Mr. Legado says that the union will contribute $10.00 per child per day to the center for the children of union employees (note: 80 percent of children are estimated to be children of union members). The state has a subsidized day care start-up grant for only the first year of operation. The grant is $100,000 for the first year only, and is paid monthly.

THE ASSIGNMENT

You are a budget analyst in the Nirvana budget office. Mayor Spark asked you to run some numbers so she can take a look at what was just negotiated between Ms. Lux, Mr. Legado, and Ms. Nemet. You should prepare the budget in a speadsheet. In the end, this is to result in a memorandum prepared for Mayor Spark (no more than two single-spaced pages not counting tables) that will include the following information:

1. An initial 2021 budget for the day care center (assume a calendar year). This should include the total surplus or deficit for each month, as well as for the year. Please use the template that I have provided on the next page to display your results.

2. A discussion of how the initial budget in 1) would change if the enrollment increase was 10% per month from Feb. through May and 0% for June through Dec.

3. An analysis of how the initial budget in 1) would change if the child/staff ratio was changed to the maximum allowed by law.

4. An estimate of what monthly fee would need to be charged to parents in order for the center to break even (for the entire year) under the initial budget you present in your answer to 1) (Note: It is ok if your estimated fee results in a small annual surplus).

5. Now consider the following two alternative budgets: (Option A) change the initial monthly fee from $800 to the amount that you estimate in 4) and change the June through Dec. growth rate from 5% to 0%; and (Option B) change the monthly fee from $800 to the amount that you estimate in 4) and change the staffing ratio from 6:1 to the maximum allowed by law. Repeat the calculations that you did in 1) for these two alternative budgets. Based on these calculations, discuss whether you would recommend Option A or Option B (taking into account all of the facts that have been presented above).

6. How might you propose to modify the budget that you recommend in 5)?

It will be necessary for you to attach the necessary tables, calculations, etc, to your memo. Please remember that Mayor Spark is not a budget person, so you need to communicate your findings in a way that will enable her to understand the situation clearly, so that the city can know how to respond to the proposed contractual agreement. This means that you need to be very careful how you structure your 2 page memo and how you package the attached budgetary information.

Please note that even though the day care center will be operated privately with no city support (other than the donation cited above), it is nonetheless important to the Mayor that the center be able to break even. If the center cannot break even under the conditions negotiated in the contract, some of the possible alternatives including charging more to parents, closing the center, or providing more city supportcould cause problems for the mayor.