University Day Care Center Susan Brooks, Director of the University Daycare Center, was reviewing the year-to-date Budget Performance Report from the Finance Department of the university. As she tried to analyze the components of each report, she realized that something needed to be done about the Centers financial status. The variance analysis for the Daycare Center showed a shortfall of over $89,000 (Exhibit 1). BACKGROUND . The Human Resources Director,therefore, had drafted a proposal for the following years budget and received approval for a one- year $160,000 subsidy for the operation of a daycare center. Funds for the remodeling and

furnishing of the Center were to be obtained from the Capital Improvement fund and the building was to be rented at a cost of $60,000 a year, with a one year renewable lease. The Human Resources department began promoting the Center Two months prior to its opening. Flyers were posted throughout the university and were placed in the mailboxes of virtually every permanent employee. A Human Resources representative attended orientation sessions for new employees and answered questions regarding the Centers services. The promotion approach emphasized the presence of the Center as an employee benefit, despite the fact that employees would pay for most of the operating expenses in the form of tuition fees. No fees were printed on the promotional literature, and all tuition discussions between potential enrollees and the UDC Director were to be held confidential. The proposal stated that the Center intended to provide daycare at reasonable rates (based on parental income) for any permanent university employee. A sliding fee scale would guarantee access for employees of all income levels. The Human Resources department hoped that the UDC would become a permanent service and envisioned that its implementation and operation would become a model for other university-affiliated daycare centers. Additionally, its presence could be an attractive incentive for employees to stay with the university or to choose employment there in the first place.

FEES AND ENROLLEES After considerable market research and consideration of various fee structures, a sliding fee scale had been developed. It incorporated not only income measures, but also intensity of care. Thus, the tuition charged for infants was generally higher, since they required closer supervision (Exhibit 2). The UDC was licensed to have seven spaces for infants (two to eighteen months old) eighteen spaces for toddlers (eighteen months to two years old) and seventeen for preschoolers (two to five years old). In October, the enrolled population consisted of four infants, ten toddlers and nine preschoolers (Exhibit 3). Some of the children did not attend every day because their parents were part-time employees or had other child care arrangements for the remaining days of the week. All parents were required to submit documentation of immunizations, as well as a physician statement attesting to the health of each child. STAFFING The original budget allowed for staffing consisting of the director, three instructors, six teachers, five aides, and a half-time clerical worker. The Center was not fully staffed in some of these categories, but, since the staffing budget had assumed full enrollment, some positions were in fact overstaffed (Exhibit 4). In anticipation of high demand for the service, Ms. Brooks had hired all of the instructors and teachers one month before the Centers opening, both to accommodate an immediate full enrollment, as well as to comply with state requirements concerning child-to-teacher ratios. All instructors and teachers were certified in child care. Aides were trained and supervised by the instructors. BUDGETING PROBLEMS The Universitys $160,000 subsidy was to be used to finance the deficit at full enrollment; that is, at full enrollment, tuition fees were expected to contribute a total of $329,194 and expenses were expected to total $489,194. Since expenses had not fallen proportionately to revenue, the University was facing a subsidy of $249,326 (Exhibit 1). Ms. Brooks believed the Center should remain an integral part of the university community. However, she also recognized the importance of its financial viability. She knew that if she did not make some adjustments in expenses, revenues, or both, these decisions would be made by someone from the department of Human Resources. This would reflect poorly on her ability to manage the budget and might also make the Center a target for elimination if budget cuts became necessary. As she reviewed the set of reports generated by the Finance Department, a number of items remained unclear as to what impact they would have on the continuing operation of the center. For example, adjustments made for the actual enrollment showed a variance of almost $65,000 for staff positions alone (Exhibit 4). Supplies expenses, by contrast, included many start-up items. Some of these were relatively long-lasting objects, such as toys and linens. Others, including disposable diapers and snack foods, were consumables. Many of the invoices for various classroom items had not yet been received. Additionally, charges for various services provided by the University, such as maintenance and laundry, were only generated every two to three months. Since this was the Centers first year of operation, however, the clerk had been instructed to carefully record the nature and the amount of each purchase, so that a better estimate could be submitted for the following years budge t. As a result, Ms. Brooks believed that the expenses shown in Exhibit 1 accurately reflected the results of the Centers activities. As of November, the UDC had increased its enrollment to over 50% of capacity in each category. Still, total revenues from all contributions were far below what had been projected (Exhibit 3). Ms. Brooks knew that part of this was due to the empty slots as well as the partial attendance by some children; however, even if adjustments were made for full enrollment by the end of the year, there would still be a revenue shortfall of approximately $67,000, assuming that average tuition in each category remained unchanged (Exhibit 5). It was clear that revenue could probably be increased if enrollment were limited to those in the highest-paying scales. One of the goals of the UDC, however, was to provide access to all employees, and charging the maximum tuition for the remaining slots would effectively limit the service to high-income applicants. Also, since the Center was not at full capacity upon opening, Ms. Brooks had seen no reason to exclude part-time attendance by some children. She had assumed that the revenue provided by part-time enrollees would offset at least some of the losses from the empty slots.

DECISIONS Complicating all of these considerations was the fact that even though future revenues and expenses were uncertain, both could be substantially manipulated. For example, decisions concerning the the hiring or firing of staff could have a large impact on salary expenditures. Ms. Brooks was reluctant to make these decisions too quickly. If teachers were laid off and then enrollment suddenly increased, she would have to rehire them in order to maintain the required child to teacher ratios. By contrast, discretion in the use of supplies was limited, but she wondered if it might be worthwhile to investigate different vendors for expensive items like disposable diapers. With only four month s of operation as a basis for making predictions, Ms. Brooks was uncertain as to how soon, if ever, the Center would be at full capacity. She also did not know what type of enrollee mix would best fit the mission of the Center and at the same time, generate enough revenue to ensure its survival. The sliding fee scale might be flawed, but the universitys Budget Department was reluctant to do any more research on this item. They maintained that daycare centers throughout the city had comparable fee schedules. Ms. Brooks doubted that she could duplicate the efforts of the research by herself and therefore decided to accept the fee scale, and perhaps make minor adjustments for individual applicants. Whether to encourage the presence of more part-time enrollees presented another dilemma. The

child-to-teacher ratio on any given day could be compromised by the presence of too many part- time children attending on the same days. The Center might be overstaffed on other days due to

such uneven attendance. This not only created problems in the scheduling and hiring of staff, but also meant that the partial slots occupied by part-time enrollees could no longer be used by potential full-time enrollees. Ms. Brooks had wanted to make the service available to all employees, but wondered if she should limit attendance to full-time children. On the other hand, if additional full-time applicants never materialized, then part-time attendees were needed, even if they did create staffing problems. Although much of the promotional effort was ongoing, Ms. Brooks was unclear as to whether there were better ways of advertising the service to employees. The option of promoting to potential applicants outside the university community had occurred to her, although she doubted if the universitys Trustees would approve of funding for this. In addition to questions of how to increase enrollment, she wondered if the Center should instead opt to simply maintain the present enrollment or even to decrease it (by attrition). This would make the task of laying off teachers easier, since fewer children would provide a suitable justification for terminating the Teachers employment. If the center could run at less than full capacity, but not run a deficit, then she might be in a better position to bargain for a larger subsidy in next years budget proposal. She also questioned the $160,000 subsidy amount. Was this just a token gesture to demonstrate to the community how progressive the university was, but one without real support from those who controlled the budget? The amount had seemed generous at first, but clearly there were problems in complying with the revenue and expenditure targets on which the subsidy was based. e Although Ms. Brooks did not expect the university to subsidize any shortfalls in enrollment completely, she realized that she would need to make a convincing argument for the continued operation of the Center. Unless she could do this by the time budget negotiations began in February, the closure of the UDC would no doubt become a subject for discussion at the annual Trustees Meeting in March. Assignment 1. What is the source of the financial problems at the UDC? Please be as specific as you can, explaining all the reasons why actual results differ from budgeted ones. 2. What might Ms. Brooks do to correct the financial problems? Please be as specific as you can in outlining a course of action that you believe she should follow. 3. What action would you recommend the Trustees take at their March meeting?

UNIVERSITY DAY CARE CENTER Exhibit 2. Sliding Fee Range Total Annual Tuition Annual Family Income Range Infant Toddler Pre-school $ 0 - 19,999 $5,980 $4,680 $3,900 20,000 - 24,999 6,644 5,200 4,333 25,000 - 29,999 7,309 5,720 4,767 30,000 - 34,999 7,973 6,240 5,200 35,000 - 39,999 8,638 6,760 5,633 40,000 - 44,999 9,302 7,280 6,067 45,000 - 49,999 9,967 7,800 6,500 50,000 - 59,999 10,631 8,320 6,933 60,000 - 69,999 11,296 8,840 7,367 70,000 - Above 11,960 9,360 7,800 Exhibit 3. Individual Tuition Contributions (Revenues) based on Present Enrollment Infants Toddlers Preschoolers TOTALS Number of full-time slots 7 18 17 42 Tuition payments $11,296 $4,680 $3,900 11,960 8,320 3,900 3,588 * 7,800 4,767 10,631 7,800 7,367 8,320 3,120 * 5,720 6,500 5,720 5,633 4,680 2,340 * 3,744 * 2,340 * 7,800

Revenue subtotals $37,475 $64,584 $39,867 $141,926 Budgeted revenue $73,694 $156,048 $99,452 $329,194 Variance from budgeted revenue ($187,268) Average tuition per enrollee $9,369 $6,458 $4,430 Budgeted average tuition per enrollee $10,528 $8,669 $5,850 * Part-time enrollees

UNIVERSITY DAY CARE CENTER Exhibit 4. Salary Variances Based on Actual Enrollment (A) Budgeted Budgeted FTEs Budgeted salaries Budgeted FTEs needed for salaries adjusted for Salary at full current at full current Category capacity enrollment* capacity enrollment Variances Director 1.0 1.0 $32,000 $32,000 $0 Instructors 3.0 1.5 66,000 33,000 33,000 Teachers 6.0 3.0 120,000 60,000 60,000 Aides 5.0 3.0 83,200 49,920 33,280 Clerical 0.5 0.5 9,000 9,000 0 Totals 15.5 9.0 $310,200 $183,920 $126,280

(B) Budgeted Budgeted FTEs salaries needed for adjusted for current current Actual enrollment* Actual FTEs enrollment salaries Variance Director 1.0 1.0 $32,000 $31,990 $10 Instructors 1.5 3.0 33,000 66,500 (33,500) Teachers 3.0 6.0 60,000 114,108 (54,108) Aides 3.0 1.5 49,920 27,140 22,780 Clerical 0.5 0.5 9,000 9,000 0 Totals 9.0 12.0 $183,920 $248,738 ($64,818) * Budgeted positions have been adjusted here to account for the current staffing needs of the Center. Amounts are budgeted to nearest half FTE (full-time equivalent) except Director. Exhibit 5. Annual Individual Tuition Contributions (Revenue) Based on Full Enrollment Infants Toddlers Preschoolers TOTALS Number of full-time slots 7 18 17 42 Tuition payments $11,296 $4,680 $3,900 11,960 8,320 3,900 3,588 * 7,800 4,767 10,631 7,800 7,367 9,369 # 8,320 3,120 * 9,369 # 5,720 6,500 9,369 # 5,720 5,633 4,680 2,340 * 3,744 * 2,340 * 7,800 4,430 # 6,458 # 4,430 # 6,458 # 4,430 # 6,458 # 4,430 # 6,458 # 4,430 # 6,458 # 4,430 # 6,458 # 4,430 # 6,458 # 4,430 # 6,458 # 4,430 # Revenue subtotals $65,582 $116,248 $79,737 $261,567 Budgeted revenues $73,694 $156,048 $99,452 $329,194 Variance from budgeted revenue ($67,627) * Part-time enrollees # Assume future enrollees pay the current average tuition and attend full-time