Confluence Charter Schools Financial Overview. May 1, 2015

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1 May 1,

2 Background: Confluence Academy, Inc. (CA) is a 501(c)3 not-for-profit corporation that consists of five (5) schools serving approximately 3,500 PK 12 th grade students in the St. Louis area. It also has a Resource Office (RO) that provides financial, operational and academic related support services to each of the schools. The organization employs over 400 teachers, administrators and staff spread out among six (6) separate locations within the city. Confluence has a $45mm financial budget for the FY14-15 school year making it the largest charter school operator in the State. Overview: In order to provide the Board, as well as our sponsors, an accurate financial picture of Confluence Academy, Inc., we have presented information on the following: 1. Evaluation of annual budget process and key financial info 2. Analysis of Resource Office functions & purpose 3. Ensure maximization of Confluence and GCAA per pupil spending 4. Existing and future Confluence (LEA) to GCAA (LEA) loans and reserve balances 5. Monthly cash flows Confluence and GCAA 6. Industrial Development Authority of St. Louis Revenue bonds info and covenants 7. Existing leased facilities and purchase options (exit strategy) 2

3 1. Evaluation of Annual Budget Process: Preliminary enrollment targets are established at the school level in January each year based on input from Principal's, LEA Leadership team and the Director of Operations. These initial targets are reviewed and tweaked throughout the budget process to ensure they are as realistic and accurate as possible. The CA CFO works with DESE and other charter school finance leaders to estimate the upcoming years WADA $ rate and Prop. C amounts, along with Federal Program revenues (Title I, II.A, III and Sped Part B) which aren t made official until Spring. Revenues are allocated to each school building based on their estimated weighted average daily attendance (WADA) times the WADA $ rate for the upcoming year. Personnel staffing levels for each campus are reviewed on a position-by-position basis by Principals and CFO/LEA Leadership team taking into consideration increases or decreases to enrollment, academic programs changes and estimated revenues. Non-personnel costs such as facility related costs, transportation, food services, technology, curriculum, etc. are reviewed versus the prior year and amounts are estimated based on upcoming years anticipated changes. Principals are provided the opportunity to weigh in on line-item amounts as necessary. Capital project lists are developed together with input from Principals and are prioritized as to importance based on several factors including available funds. 3

4 1. Evaluation of Annual Budget Process (cont.) Based on the FY14-15 budget, total annual revenues for the five (5) schools are approximately $45mm with 85% coming from State/Local and 15% from Federal sources. Non-discretionary costs are as follows (total cost / % of revenues): o Building salary and benefits = $25.1mm or 56.0% o Building related costs = $ 6.0mm or 13.4% o Transportation costs = $ 3.0mm or 6.6% o Shared Services (RO) costs = $ 2.7mm or 6.0% o Breakfast and Lunch costs = $ 2.0mm or 4.4% o Custodial/Maintenance costs = $ 1.2mm or 2.6% $40.0mm 89.0% Capital expenditures/project are also considered as non-discretionary funds. Typical annual spend is $400,000 - $500,000 or approx. 1% of annual revenues. Therefore, the total annual non-discretionary or fixed costs represent close to 90% of revenues before discretionary amounts can be derived. This leaves approximately $4.5mm of discretionary revenues (10%) to distribute to the schools. 4

5 1. Evaluation of Annual Budget Process (cont.) $4.5mm or 10% of discretionary revenues must be used towards the following: Instructional supplies and materials = $.780m or 1.7%. IT infrastructure and network costs = $.558m or 1.3% Purchased Instructional Services (STAR, Discovery, Imagine, Dibels/AimsWeb, Pearson, Kumon, Literacy Link etc.). Total budgeted in FY14-15 was $.530mm or approx. 1.2% The remaining 5.8% or $2.6mm of the discretionary budget is spent on items like recruitment and enrollment ($180,000), office and building supplies ($275,000), security services ($275,000), legal and audit fees ($250,000), various insurance coverage's ($140,000), professional development ($135,000), copier leases and paper supplies ($250,000) and student incentives ($100,000). Additionally, sponsorship fees ($215,000) must be funded which further reduces these funds. VERY FEW TRULY DESCRETIONARY FUNDS ARE AVAILABLE EACH YEAR AND BUDGETS MUST BE ADJUSTED THROUGHOUT THE YEAR TO ACCOUNT FOR EXCESSIVE STUDENT ENROLLMENT ATTRITION AND POTENTIAL REDUCTIONS IN STATE AS WELL AS FEDERAL FUNDING 5

6 1. Key Financial Info/Actual Results ( ASBR): % of Instructional & Support Compensation (excludes debt/capital related): NOTE: High % of compensation proves instructional & student support staffing is robust relative to comparable charters Confluence = $23,586,583 / $ 33,986,975 = 69% Grand Center = $ 3,592,032 / $ 5,392,500 = 67% South City Prep = $ 1,445,948 / $ 2,221,112 = 65% Gateway Science = $ 5,353,642 / $ 8,593,492 = 62% City Garden Mont. = $ 1,277,899 / $ 2,114,450 = 60% SLLIS = $ 4,677,620 / $ 8,444,396 = 55% Total Instruction & Support (function 2999): Confluence Grand Ctr. Certified Salaries (6110) $12,324,325 $2,209,796 Non-Certified Salaries (6150) $ 4,712,652 $ 377,365 Employee Benefits (6200) $ 6,549,606 $1,004,871 Purchased Services (6300) $ 8,996,323 $1,443,468 Supplies (6400) $ 1,364,972 $ 357,000 Capital Outlay (6500) $ 39,060 $ 0 $ 33,986,975 $5,392,500 6

7 1. Key Financial Info/Actual Results ( ASBR): Confluence Academy s General Reserve Fund Balance at June 30, 2014 = 23.86% Grand Center Arts Academy Reserve Fund Balance at June 30, 2014 = 3.40% 7

8 2. Analysis of Resource Office Functions and Purpose: The Resource or Central office exists with the goal of providing shared FINANCIAL, OPERATIONAL and ACADEMIC services for the five (5) schools. Examples of shared FINANCE services are: Accounting (bookkeeping, accounts payable, check processing, budgeting, cash mgmt., federal programs and grant mgmt./reporting & audit support). Payroll & benefits processing (in-house). IT support (network and database management as well as software/hardware acquisition, implementation and integration). Insurance and legal activities. Examples of shared OPERATIONAL services are: Human Resources (employee recruitment and termination, salary decisions, benefit plan mgmt., policy manual maintenance, legal liaison, sub pool, etc.) Facilities (custodial, maintenance and capital projects), food services & transportation provided through 3 rd party contracts. Student information system (consolidated) data reporting LEA level DESE Core Data Reporting within MOSIS. Student enrollment and recruiting, marketing & public relations services. 8

9 2. Analysis of Resource Office Functions and Purpose: Examples of shared ACADEMIC services are: High-level management oversight and reporting for all five (5) campuses instructional strategies, programs and results. Curriculum and instructional supports, including curricular writing and inhouse professional development. Teacher training and support via Professional Learning Communities (PLC s) and PBiS (Positive Behavior Supports) systems. Evaluation and support of the NEE (Network for Educator Effectiveness) Teacher Evaluation tool. Centralized shared services allow a single resource (employee) to provide similar service(s) to multiple schools. This results in greater economies of scale and a reduced overall cost and subsequent increase in dollars available for student instruction and support. Even in highly decentralized environments, the central office continues to fulfill many of the functions associated with traditional school districts. Ford Foundation Project on Choice District Governance Heather Schwartz. 9

10 3. Ensure Maximization of Per Pupil Spending: Charter comps: CGM = $10,438 SLLIS = $ 9,720 SoCP = $ 9,428 NSCS = $ 9,194 Average per pupil spending* for Confluence Academy s four schools is as follows: $9,752 vs State average of $10,127 Average per pupil spending* for Grand Center Arts Academy is as follows: $10,447 vs State average of $10,127 Confluence s avg. per pupil spending is reduced due to the loans that have been made to GCAA in the past (approx. $333 per student). If the $ s would have stayed at Confluence, the avg. per pupil expenditure could have been $10,008 in FY It should be noted that because charter schools are required to use general funds to pay for facility related costs (rent, maintenance, improvements, etc.), per pupil spending amounts are negatively impacted compared to traditional school districts (overall avg. spend). * Calculated based on total instruction and support expenditures / ADA (excludes capital expenditures). 10

11 4. Impact of LEA to LEA loans: Cash was loaned to GCAA in the following amounts by CA: FY10-11 $ 586,045 FY11-12 $ 1,176,300 FY12-13 $ 1,266,965 FY13-14 $ 1,074,921 $ 4,104,231* In FY14-15, additional loans of up to $1.1mm from CA will likely be necessary to cover enrollment shortfall and full RO allocation (est. at $400,000). In FY15-16 and FY16-17, an additional $363K and $182K in loans are projected. In FY20-21, GCAA is to begin repaying CA loans (Notes Rec.) in excess of $1mm. Additionally, financing will need to be secured to allow for the purchase of BA facility before FY18-19 (prior to significant rent increase). * Notes cannot be forgiven by Confluence Academy due to bond covenants included in the February 1, 2007 Loan and Trust Agreement between the Industrial Development Authority of the City of St. Louis and Confluence Academy section 814 paragraph g. Note that outstanding bonds Principal and Interest equals $31,650,000 at June 30,

12 4. Impact to Confluence LEA of Elimination of GCAA Loans: Anticipated Loan Balances are as follows: FY14 Balance $ 4,104,231 FY15 Est. Addition $ 1,100,000 FY16 Est. Addition $ 363,000 FY17 Est. Addition $ 182,000 $ 5,749,231 If Balance is eliminated in any other way than payoff, there will be an impact to Confluence s General Fund reserve balance. Balance is currently $8.75mm. In FY15-16 and FY16-17, an additional $363K and $182K in loans are projected. The anticipated impact to the Confluence General Fund balance would be as follows: FY17 Est. General Fund Bal $ 7,500,000 GCAA Loan Elimination <$ 5,749,231> GF Balance $ 1,750,769 FY17 Est. Expenditures GF/TF $36,600,000 FY17 Est. General Fund Reserve % 4.8% 12

13 Confluence Monthly FY14-15 Cash Flows 5. Monthly Cash Flows - Confluence Cash Flow Summary Confluence Academy 14-Jul Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Cash Balance as of 7/1/14 7,159, ,428, ,300, ,258, ,168, ,524, ,236, Revenues 3,136, ,960, ,537, ,326, ,325, ,353, ,140, Expenses 2,838, ,365, ,475, ,498, ,076, ,234, ,003, Excess Revenue 298, (405,257.64) 61, (172,653.57) 249, , , Adjusted Cash Balance from activities 7,457, ,023, ,361, ,085, ,418, ,644, ,373, Net change in Other assets and Liabilities 200, , , (954,299.47) 1,231, (1,241,812.22) (65,315.66) GCAA expenses (229,954.55) (139,912.45) (593,310.71) 37, (125,132.39) (166,018.00) (112,600.20) Ending Balance 7,428, ,300, ,258, ,168, ,524, ,236, ,195,

14 GCAA Monthly FY14-15 Cash Flows 5. Monthly Cash Flows - GCAA GCAA 14-Jul Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Cash Balance as of 7/1/14 770, , , ,194, , ,122, , Revenues 417, , , , , , , Expenses 507, , , , , , , Excess Revenue (90,253.62) (76,194.46) (113,626.76) (47,793.00) (43,002.62) (248,926.94) (81,474.18) Adjusted Cash Balance from activities 679, , , ,147, , , , Net change in Other assets and Liabilities (157,949.74) 125, (225,660.33) (297,161.07) 227, (236,657.81) (74,295.34) Expenses paid by Confluence 229, , , (37,722.46) 125, , , Ending Balance 751, , ,194, , ,122, , ,

15 March Industrial Development Authority of the City of St. Louis - Revenue Bonds (final maturity 2032): Issued $23,180,000 of Revenue Bonds on February 1, Used to purchase the Walnut Park, Old North and South City Compton buildings, along with necessary furniture, curriculum and technology for the three schools. Bondholder Trustee is UMB Bank, N.A. (Brian Krippner and Karie Puleo). Majority bondholder is Nuveen Asset Management, but several other large bondholders exist. Outstanding series A bonds Principal and Interest equals $31,650,000 at June 30, Interest payments are due and made each June 15 th and December 15 th. Interest rates vary by tranche with the 2014 s at 4.75%, 2020 s at 5.0%, 2025 at 5.25% and the 2032 s at 5.35%. Payment due in FY15-16 is $705,000 in interest and $1,053,787 in principal for a total of $1,758,787. Bond covenants exist in order to protect the bondholders interests bondholders want the organization to continue to exist in order for the continuation of the bi-annual principal and interest payments. 15

16 6. Industrial Development Authority of the City of St. Louis Bond Covenants (cont.): Borrower (Confluence) has granted the Trustee (UMB) a security interest in its Pledged Revenues and any rights to such Pledged Revenues. It has also granted Trustee a Deed of Trust and security interest in the Mortgaged Property. Trustee has a secured interest in all assets of the Borrower. Bond documents Section 602(o) require that assets of the Borrower be transferred in accordance with its Articles of Incorporation and Chapter 355, as amended of the Revised Statutes of Missouri. Any such transfer will be subordinate to the rights of the Bondholders. Not less than 2 ½ years prior to charter expiration, Borrower shall use its best efforts to have the charter renewed. A management company is required to be engaged to run the schools unless approval by a majority of the bondholders is received. This approval was obtained in 2012 prior to the CA Board taking over self-management of the schools. 16

17 6. Industrial Development Authority of the City of St. Louis Bond Covenants (cont.): Bond covenant (amendment) requires CA to maintain an appropriately certified Director of Academics. A management consultant (BAFC) is required to be retained for a period of time in the absence of the engagement of a third-party management company. Enrollment must meet or exceed 80% of 3,024 students (2,420). Must maintain its corporate existence and will not merge or consolidate with or sell or convey, all or substantially all, of its assets. Section 808 requires the maintenance of Books and Accounts of all its operations under Generally Accepted Accounting Principals and can be made available to the Authority, the Underwriter or the Trustee. Must report annual financials along with audit statements, as well as provide certain monthly/quarterly reports to the Trustee. Must maintain liquidity covenant of 30 days of cash on hand at certain points throughout the year* * Working with Bondholders and BAFC to determine adequacy of this covenant 17

18 7. Existing Leases and Purchase Options - CPA Confluence Preparatory Academy located in the FCB Library building at 310 N. 15 th Street 20 year initial term lease signed October, 2009 granting Confluence Academy exclusive use of up to 126,364 sq. feet (by ). $5.0mm additional TI loan from Library being amortized and paid down within monthly rent payments (approx. $400K per year). Build-out was financed in part with $10.0 mm New Market Tax Credit (NMTC) deal done in conjunction with the lease/rehab at the Beaux Arts building (GCAA). Annual lease cost of $1.152mm in FY14-15 and $1.233mm in FY15-16, includes base rent as well as amortization of a portion of a Tenant Improvement (TI) loan. 3 yr. option period to purchase FCB building, Atrium and 150 parking spaces beginning September 2016 (with six month notice). If condominium structure can t be created, lease can be terminated. If option is not exercised, Tenant allowed to continue to rent. Building purchase option price is as follows: $40 per sq. ft. (x 126,364) = $ 5.055mm Remainder of o/s TI loan = $ 3.817mm Atrium glass cost = $.045mm Total $ 8.920mm Note: Confluence financed a 42,444 sq. ft. 4 th story gymnasium on the roof of the FCB building in This structure would transfer to Confluence Academy at no cost upon exercise of the purchase option. 18

19 7. Existing Leases and Purchase Options Beaux Arts Grand Center Arts Academy located in the Beaux Arts and Pythius Hall buildings at 711 N. Grand Blvd. (former Carter Carburetor HQ building). Project financed in part with $10.0 mm New Market Tax Credit (NMTC) deal done in conjunction with the lease/rehab at the FCB Library building (CPA). 15 year initial term lease effective July, 2011 granting Confluence Academy exclusive use of up to 111,463 sq. feet. Base and supplemental rent of $763,900, with amendment added for 2 nd floor buildout allowance and transfer of Sun Theater debt adding $83,200 total of $847,100 annual rent or $7.60 per square foot. Built out 2R with $250,000 construction allowance from developer added to deal. 2 nd floor and basement were financed by Confluence Academy ($650,000). Rent escalates by $44,895 per month or $538,740 annually as of July 1, Option to purchase the Beaux Arts / Pythius building between December, 2017 July, Price is the greater of the buildings fair market value or amount of remaining debt: Option Price (o/s Debt) = $ mm 19

20 7. Existing Leases and Purchase Options Sun Theater GCAA / Sun Theater located at 3267 Grandel Sqaure. Initial term of lease effective from commencement date (May, 2014) through June 30, 2020 granting Confluence Academy exclusive use of up to 28,678 sq. feet. Base rent of $153,000 annually. Rent escalates to $314,600 per yr. beginning July, 2020 for the remainder of the lease Majority of project developer financed with New Market and Historic Tax Credits, except for $2.218mm debt moved from Beaux Arts deal to the Sun deal. Debt to be repaid back to Friends of Confluence by ultimate purchaser of the Theater. Option to purchase the Sun Theater between July 2020 June, Price is the greater of the buildings fair market value or the remaining debt: Option Price - Debt = $ 2.170mm* Friends of Confluence Loan = $ 2.218mm Total $ 4.388mm * Mainly represents Kranzberg outstanding debt/interest & nominal option cost & is the NET cost to exercise option. 20

21 Conclusion: Confluence Charter Schools There are four main areas where a comprehensive external financial review would provide the most relevant and actionable information: 1. Identify strategies that can be implemented to increase State, Federal or private (donated) funds, along with maximizing existing assets (Sun Theater) for the Confluence Academy Charter Schools. 2. Determine areas where costs can be decreased without negatively impacting the services provided students or putting the organization at risk. 3. Review building level staffing, as well as the Resource Office, to determine the adequacy of personnel levels and relative cost/benefit to the organization. Additionally, determine the viability of further leveraging the Resource Office. 4. Review the dual LEA s and determine the ideal organizational structure as well as determine a way for Grand Center Arts Academy LEA to pay off or eliminate the Confluence Academy LEA s loan balances. 5. Develop a short and long-term facilities financing plan that will address the issues of securing the Confluence Prep and Grand Center Arts Academy buildings and/or provide for alternatives. 21