INTRODUCTION

Kate Erikson settled in at her desk on a cold January morning. It was the first week of school and her first day as Executive Director of the Cascadia Hearing School.

She was nervous, excited, and a bit apprehensive. Not long ago, she was a full-time Master of Public Administration student. While a student, she interned with the Boys & Girls Clubs of Oakland, CA, and after graduation, she worked there full-time. She excelled at her work, and after just four years, Kate was now the Assistant Director and Educational Programs Manager for the Ossian E. Carr Clubhouse – a brand-new Club facility in one of Oakland’s toughest neighborhoods. She loved working with kids and liked the Club’s aggressive approach to engaging community and corporate partners. Her most significant professional accomplishment to date was bringing State Farm (the home and auto insurance company) and Kaiser Permanente (the health insurance company) aboard as major sponsors. A picture with NBA star Steph Curry, whom she met at the Carr Clubhouse grand opening, hung proudly on the wall in her new office.

As much as she liked the East Bay, her new spouse was from a bit further north and wanted to get closer to home. She heard about the opportunity at Cascadia through LinkedIn, applied, interviewed, and was thrilled to get an offer to join the school as its Executive Director beginning January 1, 2019.

Later that morning, her Board president, Truman Lewis, called to invite her to lunch. Lewis said, “It’s time we talked about why we hired you.”

A NEW APPROACH TO TEACHING DEAF KIDS

The Cascadia Hearing School’s mission is simple: Prepare deaf and hard-of-hearing children to attend school with their normal-hearing peers.

While it sounds simple, it’s a radical departure from the norm. Most state governments established residential schools for the deaf during the early to mid-19th century. These schools were designed to foster a “welcoming sub-culture” where deaf children could learn to lead productive lives despite their “crippling, permanent disability.” Once diagnosed as deaf, sometimes while still infants, they would be “sent away” to these schools to learn sign language and acclimate to life in the deaf sub-culture. Today, many parents choose the school for the deaf model for their children. These schools have thousands of alumni deeply committed to preserving and protecting sign language, traditional deaf education, and the deaf sub-culture. Deaf adults educated in this system often say that they don’t know where they fit into the world without the deaf subculture.

In the late 1970s, a group of pioneering audiologists started to challenge this paradigm. New advances in hearing technology allowed the profoundly deaf (people unable to detect sounds) to begin processing aural stimuli. These audiologists wanted to use this new technology to help deaf children communicate through speaking and hearing, not sign language.

Cascadia’s founders, Keith and July Sanders, were part of this first wave. They started treating children in their homes using new technologies like high-powered hearing aids and cochlear implants (a device that detects ambient sounds and communicates those sounds to the brain through the nerves behind the ear).

These technologies advanced quickly and spread even more rapidly. By the mid-2000s, otolaryngology surgeons (doctors who treat disorders of the ear, nose, and throat) could install cochlear implants that made it possible for children born deaf to hear and speak. Today most children born with hearing loss are more likely to use hearing technology before their second birthday.

This technology has turned the education of deaf children inside out. In the past, deaf education was about helping deaf children thrive in the deaf sub-culture and giving them enough skills to survive in the hearing world. Today, many teachers of the deaf employ a therapy and education model built around speaking and listening – known as “Auditory-Verbal Therapy” – that’s designed to leverage these new hearing technologies.

Over time teachers have developed a standard curriculum to support the Verbal-Therapy model for three-year-old and four-year-old children in a preschool setting. That curriculum is taught in nearly 20 “speaking and hearing pre-schools for the deaf” worldwide.  The mission of these schools is simple: Prepare deaf children to attend school with their normal-hearing peers. Cascadia, founded in 1996, was one of the first. Its original ten students were from Keith and Judy Sanders’ audiology practice.

A FULL-SERVICE APPROACH

Auditory Verbal Therapy demands early diagnosis. Audiologists and educators who subscribe to this model believe it’s essential to diagnose hearing loss as soon as possible, ideally at birth. Once a child is diagnosed, a therapist will identify appropriate hearing technology and therapeutic exercises to stimulate the child’s speaking and hearing senses and reflexes. They will also work with the child’s parents to create an environment that encourages speaking and listening as the child’s primary mode of communication.

Today most hospitals screen newborn babies for hearing loss within a few hours of birth. If there’s evidence of hearing loss, the child’s parents are referred to their state or local health department, which then connects them with various resources for audiology and other treatment. At this point, many families immediately gravitate toward sign language and the school for the deaf model. Others choose to pursue Auditory-Verbal therapy. Some children receive elements of both, depending on the extent and type of their hearing loss and their natural inclination toward specific types of communication.

Children placed in the school for the deaf model receive most of their therapy and eventual education at the school or one of its satellites. This model is relatively centralized and is funded almost entirely by a state government.

By contrast, Auditory-Verbal therapy happens through complex, decentralized networks. Suppose the child lives in an area covered by an audiologist or speech therapist who administers therapy according to the Auditory-Verbal model. In that case, that therapist will design treatment in consultation with the speaking and hearing school, like Cascadia, which the child will likely attend once they are pre-school age. These audiology/speech therapy services and the attendant parent support services are delivered and paid for in several different ways (see details below).

There are two main problems with this model. One is the breadth and reliability of funding. Not all children are eligible for any funding for these services, so the financial burden falls entirely on their parents. Research has shown that parents often choose the school for the deaf model because they cannot afford the Auditory-Verbal path. Cascadia frequently subsidizes the cost of care for families in their program.

The second problem is the coordination of care. If a child’s audiologist leaves or is replaced, that child will experience delays in their therapy. When treating children under the age of three, every month counts and delays in care can substantially impede progress.

Schools like Cascadia have tried to address this problem by delivering many of these “wrap-around” services. Cascadia has developed an audiology/speech therapy and parent support service it calls the “Parent-Infant” program (also called the “Early Intervention” program or “EI”). Parent-Infant typically enrolls around 100 up to 145 children. All were referred to Cascadia through local hospitals and public health agencies. Children in the parent-infant program frequently enroll in Cascadia’s preschool.

During the interview, Kate Erikson learned that Cascadia’s board, staff, and other stakeholders are extraordinarily proud of its Parent-Infant program. They believe it greatly benefits deaf children throughout the region, especially those attending Cascadia’s preschool program.

THE SUSTAINABILITY QUESTION

During Kate’s interview, Cascadia’s Board of Directors regaled her with beautiful stories of deaf children who have “mainstreamed” into neighborhood public schools. What an excellent model, she thought. Cascadia transforms kids’ lives. It gives kids and their families the chance to live without the stigma of being “disabled.” And, in some sense, more importantly, it’s a wise investment for the public. Mainstreaming kids saves millions of dollars in lifelong support services that deaf kids who don’t speak are entitled to under federal law. Kate was excited and proud of her new role.

The problem was money.

At lunch, Board Chair Truman Lewis laid it out. Truman was an excellent communicator, a no-nonsense guy, and a passionate supporter of Cascadia. In his day job, Truman was head of corporate communications for a Fortune 1000 company headquartered nearby. Nearly thirteen years ago, his daughter, born deaf, “graduated” from Cascadia. Last week she was notified of her early acceptance to Stanford.

He put it to Kate in the gloomiest of terms. “Our last Executive Director was a fabulous audiologist and a fantastic advocate for kids,” Truman explained. “But he was not a numbers person, and he certainly was not a finance person.”

He went on. “In the last five years, three of our peer schools have closed their doors. Local governments and school districts are reluctant to send kids to us while they lay off staff. Foundations other than Rubinstein are not interested in our work. Big hearing technology companies like MED-EL and Advanced Bionics would love to support us, but that looks like a conflict of interest.”

Then he dropped the bombshell. “We think we need some big financial changes,” he said. “We’re just not sure what we need.”

Kate nodded pensively.

“That’s why we hired you,” he implored. “You’re the total package. You understand non-profits. You understand educational programming. You’ve done community partnerships. You’re not wedded to the speaking and hearing model. Help us find a new way.”

At that moment, Kate realized her financial leadership would determine Cascadia’s fate. “So, what’s our next step?” she asked.

Truman replied, “I’d like a comprehensive assessment in time for next month’s board meeting.” He explained that the Board was just as eager as him to see a new approach. “All options are on the table,” he implored. “Don’t be afraid to look at adding programs, shrinking or ending programs, cutting costs, for-profit lines of business, whatever.” He said, “We’ll consider anything that will put us in a good long-run financial position.” He added, “Unfortunately, your predecessor and the Board won’t be much help. You’ll need to figure this out on your own.”

Kate returned to her office, sharpened some pencils, and got to work.

ASSIGNMENT

Prepare a memo (1,500 words or less) to the Board of Directors that outlines Cascadia’s path to financial sustainability. The memo should have standard 1-inch margins. Be sure to use at least 11-point font. Specifically, the Board has raised concerns as to the financial viability of Cascadia’s core programs. Currently, Cascadia has no data on the full costs for each program. Kate, together with the leadership team and the Board, would like to use these data to determine which programs are profitable and which ones are not profitable. They’d then recommend how to utilize excess revenues (e.g., subsidize less profitable programs or build budget reserves). They can also use the data to limit operations or eliminate unprofitable program(s), especially if they are not core to Cascadia’s mission.

To answer these questions, you’ll likely need to produce the following:

1. A flexible spreadsheet-based Program Budget for AY- 2020 reflects the costs of each of Cascadia’s four core service programs. You must allocate General Management and Administration, and Communications, Fundraising, and Development costs to the four programs. You can then use each program’s total costs to evaluate how changes to program size (e.g., number of students or clients) or structure (e.g., whether to raise tuition rates, charge parents additional service fees, or eliminate programs that are not profitable) impact CHS’s bottom line.
2. A flexible spreadsheet-based monthly Cash-Flow Budget for AY-2020, assuming Cascadia has $154,080 at the start of AY 2020 (AY 2020 begins October 2019 and ends September 2020). You should use your program budget to develop your monthly cash flow budget that reflects cash inflows (e.g., payments from clients, government, or receipt of grant funds), cash outflows (i.e., payments to vendors or employees), and cash balances at the end of each month.
3. Propose at least three strategies the Board should consider that directly address the nonprofit’s fiscal challenges. To that end, you’ll need to prepare a revised Program Budget spreadsheet and a revised Cash Flow Budget spreadsheet that demonstrates the impact of your proposed strategies on the school’s bottom line (surplus or deficit) for AY 2020. In evaluating your options, consider the changes to revenues (e.g., revenues per child per month in the parent-infant program) and expenses (e.g., the total cost per student per month). Is the increase in revenues in your proposed strategy driven by higher reimbursement rates or higher enrollment? Similarly, are changes in expenses the result of improved efficiency or changes in enrollment? What is the impact of your proposed strategy relative to CHS’s baseline budget deficit (i.e., Part 1)? With the pending expiration of grants from the Rubenstein Foundation, will CHS continue to report a budget deficit? How have you addressed equity and inclusion in your proposed budget?
4. Include supplemental spreadsheets in the Excel file you submit. Your supplemental spreadsheets should demonstrate the impact of your proposed strategies (at least three) on the nonprofit’s operating budget. Apart from the supplemental spreadsheets, avoid having extraneous spreadsheets. Be sure to incorporate evidence of your analysis in your 1,500-word memo. To ensure your analysis is replicable, include a list of assumptions used to develop both your program budget and monthly cash flow budget in your Microsoft Excel File. An assumption is a reasonable interpretation of budget practices. For example, one could assume that salaries are paid on the last day of each month. A parameter is a crucial piece of information provided to you that you’ll use to develop a budget or complete an analysis. For example, the cash balance at the start of AY 2020 was $154,080.

Cascadia organizes its operations into four core service programs: The Early-Intervention Program (or “Parent-Infant” program), the Pre-School Program (or “Classroom” program), Outreach Program, and Audiology Services.

In addition to the four programs, there are two additional departments – (a) General Management and Administration and (b) Communications, Fundraising, and Development. Cascadia has not previously established a method for allocating the costs of these two departments to its four core service programs.

Operational details are as follows:

(1) Cascadia is partly funded with grants from the Rubinstein Foundation, a private family foundation. At the end of AY 2019, Cascadia expected to have the following grant awards from the foundation:

• Time-restricted multi-year grant of $1.5 million. Funds are expected to be available in four equal increments from AY-2018 through AY-2021. These funds are non-renewable as the Rubenstein Foundation is scheduled to end operations at the end of the 2022 calendar year.
• Use-restricted multi-year grant of $550,000 to support the potential launch of the Audiology Services program. Past discussions with the Rubinstein Foundation have included a potential expansion of Cascadia’s Audiology Program to meet the needs of Cascadia’s preschoolers and children in the Parent-Infant program and ensure the community’s access to a licensed Audiologist. If Cascadia decides to go ahead with this expanded Audiology program, this $550,000 in funds would become available in two equal increments in AY-2020 through AY-2021.

The Foundation frequently honors its commitments upon receipt of an invoice. Payments from the Foundation are received within 30 business days of invoice. In prior years, the director had provided the Foundation with a quarterly grant report with an invoice appended to the grant report.

(2) The nonprofit has also successfully raised funds from various donors (individual and corporate). The November 10th, 2018, the gala raised $560,000 in unrestricted operating funds. Expenses for the gala event were $42,000.The Communications, Fundraising, and Development department estimates there is a 35 percent chance the gala would raise $1,000,000, a 30% chance the gala would raise $800,000, a 20% chance the gala would raise $500,000, and a 15 percent chance the gala would raise $350,000.The collection of gifts has been predictable over the last three years. The Communications, Fundraising, and Development team can collect 10 percent of the donations in advance of the Gala event (i.e., October), 25 percent at the Gala event (expected in November), and 30 percent one month following the event. Donors frequently honor their commitments by the end of May of the following year. However, 8.5 percent of the pledges were deemed uncollectable in the last five years.

(3) Parent-Infant Program is a unique year-round program that pairs families with a deaf child with a speech-hearing therapist. Therapists schedule one-hour appointments with parents. This does not include the ten minutes they need to prepare for the appointment and twenty minutes after the appointment to record therapy notes. In practice, every appointment with a family was at least 1.5 hours. Each child was expected to meet with a speech therapist three times a week. The Education Director expects therapists will work 40 hours per week (i.e., eight hours per day – five days per week). They are eligible for an hour break for lunch and two-fifteen minute breaks every day. Speech-hearing therapists are typically college graduates. Their base salary, excluding benefits, is $65,000 (see (7) below). All therapists are full-time employees.

The demand for services far exceeds capacity. The program currently serves 102 families and could serve up to 165 families if Cascadia hired additional therapists and utilized unused office space (e.g., with the elimination of Audiology or Outreach services, more on this below).

The Education Director has proposed investing in new technology ($100,000, including installation and training) to allow therapists to chart a child’s progress during therapy sessions. Unfortunately, existing computers would not be able to support the new software, so the school would need to upgrade the computers used by the therapists. The estimated cost is $2,000 per therapist. With the latest technology, therapists will record therapy notes during the session and as a result, appointments will be an hour long instead of an hour and a half.

Currently, families do not pay out of pocket for Early Intervention services. Instead, Cascadia is reimbursed by the county government for these services. Reimbursement rates for AY-2020 are expected to be $625 per child per month – a rate far below the full cost of services. Therapists are expected to schedule three appointments per patient per week.

Some families are also eligible for Early Intervention services under the Individuals with Disabilities Education Act (IDEA). Reimbursement rates for AY-2020 are expected to be $300 per month per child. The Education Director estimates that 85 percent of the families will be eligible for IDEA funds. The remainder is not eligible for federal funding for various reasons, including parents who are non-citizens (including immigrants and refugees). Cascadia has the option of charging these parents a fee. It has not done so in the past, but given current budget challenges, it may consider charging families ineligible for IDEA funds a fee less than or equal to the federal reimbursement rate (i.e., $300 per month).

Reimbursements from the County and IDEA are semi-annual, with payments expected in March and September.

(4) Cascadia’s nine-month Classroom Program is at capacity, with 120 children expected to register for school in AY-2020. Children are evenly distributed across the ten classrooms. There are five half-day classes for children under the age of three and five full-day classes for children above the age of three but below the age of six. Full-time teachers staff the all-day classes. The base salary for a full-time teacher in the full-day program is expected to be $55,000 (excluding benefits). Part-time teachers staff the half-day classes. The base salary for a part-time teacher in the half-day program is expected to be $49,500. To support learning, Cascadia hires and assigns a teaching assistant to every classroom (10 TAs in FY 2020). Teaching assistants are paid an hourly rate of $17.50 per hour. They work 40 hours a week from September 1 through May 30 (for simplicity, you may assume they receive an hourly wage when the school is closed for holidays (e.g., Thanksgiving, Christmas, and Spring Break or any other public holiday).

For AY-2020, tuition rates are expected to be $2,000 per child per month for full-day and $1,500 per child per month for half-day. Cascadia does not charge tuition out of pocket to deaf students. Instead, school districts are required to reimburse Cascadia for each deaf child enrolled in the program. Reimbursement rates are lower than current tuition rates (approximately 65 percent). These are semi-annual, with payments expected in November and May.

Of the 120 children, twenty are “normal hearing” peers (ten are in half-day classes, and ten are in full-day classes). These are children without hearing loss whose parents want them to learn in an environment like Cascadia’s that emphasizes active listening, empathy, and emotional intelligence. Normal-hearing students are not eligible for school district reimbursement and must pay full tuition at the rates mentioned above.

The Education Director proposes limiting enrollment to eight students per class (i.e., dropping Classroom enrollment from 120 to 80 students). This would allow teachers the opportunity to provide more individualized attention. Smaller class sizes would also eliminate the need for teaching assistants.

The Executive Director is not convinced this approach is financially viable. Given the demand for quality education, the Executive Director is considering enrolling 144 students – with no more than 12 students in a classroom. The school currently maintains a waiting list of 20-30 deaf students and 10-15 normal-hearing peers – so enrollment would not be an issue. Space, however, is an issue. To add two new classes, the school would need to eliminate either Outreach or Audiology (more on these programs below).

(5) The Outreach and Consultations Program offers training, consulting, curriculum design, and other services for deaf educators and therapists at healthcare-related organizations and private and public schools in the region. The Lead Therapist (base salary of $95,000 per year) supervises the two therapy consultants and supports staff in the Parent-Infant Program (25 percent of their time). He also designs the curricula used in the Classroom Program (20 percent of their time). The rest of the Lead Therapist’s time is spent in the Outreach program, developing treatment plans used by the staff when meeting with external clients. Revenues in the Outreach and Consultation program were $165,000 in AY-2019. Without additional staff members, revenues are expected to remain flat. With two additional staff members, the Lead Therapist expects the program would be able to meet the needs of external clients and generate $330,000 in revenue. Therapy consultants’ base salary, excluding benefits, is expected to be $65,000 annually. The therapy consultants and the Lead Therapist are full-time employees of the school.

(6) Cascadia launched the Audiology Program in 2018. This program provides children in the Classroom and the Parent-Infant programs direct access to an Audiologist. Their hearing aids and cochlear implants require constant testing, adjusting, and cleaning. Audiology clinics hosted at hospitals or universities can take weeks to service; in that time, a child’s treatment can lag. Cascadia’s in-house Audiologist guarantees easy access and quick turnaround for all children at the school at no charge. Currently, the program has a full-time audiologist on staff (base salary of $105,000 per year). The school has the option to expand the Audiology program by delivering services to clients who are not enrolled in the school. The Audiologist estimates that if the program were expanded, she could continue providing audiology services for students, and could see 25 to 45 patients per week (50 weeks a year). She estimates reimbursement rates from private health insurance, Medicare, or Medicaid would be $375 per visit. That said, she knows at least a quarter of the clinic’s clients will not have audiology services covered by their insurance or will not have any coverage at all. The school will need to consider whether to charge uninsured clients $375 per visit, charge a fee significantly lower than the reimbursement rate (e.g., $50 per visit), or provide the service for free.

If the school does opt to expand the Audiology program, it will need to hire a full-time medical billing assistant to schedule appointments, verify insurance benefits, and manage all reimbursements ($45,000, excluding benefits). An expansion would also mean that audiology equipment requires more frequent updates, service, or replacement.

Recall that part of the Rubinstein Foundation grant is use-restricted, meaning that funding is available only if Cascadia expands its existing audiology clinic to serve the community’s needs. The school estimates that at least 50 percent of FY 2021 funds would be used to purchase equipment.

(7) The exhibits below provide additional information on other operating expenses. Here are a few important notes to keep in mind when developing a budget –

• By law, Cascadia must pay 6.2 percent in Social Security, 1.45 percent in Medicare, and 8 percent in Unemployment, Disability, and Worker’s Compensation benefits for all employees. Fringe benefits include contributions to employee retirement and disability coverage (7.5 percent of base salary) and health, dental, and vision coverage ($425 per employee per month). Healthcare and retirement benefits are currently limited to full-time employees. The Board is considering whether or not to extend these benefits to part-time employees.
• Cascadia is housed in a 25,000-square-foot former convent owned by the local Archdiocese (which pays below-market rents of $1.00 per square foot per month). The Education Director assigned several rooms (approximately 40 percent of the space) to the Classroom program and roughly 20 percent of the space to the Parent-Infant program. Four smaller offices (approximately 15 percent of the space) are assigned to the Outreach Program. Two large rooms (roughly 15 percent of the space) are given to the Audiology Program. The rest of the space is communal and assigned to the General Management and Administration (5 percent) or Communications, Fundraising, and Development departments (5 percent)
• Unless noted otherwise, non-personnel costs, as detailed in Exhibit 2, are not expected to change in AY 2020.