This is the third blog in our series on the “3 Major Risks for School Operators,” which focuses on the second major risk: governmental regulation rapidly increasing school operators’ costs, resulting in profit margins being squeezed downward along with operators’ business and real estate asset values!
This trend in governmental regulations started off big several years ago with Obamacare health insurance benefits for employees. Of course, businesses with fewer than 50 employees were exempted, so small-scale school operators didn’t suffer this large cost change. However, with the many operators who were not exempt now supplying this health insurance benefit, the available labor pool of candidates who work in the school industry have come to expect and ask for this benefit, as well as other benefits.
Without a doubt, the industry as a whole today has a much higher percentage of employees receiving these benefits than ever before. The average industry costs for providing healthcare to school employees is $4,000 to $5,000 annually per participating employee, and that is only the employer’s share!
The other trend that we have begun to see across the U.S. in the last two to three years is governmental legislation requiring higher minimum wage scales, with added emphasis in many locales pushing for a $15-per-hour minimum wage level. The heaviest push for these dramatically increased wage scales is in the larger urban areas along the East and West Coast. However, many other areas will adopt a sliding scale of increasing minimum wage levels over the next four- to five-year period.
The real wage scale story we see — even in areas where the state/local governments have not passed dramatically increased minimum wage requirements — is that many have passed legislation for modestly increased minimum wage levels spread out over future years. This adds up to a nationwide consensus that minimum wage scales needed to be increased with the result that workers now expect increased wage levels.
*Percentages are estimates only.
So, how does this affect the school business owner? Personnel costs have always been the largest school operating expense, and it’s the most difficult to control. Let’s assume your average wage is $10 per hour, which places your total personnel costs around 50% of revenue. When wages increase to $15 per hour, your personnel costs become 75% of that revenue. This means your school can only remain viable by continually increasing tuition rates. The question is, “How much can your current parents bear in tuition costs before they have to make other arrangements?”
In summary, school owners — more than ever before — must provide the highest quality programming and staff in the best-maintained facilities to have the ability to annually increase tuition rates high enough to offset these increasing costs or be faced with diminishing earnings (and business value) over the coming years.