Positive thinking: A not-for-profit charts a way out of a financial morass.

A not-for-profit charts a way out of a financial morass

THE PRESIDENT OPENED THE GARDENS AT WESTRIDGE'S MONTHLY board meeting by saying, "As you recall, last month Bob summarized 10 critical items about our community which, frankly, shocked many of us. [For details, see September's Senior Housing column.] We asked Bob to come back this month with a definitive and practical action plan. Bob, are you ready?"

Bob exchanged a nervous smile with Phyllis, one of his senior staffers, and stood up. "You bet," he replied. "Let me tell you about the progress we've made in the last 30 days on those 10 problem areas."

* Excessive deaths triggering unexpected cash demands. Bob noted that the average entry age of new residents moving onto the campus was one and a half years higher than expected, contributing to a higher than expected death rate. To address the problem, Bob had initiated an intensified marketing program to build demand and accelerate resales of vacant units. "Our maintenance crews now go into a `red alert' mode and can turn around a vacated unit within 72 hours," he said.

* Declining fundraising proceeds. Bob's solution to this problem startled some board members. "After a six-month period of adjustment, we will no longer use fundraising proceeds to subsidize our operations deficits," he said. "Instead, all donations will pay for either tangible and permanent long-run improvements or new and innovative programs in areas such as wellness or dementia. After we demonstrate complete financial viability, we may choose to buy down the rate on a selected number of units to provide scholarships for needy residents as part of our charitable content." Bob had already tested this new philosophy on several donors, he added, and had received a favorable response.

* Phantom income. Board members had been misled by entry fees that were booked into income, in accordance with accounting protocol, although the cash had been spent a long time ago. "From now on," said Bob, "I'll submit cash flow statements at every board meeting indicating our real cash position, along with the current status of accounts receivable or accounts payable accruals."

* Challenges to not-for-profit real estate tax exemptions. Not-for-profits all across the country were losing the tax exemption battle, Bob reported, and The Gardens was no different. However, there was room for a compromise. "I've had several meetings with the city and worked out a tentative agreement to continue our real estate tax moratorium for two years. After that, we'll pay a significantly reduced service use fee rather than conventional real estate taxes." In his negotiations with the city Bob had stressed the point that, while senior housing residents do need some city services, they need far fewer than growing families do.

* Excessive costs. "For years, we have justified annual budget increases by building off last year's numbers," said Bob. "I asked every department head to go back to square one and budget their costs objectively from there. I then got all of the department heads together, complimented them on their efforts, and asked how they could cut operating expenses by an additional 5 to 7 percent in ways that would have minimal impact on resident quality of care or quality of life.

"After some grumbling, we achieved a savings of 5 percent in operating expenses. Most of that came in small increments: an FTE here, some minor operating supplies there. Some was achieved by a tighter integration of the back of the house in terms of how we delivered and served the food to each of the three satellite dining rooms."

* A laissez-faire marketing program. "The days of waiting for prospects to find us are over," Bob announced. "We are designing a results-oriented sales and marketing program with two major thrusts: expanding our base of new leads and qualified prospects and delivering these qualified prospects to the community for conversion to sales. We're installing a computer-generated lead tracking system, and we have daily performance goals for the sales and marketing director and her assistant. They're now on a progressive incentive program. Some months this might cost us a little more, but the expected increases in occupancy will more than compensate for these additional costs."

* An aging physical plant. Their aging "Oldsmobile" of a facility needed to catch up to its competitors' well-tuned "Buicks." Bob outlined a new revolving capital investment plan listing a number of items that required capital investment within the next 12 months, along with a year-by-year 5-year plan, to be updated annually. "Improvements include those of a cosmetic nature, necessary deferred maintenance items, and several items that would improve operational efficiency and reduce our annual operating expenses," he explained. "We'll also retrofit living units as they became vacant. The additional fee to cover these costs, assuming an 8 percent borrowing rate and a cost of approximately $6,000 per unit, will be approximately $45 per month--certainly reasonable for the value added. We could also upgrade existing residents' units, assuming they are willing to pay the increased monthly service fee."

* Cost creep. At the last board meeting, Bob had admitted that many assisted living residents were receiving increased assistance from his staff as they aged in place without being charged for these increased costs. "Effective immediately, we've set up a plan whereby 45 minutes of services per 24-hour day are part of the base monthly service fee for assisted living residents," he said. "We then have a tiered pricing plan for services provided above the 45-minute threshold. The plan basically calls for an additional $8 a day or $245 per month for every 20-minute segment of care above the threshold."

* Declining third-party payments. Bob had come up with a plan to respond to the negative impact of PPS. "I'm recommending that we stop providing home health services except for our own residents," he said. "With your approval, we will also scale back rehabilitation to a level that is covered by newly reduced overhead, without relying heavily on significant outside business." To beef up the declining numbers of private-pay nursing home residents, he added, "I'm further recommending that a portion of our 60-bed nursing home be retrofitted as a medical model dementia unit. This unit stands a better chance of sustaining higher private-pay ratios."

* Endangered bond covenants. "The good news is that the potential violation of the bond covenants will not trigger for at least 12 months. With this new plan, I'm confident that these covenants will not be violated. The 5 percent reduction in operating expenses will net us an additional cash flow of over $250,000 a year. Then there's the revenue enhancement we'll realize from our new tiered pricing strategy. And by refinancing our bonds at a rate of 6 percent instead of our current 8 percent, we can realize additional cash flow of over $600,000 a year."

In closing, Bob concluded: "Ladies and gentlemen, we're not out of the woods yet, but I truly believe we have a workable recovery plan. And nothing that I'm recommending in any way impairs our tradition, our mission, or our commitment to our residents. Any questions?"

The plan was enthusiastically approved and the meeting adjourned. As he walked out the door, Bob raised his eyebrows at Phyllis and let out a sigh of relief.

"Do you really think we can pull this off?" she asked.

Looking straight ahead, Bob didn't miss a beat. "We have no choice," he said.

A contributing writer to Contemporary Long Term Care, Jim Moore is president of Moore Diversified Services, a Fort Worth-based senior housing and health care consulting firm, and author of Assisted Living 2000.