Nirvana, a medium-sized city in the midwestern part of the United States, has experienced a significant change in the municipal work force of 1800 employees. Many more employees are responsible for caring for children than in the past. In a recent survey of city employees, over forty percent of employees said that “affordable day care for children” was important to them. Meanwhile, the Director of the Office of Personnel, Mary Lux, has become convinced that the lack of affordable day care is one of the main reasons for absenteeism and lateness among city employees. Mayor Petula Spark, some of the members of the city council and the leader of the major city employees’ union (Denardo Legado) have all agreed that something should be done. The question is—what would it be?
Mayor Spark was in favor of doing something as long as it did not result in a major expense for the city’s already strained budget. She told Legado, who was negotiating for day care on behalf of the city employees: “We’ll give you space and utilities for one year at no cost. It is up to you to come up with a suitable day care center that conforms to state and federal law.” The only state and federal requirements specific to day care centers are that they a) need to be licensed and inspected once a year (the cost of annual inspection is $300); b) that all new day care workers take part in a three-day state-certified training program (training costs are $600 per employee); and c) that the child to day care giver ratio be no greater than 8 to 1.
Mary Lux was responsible for planning the details of the day care program for the children of city employees. With Mr. Legado’s support, Ms. Lux negotiated an arrangement with a local non-profit agency that was already providing day care services in the Nirvana metropolitan area. Tiny Tots Inc. has three locations; the contract with the city of Nirvana would be the fourth center. The Director of Tiny Tots, Klara Nemet, was enthusiastic about the new center. Ms. Nemet told Ms. Lux that “we will not need any additional administrative staff since my administrative secretary Ms. Perfekt and I could handle the additional administrative work.” Ms. Perfekt earns $3000 per month, while Ms. Nemet’s salary is $5000 per month. Tiny Tots, Inc. also must pay 7.65 percent of all salaries in the form of Social Security and Medicare contributions, 8 percent for unemployment and disability benefits, 6 percent of salaries into a pension fund, and $100 per month for health insurance for each employee.
The additional details of the contract are as follows:
1. The day care center will be open 20 days every month.
2. Parents will pay a monthly fee based on an 8 hour day (9:00 a.m. to 5:00 p.m.). Fees do not vary if less than a full day or less than a month of day care is used by the parents.
3. The city and Ms. Nemet agreed that the center would have a 6:1 ratio of children to day care workers for the first year of operation.
4. Day care workers earn $14.00 per hour. They work from 9 to 5 and get paid for 8 hours.
5. Children get a snack and lunch. The food cost is $10.00 per child per day.
6. The cost of supplies is $5.00 per child per day.
7. The city of Nirvana has purchased certain equipment (such as cots and desks) for the first 120 children. These costs are expected to increase by $200 per child for each child over 120.
There are several other relevant facts that will affect the budget of the day care center. When it opens in January of 2017 it is projected to have 120 children. Beginning in February, it is expected that the number of children will grow by 10 percent per month through May 2017. Beginning in June the monthly growth is expected to slow to only 5 percent. Parents will pay $600 per month per child. The space and utilities donated by the city is estimated by Ms. Lux to be worth $4,000 per month (e.g. if the daycare center had to pay a market rent, that rent would be $4,000 per month). Mr. Legado says that the union will contribute $5.00 per child per day to the center for the children of union employees (note: 70 percent of children are estimated to be children of union members). The state has a subsidized day care start-up grant for only the first year of operation. The grant is $90,000 for that year, and is paid monthly.
You are a budget analyst in the Nirvana budget office. Mayor Spark asked you to “run some numbers” so she can take a look at what was just negotiated between Ms. Lux, Mr. Legado, and Ms. Nemet. You should prepare the budget in a spreadsheet. In the end, this is to result in a memorandum prepared for Mayor Spark (no more than two single-spaced pages not counting tables) that will include the following information:
1) An initial 2017 budget for the day care center (assume a calendar year). This should include the total surplus or deficit for each month, as well as for the year. Please use the Excel template that I have provided on Blackboard to display your results.
2) A discussion of how the initial budget in 1) would change if the enrollment increase was 10% per month from Feb. through May and 0% for June through Dec.
3) An analysis of how the initial budget in 1) would change if the child/staff ratio was changed to the maximum allowed by law.
4) An estimate of what monthly fee would need to be charged to parents in order for the center to break even (for the entire year) under the initial budget you present in your answer to 1) (Note: It is ok if your estimated fee results in a small annual surplus).
5) Now consider the following two alternative budgets: (Option A) change the initial monthly fee from $600 to the amount that you estimate in 4) and change the June through Dec. growth rate from 5% to 0%; and (Option B) change the monthly fee from $600 to the amount that you estimate in 4) and change the staffing ratio from 6:1 to the maximum allowed by law. Repeat the calculations for these two alternative budgets that you did in 1. Based on these calculations, which alternative would you recommend (taking into account all of the facts that have been presented in the case).
6) Is there any way you might propose to modify the budget that you recommend in 5)?
It will be necessary for you to attach the necessary tables, calculations, etc., to your memo. Please remember that Mayor Spark is not “a budget person”, so you need to communicate your findings in a way that will enable her to understand the situation clearly, so that the city can know how to respond to the proposed contractual agreement. This means that you need to be very careful how you structure your 2 page memo and how you package the attached budgetary information. (Some guidance on what I am looking for in the memo is provided on Blackboard.)
Please note that even though the day care center will be operated privately with no city support (other than the donation cited above), it is nonetheless important to the Mayor that the center be able to break even. If the center cannot break even under the conditions negotiated in the contract, some of the possible solutions—including charging more to parents, closing the center, or providing more city support—could cause problems for the mayor.
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The new daycare center in Nirvana is expected to address the problems of employees with respect to affordable childcare and help them to focus on work. Despite the center being a non-profit organization, it is important to ensure that it has sufficient cash inflows so that the cash outflows can be managed and the center does not suffer from short term liquidity crisis. Accordingly, budgeting was done for the first year through changes in various input parameters to identify the break-even and surplus points of operation for the center.
Initial budget parameters and deficit
The initial budget for the upcoming year was prepared on the basis of several assumptions. It was assumed that the center would commence operations with 120 children and the number of children would grow by 10% till May and starting June, the growth rate would reduce to 5%. In order to provide better care, the ratio of day care workers to children would be 1:6 which is better than the state requirement of 1:8.
The revenues would comprise of $600 monthly payment per child by their parents. Since the space and utilities are non-monetary grants, these have been excluded from calculations as budgeting focuses on monetary grants only which would lead to cash inflows. Other sources of revenue would be the startup grant of $90,000 and subsidy for children of union employees. It is expected that annual revenues of the daycare center would be $1,597,915, as shown in Appendix 1.
The expenses comprise of personnel expenses which constitute the most significant portion of expenses. The daycare workers would be employed on the basis of number of children and there would be 2 more employees for managing the administrative work. The total personnel costs, including fringe benefits, are expected to be $1,189,844 for the year....
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