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Providence Financial












MONTHLY NEWSLETTER:  MARCH 2009 ISSUE

SURVIVAL MODE
BY BRENT VAN ALFEN
PROVIDENCE FINANCIAL CO., LLC



Investors may now buy U.S. Treasuries for up to a twelve month maturity and get ZERO interest in return! Yup – I am not kidding you. Why would people invest for zero interest? They are concerned about safety. It is often called a “flight to quality.” Investors are rejecting AAA rated municipal securities with yields up to 4.84% TAX FREE for a perceived safe harbor in the Treasuries in spite of getting no return. Given this market, it is easy to understand why unrated, unenhanced, “high risk” charter school bonds are very difficult to sell. The most recent transactions that I am aware of in the secondary market have traded at 9.5% yield. Recent new issues for rated, investment-grade charter school bonds have been at a similar rate. I am told that if you could sell unrated, unenhanced charter school bonds in today’s market, you would likely pay a “double digit” rate. Unless there are some very unusual covenants in these bonds that will provide the school a rate adjustment or relief of another type, they will be paying a lot of interest that could otherwise be used for teachers and books. These rates are indicative of a market that is still in lockdown. There is precious little liquidity available to invest in bonds or equities. We are just finishing the second worst February that the stock market has experienced on record. As money continues to drain from investors’ portfolios, 401K accounts are becoming “201K” accounts. Many professionals from both political parties are concerned that the stimulus bills have varying defects--including being too large while others say it is too small. Some say it is far too much “pork” while others say that spending even on pork projects is still stimulative. One sobering fact is that interest on the Federal debt is now the number three budget item behind Social Security and Medicare. As our population continues to age and our politicians continue to spend more than the government takes in, it does not take a rocket scientist to see where we are headed.

While we should all do whatever is in our power to influence our political representatives to use wisdom, panicking is non-productive. Like Chicken Little, we can cry that the sky is falling; but in the end, we can only control what is in our power to control. As far as charter school management is concerned, following are some suggestions about using prudence in troubled times:

Reduce costs on a pro-active basis. Don’t wait for state budget cuts to force you to react by cutting costs. You know budget cuts are surely coming, or are at least likely; so get out in front of the coming reductions. Reacting to the problem will just put you behind.

Cost cutting should be addressed to non-essential costs first then progress to less-essential areas. Cut the fat -- not the muscle of your school. These are situational value judgments, but the most critical decision is to keep your best teachers. It’s very important to address overhead expenses. I have often seen schools that are not performing financially, but their administrators drive expensive vehicles supplied by the school. Extravagant off-campus offices are another common abuse. Where the necessary cost cuts are extensive, share the pain as much as possible. Small cost reductions on a broad scale, if shared fairly and proportionally, will be understood by all concerned. Reductions in pay or benefits or a few days of unpaid leave are ways to share the pain. Wisely enabling your employees to submit ideas as to how to reduce costs can make these difficult decisions more widely accepted.

Outsourcing services can often be a way to reduce costs. Look at all costs from a new perspective.

Create a culture of thrift in your school. When all employees look for ways to cut costs, it is surprising how much you can save.

You will need to be creative to keep your schools healthy and continue to deliver superior education in the current economic environment.

For information contact Brent Van Alfen, Providence Financial Co., LLC
Phone: 801-299-8555 Email: brent@providencefinancialco.com