An analysis by Steve Willson of McHenry County College’s planned health club-sciences building proposal:

Analysis of the Business Plan for the Proposed MCC

Health and Sciences Education Building

Introduction

The McHenry County College Board of Trustees received a document entitled Business Plan for the Proposed MCC Health and Sciences Education Building dated September 17, 2013 and prepared by PowerWellness.

The purpose of this document is to examine the completeness and accuracy of the Business Plan. It will proceed in two parts. First is an examination of the conditions necessary for a true feasibility study. Second is an examination of the Business Plan for accuracy and completeness along with a presentation of data that was not in the Business Plan but should have been.

Conditions Necessary for a Feasibility Study

When a large project is considered, it is common for the parties responsible for the cost to have a feasibility study prepared. This is true of both investors in for-profit projects and for governments considering projects that are intended to be self-supporting, such as golf courses and toll roads. The purpose of a feasibility study is to give confidence to the decision.

The term “feasibility study” is well defined and includes three necessary conditions essential to its purpose. If any of these conditions do not exist, then the use of the term is unacceptable.

The first condition is independence. If the party preparing the study is independent, then greater confidence can be placed in the reported results. If the party preparing the study has a vested interest in the conclusion, then little confidence can be attached to the result.

Documents prepared by parties with vested interests cannot be called feasibility studies.

The second condition is expertise. A feasibility study must be prepared by a party having expertise in the area under study. Toll road studies are prepared by traffic engineering firms. Apartment studies are prepared by commercial real estate firms.

Documents prepared by parties who are not expert in the field of study cannot be called feasibility studies.

The third condition is accuracy and completeness. A feasibility study examines and presents all relevant data in a useful manner.

Documents that fail to present relevant data, that present only data that support the conclusion, or that present data in a biased manner cannot be called feasibility studies.

The table below summarizes these points:

Feasibility Studies versus Marketing Presentations

Condition	Feasibility Study	Marketing Presentation
Independence	No vested interest	Vested interest
Expertise	Are expert in the field	Are not expert in the field
Data	All relevant data	Only data that supports the conclusion

 

PowerWellness Not Independent

With regard to the first point, independence, PowerWellness, the firm that prepared the study, has a vested interest in the conclusion. When first hired, the administration made public the fact that if the project were executed, then PowerWellness would be considered for management of the health club portion.

With a documented conflict of interest, no study prepared by PowerWellness can be called a feasibility study.

Using a firm with a documented conflict of interest calls into question the validity of any conclusions and renders such a report useless for decision making purposes. No investor would accept a report prepared by a party with an obvious conflict of interest as unbiased and reliable, and neither should bodies acting on behalf of the public.

PowerWellness Not Experts

With regard to the second point, expertise, the project under consideration includes classroom space for the expansion of the health sciences curriculum, a clinic, and a health club.

PowerWellness manages fitness centers. It has no demonstrated expertise in projecting the demand for health care jobs or the rate of pay associated with such jobs. It has no demonstrated expertise in developing college curricula for such jobs. It has no demonstrated expertise in determining the space necessary for such programs.

The only area in which PowerWellness has expertise is in running health clubs.

An independent trustee might ask PowerWellness and Meritage, the firm that PowerWellness hired to conduct a survey about demand for a health club at MCC about their respective track records. That is, a trustee being asked to rely on PowerWellness and Meritage about how accurate their prior studies have proven for other clients. That would require both firms to show ALL studies they have prepared in a reasonable period – say the last five years – and how close the actual results came to original projections.

That such data has not been provided might cause a skeptical observer to question both firms’ expertise. If such data were provided and showed a track record of inaccuracy, then a skeptical observer would conclude affirmatively that reports prepared by PowerWellness were not to be relied upon.

Completeness and Accuracy of Data

So far it has been demonstrated that the Business Plan presented to the MCC Board of Trustees fails two of the three necessary conditions for a feasibility study, casting doubt on the reliability of such a report. In fact, the report has the hallmarks not of a feasibility study but of a marketing presentation.

Nevertheless, even reports prepared by nonexperts with obvious conflicts of interest may include all the relevant data for making a decision.

This is the third condition necessary for a feasibility study: the completeness and accuracy of the supporting data. If important data is left out, then the report is not a feasibility study. If data are presented as supporting a conclusion that is not actually supported, then the report cannot be called a feasibility study.

The remainder of this document is devoted to examining this question.

Review of the Business Plan

Master Plan

The Business Plan begins with the Executive Summary. The Executive Summary references the 2011 Educational Master Plan to support the recommendation for a large addition to the campus (page 1). Unfortunately, the 2011 Educational Master Plan suffers from all of the same defects as the Business Plan, including that it was prepared by firms with obvious conflicts of interest, by firms without expertise in projecting student demand. Most importantly, it failed the third test, accuracy and completeness of data, by leaving out information on issues such as change in student enrollment at schools within the College District and utilization of existing facilities, and by making grammar school errors in such fundamental calculations as the rate of population growth. (Calculating annual rate of change is taught in eighth grade in McHenry County schools.) The attempt to include conclusions of the Master Plan as justification for the expansion project renders the conclusions of the Business Plan suspect.

NIU Environmental Scan

The Executive Summary also references the NIU Environmental Scan (page 1), a document that explicates certain Census and Bureau of Labor Statistics data. Unfortunately, the Environmental Scan does NOT support the expansion of the campus. That conclusion will not be found anywhere in the document. I spoke with the director of the Center for Governmental Studies at Northern Illinois University who confirmed this was neither the Scan’s purpose nor conclusion. The attempt to include the NIU Environmental Scan is justification for the expansion project renders the conclusions of the Business Plan suspect.

Projected Job Openings

The college has a mission of providing training for jobs that will actually exist. No trustee, in good faith, would encourage students to enter fields for which projected demand is low. Therefore it is critical to examine all the evidence regarding projected job openings.

The Executive Summary (page 4) says, “The Illinois Department of Employment Security’s Industry Long Term Projections indicate an increase of 3,391 new jobs within McHenry County in the educational and health services fields.” This statement may be technically correct – I was unable to confirm it, especially since a timeframe is not included (Ten years? Twenty years?). But is it relevant? No, it is not. Are there other data that provide deeper, more nuanced evidence? Yes, there are, demonstrated below. The failure to include relevant data renders the conclusions of the Business Plan suspect.

The IDES Industry Long Term Projections state that between 2010 and 2020 (a period already 30% over) the total number of job openings in McHenry County under the heading “Healthcare Practitioners & Technical Occupations” (category 29-000) will be 580, with a total of 157 job openings each year including both new jobs and replacements.

Unfortunately, almost all of these jobs require degrees beyond those offered by a community college (e.g., chiropractor, dentist, pharmacist, surgeon). Four categories of jobs were listed for which MCC offers programs.

Registered Nurse	54
Occupational therapist	3
Physical therapist	5
Recreational therapist	0
LPN and vocational nurses	10

 

New RN jobs require a bachelor’s degree. Fewer than half of all registered nurse students now begin at community colleges; most begin and finish at a four year college. Therefore the demand in McHenry County for students transferring into an RN program at a four year college is perhaps 25 students annually.

The IDES projects a total of 286 new job openings between 2010 and 2020 in the category “Healthcare Support Occupations” (category 31-0000), a total of 64 job openings per year including new jobs and replacements. This category includes health care jobs that do NOT require bachelors degrees or higher, but it also includes many jobs do not require a certificate from a community college.

EMTs and paramedics	7
Medical lab technicians	1
Athletic trainers	1
Nursing Aides, Orderlies & Attendants	12
Occupational Therapist Assistants	1
Medical Assistants	8

 

The actual IDES data provide strong evidence that the number of projected job openings in the categories for which MCC proposes to expand is too low to support the need for a massive expansion.

Projected Earnings

In contemplating what programs to expand, consideration should be given not only to the number of job openings, but to earnings. The table below shows educational requirements and earnings potential for various jobs, taken from Learn More, Earn More, by the IDES.

Position	Education Required	Entry Wage (per hour)	Experienced (per hour)
Registered Nurse	4 years college	$22.53	$36.01
Medical Records Tech	2 years college	$11.02	$19.02
Physical Therapist Assistant	2 years college	$16.94	$28.10
Fitness Trainer/Aerobics Instructor	Vocational	$8.63	$20.46
Licensed Practical Nurse	Vocational	$15.50	$22.80
Nursing Aide	Short-term OJT	$9.23	$13.28

 

No trustee in good faith would want to encourage students to study for jobs that do not require a degree from a community college and that offer low pay.

Fitness Center

In examining the demand for a large new fitness center, the best evidence would be historical utilization and the experience of existing competitors. The weakest evidence would be attitude survey data.

MCC already has an under utilized fitness center that loses money and at which membership has been declining. The Business Plan should explain exactly why the current fitness center fails yet a bigger fitness center would succeed. It does not.

Several cursory visits to the fitness center at various times of the day and on various days would indicate to the independent observer that the fitness center sits nearly empty most of most days. Yet no data are provided in the Business Plan on utilization. A skeptical trustee might ask why and might ask for such data. If low utilization is confirmed, this would be strong evidence that demand is low and that a larger fitness center would likely just lose more money.

A second factor that a true feasibility study would take into account is competition, specifically how many competitors currently exist and how high are the barriers to entry of new competitors.

The Business Plan does not include such data.

There are more than twenty health clubs in McHenry County, more than ten within a ten mile radius of MCC.

In addition to the commercial enterprises, Sage YMCA is undertaking an $18 million, 40,000 square foot expansion, a fact not mentioned in the Business Plan.

Does MCC really wish to build a fitness club that competes directly with services already being offered by another charitable organization in McHenry County?

 

If there were significant unmet demand, then the existing clubs would have waiting lists. None do. In fact, in the last two years, a handful of health clubs have closed, strongly supporting the contention that supply equals or exceeds demand. Further, each month the mail brings several coupons offering discounts for joining various clubs, further evidence that there is no unmet demand.

Therefore the economic evidence shows clearly that the demand for health club services is being met by the private sector.

A third factor that a true feasibility study would include would be the competitive advantage of a new fitness club. The Business Plan shows no competitive advantage for a larger fitness center at MCC.

The evidence for demand consists entirely of the results of a small survey conducted by Meritage, the firm hired by PowerWellness, which has already been shown to have a conflict of interest on this topic. The survey concluded that two-thirds of the residents of the county do not belong to an existing health club and that one-fourth would be likely to utilize a fitness center at MCC. No explanation is given as to why these residents do not simply join an existing club closer to home. The connection between the survey evidence and actual demand is nonexistent. Meritage might as well have conducted a survey showing some people would eat at a new restaurant and therefore have concluded that ANY new restaurant would succeed.

In summary, the Business Plan leaves out key data that contradicts the case for a new health club, and the connection between the survey data and actual evidence of projected membership at an MCC fitness club is missing.

Need for Classroom and Lab Space

In analyzing the need for additional classroom and lab space, certain facts should be considered. First, how many jobs are projected in each area of study proposed by the college (see above). Second, how many graduates in these areas does the College currently produce. The difference between these two numbers would be a first indication of unmet demand.

IF and only if there is substantial unmet demand, the next step would be an examination of existing space to determine whether the current space is being fully utilized or could be reconfigured to meet unmet student demand.

Let us examine the evidence.

According the College’s CAFR (Statistical Section, Table 16), average class size at MCC is now 17, lower than at any time in the last ten years and 23% below the peak year of 2005. In fact, in the last three years alone, average class size has declined by 15%. This would indicate that there is significant capacity available if classes were scheduled optimally. To state that this is not possible is to deny the evidence of the College’s own history.

Further, current classroom space is used less than 50% of the average school day. This also indicates there is substantial room to take care of additional students without adding space through superior scheduling.

None of this is addressed in the Business Plan.

The college currently has 66 classrooms (65,000 square feet) and 32 labs (42,000 square feet) (CAFR, Table 17 and Illinois Community College Board Table V-4). This is a total of 107,000 square feet of lab and classroom space. This space currently serves 7,023 students (headcount) or 62,558 credit hours (source: Fall 2013 10th Day Enrollment Report).

The business plan calls for an increase in lab and classroom space of 75,500 square feet, an increase of 70%. Does the Business Plan project that the number of students is likely to increase 70%? No, it does not, not even close. In fact, as the evidence shown later will prove, the number of students is highly likely to decline.

One approach that should NOT be used is the argument from the average. The current administration has argued that MCC somehow has a “deficit” of space by comparing the amount of space per student at MCC to the amount of space at other schools. A contrary interpretation would be that other schools are even worse than MCC at utilizing space. But the argument fails on flawed logic. If the argument is followed to its conclusion, then every school below the average should add space. This, of course, would necessarily raise the average, making it necessary to add even more space. The argument is simply flawed and using it raises doubts about the objectivity of the conclusion.

The evidence does not support the contention that 75,500 square feet of additional space is needed.

Population Change

Population growth will drive both demand for education at MCC and demand for medical services. Does the Business Plan examine historical and projected population changes and their age cohorts? No, it does not.

According to the Census Bureau, between 1990 and 2000, McHenry County population increased 42%. From 2000 to 2012, population increased only 18.7%. That is an annual rate of change of only 1.7%. Since 2000, McHenry County’s population has actually declined by 0.2%.

Elementary School Enrollment

The Business Plan (page 35) says exactly one thing about elementary school enrollment: “Overall enrolment in McHenry County K-12 has remained flat at approximately 57,000 [since 2006], which should continue to support MCC enrollment.” This is a clear attempt to mislead by providing the wrong statistic and drawing the wrong conclusion. The key statistic is the trend in elementary enrollment, because the third graders of today are MCC’s freshmen in ten years. So what are the facts? Enrollment in McHenry County elementary schools has been declining for years. Many are 25% to 30% below their peak, and, on average the schools are 14% below their peak. There are 18% fewer third graders in McHenry County than there are high school seniors. Thus, we know for a fact that the prime demographic cohort, accounting for 75% of MCC’s enrollment, will be much smaller in future years. No one from PowerWellness or any other consultant hired by the college spoke with any elementary or unified school district superintendent.

Should we expect this trend to suddenly reverse? No, we should not. The Census Bureau projects that between 2010 and 2030, the total population of Illinois will decline by 400,000 or 3.2%. In particular, the number of residents in the 15 to 19 year old age cohort is projected to decline by 3.0%, and the number of residents in the 20 to 24 year old age cohort is projected to decline by 3.2%.

The population and enrollment evidence indicate strongly that there will not be demand for more space at MCC.

Construction Cost Estimates

Scenario A1 (Business Plan, page 9) projects that a 130,400 square foot addition would cost $47.3 million, or $363 per square foot.

Scenario D projects that a 75,500 square foot addition would cost $29.5 million, or $391 per square foot.

Other projections are for an even higher cost per square foot.

The average home in McHenry County costs less than $125 per square foot. Commercial space is available in McHenry County for under $100 per square foot.

Demand Projections

The previous sections make clear that population growth in McHenry County is in our rearview mirror and that, in fact, the number of high school seniors available to MCC will undoubtedly decline dramatically. The data also show that the number of jobs in the health field is likely to grow very modestly.

It is now time to examine the numbers for each individual program as presented in the Business Plan and to compare them with the other available data.

Exhibit 2.1 of the Business Plan (page 19) shows that Biology is the largest single segment in the “health sciences” field, accounting for 41% of credit hours. Demand for Biology classes peaked in Spring 2012 and declined slightly in Spring 2013. In fact, credit hours are basically flat versus Spring 2010. Biology is a core course for all students going on to a four year college. Few of the students in biology are actually going on to degrees or certificates from MCC in health sciences. To contend that demand for biology evidences the need for expanded health sciences programs is false.

Nursing Assistant Education is the second row in the table. Enrollment peaked in Spring 2012 and declined in Spring 2013. As noted earlier, the State projects 12 new job openings a year for Nursing Aides, Orderlies and Attendants. Nursing Aides are listed in the IDES Learn More, Earn More report as requiring short-term on-the-job training with a starting wage of $9.23 per hour (about $1.00 more than the minimum wage in Illinois) and $13.28 per hour for nursing aides with experience.

Nursing is the third row in the table. Nursing has increased sharply, almost doubling in credit hours since Spring 2011. As noted earlier, the State projects 54 new job openings a year for Registered Nurses in McHenry County, and almost all must be graduates of a four year college program. According to MCC, 25 students graduated from the nursing program in 2010, 24 in 2011, 22 in 2013 and 18 in 2013. In other words, the college is currently very close to meeting the demand for students who plan to become registered nurses.

The next row is Emergency Medical Technicians. MCC has 110 students in enrolled in this program in 2012/2013. According to the IDES, the number of job openings in McHenry County for EMTs and paramedics is projected to be seven per year.

The next row is Health Fitness Education. It accounts for 19.5% of the credit hours in the table. Enrollment has declined since 2008. The program had 12 graduates in 2012. Health Fitness Education is not actually a health sciences field; It is listed in the IDES report under the heading “Personal Care & Service Occupations” (Sector 39-0000), along with barbers and embalmers, not in the medical sectors. The IDES projects that there will be 12 job openings per year for fitness trainers and aerobics instructors. In other words, demand is being met by the current program.

Occupational therapy has 16 students. The IDES projects three annual openings for occupational therapists. In short, the current program appears to meet projected demand.

The Clinic

Demand for a clinic is so ill supported that it is not necessary to examine the demand for or financial feasibility of this program.

Financial Projections

The Business Plan makes financial projections for the addition, including the health club. As noted earlier, projections for demand for the health club are not well founded, and so projections for cost and income for this program must be discounted drastically. The assumptions underlying the remaining projections do not agree with projections by IDES for job openings.

Financial projections assume that every student will pay $9.00 more per credit hour to pay for the new addition. The fairness of having over 6,500 students who are not in the health sciences degree programs pay for new space they will not use is a policy question for the Board to decide.

Credit hours are projected to increase 2% annually (Business Plan, page 88). Change in population since 2000 and projected population change indicate such growth is unlikely. The change in elementary school enrollment provides overwhelming evidence that enrollment at MCC is unlikely to grow at this rate.

(Side note: In all feasibility studies within my experience, the source of the assumptions is explicitly identified. If the assumptions come from management, this is explicitly disclosed and the resulting report is, of course, not identified as a feasibility study. The source of the assumptions in the Business Plan is not identified. A Freedom of Information Act request for the identity of the source of the assumptions was denied. The lack of this information casts further and serious doubt on the reliability of the report.)

Finally, the cost projections are dramatically at variance with the College’s existing cost structure. If the College can run the new operation at the projected costs, then it should seek to replicate this success in all other programs at the college, reducing costs by more than 30%. If this is NOT possible, then the reliability of the cost projections must be questioned.

In summary, Census data, enrollment data, and the college’s own historical data cast serious doubt on the financial projections.

What Factors Should Have Been Analyzed?

So far this paper has analyzed the Business Plan in the order in which data within that document is presented.

However, it is fruitful to examine the subject from a more macro perspective, to examine the question of what factors should have been in any business plan, any feasibility study, and then to ask whether these questions were addressed.

A feasibility study should identify the major factors affecting a decision and then show all relevant data concerning each factor. In analyzing the need for a major addition, what factors should be considered?

The first and most important factor is the trend in overall population growth, especially in college-age freshmen. If demand in one sector (health sciences) is likely to increase but total enrollment is likely to decrease, then the case for building a large addition is severely weakened. Is enrollment likely to decline? Yes, has previously been evidenced. Was this evidence presented in the Business Plan? No. Did the business plan obfuscate the trend in enrollment? Yes.

But perhaps enrollment of non-traditional students will increase. Did the Business Plan make this assertion? No. Did it provide any evidence that non-traditional student age cohort is likely to increase? No. Is there evidence of the projected change in the various age cohorts? Yes, between 2010 and 2030 the Census Bureau project an increase of people aged 25 to 54 of 0.9%; in other words, less than 1% in total over twenty years. In order for enrollment at MCC to increase, enrollment from the non-traditional age sector would have to increase very sharply. Does the historical evidence of enrollment show an increase in non-traditional students? No, in fact the most recent enrollment figures show a decrease. Did the Business Plan make a case that enrollment of non-traditional age students is likely to increase sharply? No, it didn’t.

The second most important factor is the demand for health care jobs. Is the number of jobs for which MCC can provide education likely to exceed current graduation rates in those fields by a substantial amount? The answer, as demonstrated, is no. Evidence for this would be detailed evidence from the IDES for each job category and compare it with current graduation rates. Did the Business Plan provide such data from the IDES? No. Did the business plan provide one statement about future job growth that included many categories for which the proposed plan does not provide training? Yes. Did that number even include a time frame for the job growth it projected? No. In short, did the Business Plan provide the evidence needed to determine if the demand for health care job education is unmet? No. Did the Business Plan include sectors not truly relevant to the growth in health care jobs? Yes, it included Biology, which is a general science requirement and from which only a very small percentage of students go on to health sciences certificates, and the Business Plan included health education – health club jobs – which are NOT health sciences jobs according to the IDES.

The next important factor is are the jobs the Business Plan is targeting jobs that require a community college certificate or degree, and do these jobs offer high wages? After all, what would be the point in training students for low paying jobs or jobs for a community college certificate is not required? Did the Business Plan provide evidence on these points? No. Is there evidence indicating many of the jobs targeted by the Business Plan do not require community college education and pay low wages. The answer is yes, from the IDES.

The next important factor is whether current space is adequate to handle future demand. Space is needed if classes are overcrowded and if almost all classrooms are being used almost all hours of the school day. Did the Business Plan provide evidence on these points? No. Are classes over-crowded? No, average class size has actually fallen markedly in the last several years. Are classrooms being used to capacity? No, classrooms are used, on average, les than half of each school day. Were these facts presented and addressed in the Business Plan? No.

The next important factor would be assessing the demand for a health club, since this is major component of the proposed capital addition. Did the Business Plan provide clear evidence that a health club is likely to be fully utilized? No, it provided limited survey evidence that people were “interested” in a health club. Did the Business Plan provide any evidence that such survey results correlate highly with actual outcomes? No. Do PowerWellness and Meritage have strong track records proving that their projections correlate highly with actual outcomes? We don’t know because no evidence was provided. Is there counter evidence to the demand for a health club at MCC? Yes. First, in the declining utilization of the existing health club. Second, in the existence of numerous competing health clubs in the area, all with excess capacity. Third, in the known plans for the substantial expansion of Sage YMCA. Did the Business Plan address the known and planned expansion of competing health clubs? No. Di the Business Plan explain what competitive advantage MCC would have in attracting people who have never belonged to a health club before or who would leave another health club to join MCC? No.

The next factor would be the analysis of financial projections. Are the construction cost projections in line with construction costs of similar space in McHenry County? No, the projected costs are dramatically higher. Is evidence provided of the construction costs of recently built commercial buildings in McHenry County? No, no such evidence is provided.

Are the expenditure costs for operating new health sciences programs consistent with MCC’s historical cost structure? No, the projected costs are a fraction of MCC’s cost to fund all existing programs. Is evidence provided to explain the difference between MCC’s costs and the projected costs? No, no evidence is provided about MCC’s historical costs nor is any explanation provided. Is evidence provided that other community colleges operate such programs at the costs projected in the Business Plan? No, no such evidence is provided.

CONCLUSIONS

The purpose of this report was to examine the completeness and accuracy of the Business Plan. The evidence indicates the following:

(1) The claim that the College has a feasibility study is false. In addition to hiring a firm with an obvious conflict of interest, a firm without expertise in the requisite areas, the report itself simply ignores material data that contradicts its conclusions and provides irrelevant data that do not actually apply.

(2) The college appears to be meeting the projected demand for health sciences jobs. The evidence is strong that population in McHenry County will grow slowly in the future, that the number of students reaching the age of 18 will decline each year for the for the next ten or more years, that the number of health sciences jobs will grow more slowly than the College seeks to project, and that many of the jobs for which they wish to prepare students are low wage jobs not requiring a degree from a community college.

(3) The financial projections are at variance with the evidence of demand for health clubs, with the college’s historical cost structure, and the anonymous assumptions for growth are at odds with the evidence for future population growth the actual experience of local elementary schools, which are experiencing such extreme reductions in enrollment that several have been forced to close schools.

It may well be that the College needs some more space. It may well be that the College needs a different mix of space, that certain labs are obsolete or inadequate. Unfortunately, the Business Plan does not make that case.

Stephen Willson

October 21, 2013