Financing Independent Schools for the 21st Century

What is already clear is that any school interested in assuring its long-term financial health needs to take two key steps. First, initiate data-driven leadership. In other words, make sure financial decisions are based on solid data. School administrators interested in the long-term financial health of their institutions need to study carefully their own 10-year data and compare the trends found there to global trends in independent schools. Second, undertake financial modeling -- which is to say, project forward five years to produce differing financial scenarios in an attempt to develop the preferred script for the future.

Data-Driven Leadership

A school that compares its own 10-year trends to global trends will undoubtedly notice that the global trends of the past 10 years are both fascinating and sobering. For the 900 or so schools in the NAIS database that have consistently provided data over the past 10 years, we see the following trends related to financing:

1. Tuitions are up, on average, 30 percent in inflation-adjusted dollars. While the conventional wisdom in recent years is that tuition should rise at the rate of inflation plus 1 point (if the Consumer Price Index goes up 3 percent, schools would increase tuition by 4 percent), for the last two decades, NAIS-member schools, on average, have raised tuition by a dramatic 3 points beyond cost of living/CPI increases, each and every year. This, of course, has not always been the case. In fact, for the decades of the 1950s, '60s, and '70s, the rate of tuition increase mirrored, roughly, the rate of inflation. So something has changed fundamentally and alarmingly about the collective thinking on tuition increases. The immediate questions this trend suggests include the following: Is this a sustainable trend for the coming 10 years? Even if it were sustainable in terms of demand for independent education, will what seems to be a virtuous cycle from a business standpoint (more revenue per customer) also be a vicious cycle from a mission standpoint (a narrower range of customers and the elimination of the middle class in schools)? Do schools risk what businesses in similar situations risk -- lower cost competitors entering the marketplace and seriously eroding the schools' base of customers?
    
2. Demand is up in terms of inquiries, applications, and enrollment. While enrollment is up 20 percent in the NAIS benchmark schools, inquiries are up 51 percent and applications up 30 percent. This is an interesting, if not counter-intuitive trend. During the last decade, independent schools overall have enjoyed the luxury of becoming more selective while raising their prices. Like medical care, high quality education so far has seen no limit to what people are willing to pay nor any limit to the sacrifices they make in order to access the service. Interestingly, despite much higher tuitions, attrition is down (by 8 percent overall, averaging 9 percent for day schools and 15 percent for boarding schools) for the majority of schools. One could argue that schools are experiencing the ultimate "virtuous cycle": rising demand allowing higher prices (and more revenue) with a greater percentage of satisfied customers.

   Of course, there are many caveats to this observation: that any individual school's situation can vary significantly from the trends, especially in "small markets" where there is no real price comparison to other independent schools, so the customer base compares the independent school tuitions to public schools (free) or parochial schools (low cost because of parish subsidies). That said, even in small schools in small markets, tuitions continue to rise and enrollment seems to remain stable if not growing. The bigger caveat, of course, is that schools may face an uncertain economic future. The only time in recent history when enrollment in NAIS-member schools actually plummeted was when there was a confluence of rare events: a relative dearth of school-age children and a recession. The sobering news is that, at the elementary school levels, we have just re-entered the first of these phenomena (depressed demographics), and we are perched precariously on the brink of the second (sustained depressed economy).

3. Faculty salaries have improved, but only marginally, in inflation-adjusted dollars up only 1 percent a year (11 percent over the last decade). The good news is that the increases at the starting salary (around $30,000) and median salary (around $40,000) put NAIS-member schools as a group in a much more competitive place than it has been vis-à-vis public school salaries, which are, nationally, only 10 percent higher. The bad news has two components: first, that in terms of relative increases, independent school teachers are not better off than they were a decade ago; second, the national averages belie the fact that very high urban independent school salaries raise averages overall. Still, independent schools in urban, suburban, and rural areas struggle to close the salary gap with the most prominent public schools in their individual communities (an important consideration, since independent school teachers tend to benchmark their salaries against the highest-paying local public school system). From a systems analysis perspective, however, the most striking realization the data suggest is that average faculty salaries is not the culprit for the dramatic increases in tuition. When we ask school leaders and trustees what is the driver for price increases, they offer primarily two answers: the "arms race" in facilities development and the ever-increasing investment in technology. Yet, while these two factors are contributors, it turns out that they are not the main issue. What is, then, the budgetary aneurysm working its way through the independent school body politic? The size of the staff and student:teacher ratio.
    
4. Total staff has increased by 32 percent and the student:teacher ratio has declined by 7 percent (9:1 for day schools and 7:1 for boarding schools). While it is not true that individual salaries have grown substantially, it is true that the salary and benefits budget has exploded. The story is not better pay but rather many more paychecks, for, in most cases, the same size school. So who are all these new employees schools have hired? More teachers for new programs, more technology staff, and more counselors head up the list. Thus, we have, some would argue, two factors at play here: expansion of program (more sports, more foreign languages, more technology, new courses) and expansion of services (more learning specialists, more student specialists -- deans, counselors, diversity coordinators, etc.).

   And what is driving this expansion? The first answer seems to be "parent demand," but is this, in fact, the case? NAIS is conducting some parent research to see if the majority of parents want more services at higher prices, or rather, as we suspect, a vocal minority has captured the attention of schools, and schools have just found it easier to provide more programs and services than to moderate price increases. On the other hand, NAIS's recently published Attrition Study (available at www.nais.org) indicates through its study of low- and high-attrition schools that low attrition correlates not with class size or school size but rather with student services provided (including having a diversity coordinator).

5. Financial aid grants are up 38 percent (in inflation-adjusted dollars), but the number of aid recipients is flat (only up 1.8 percent in 10 years). Obviously, what schools have done, to their credit, is to match tuition increases by comparable increases in their financial aid budgets. What they have not done is to seek more socioeconomic diversity and equity in their schools by expanding the numbers of students receiving aid (which is now about 20 percent of the typical student body, around 16 percent receiving financial aid and around 4 percent faculty kids receiving tuition remission). Furthermore, the data show a dramatic shifting of the income levels of those applying for financial aid: The near-middle-class applicant pool is headed way down and the affluent (with family incomes over $100,000) applying for financial aid is headed way up. The critical mission-related question for financial aid planning is this: Do we want middle-class families ($40,000-$80,000 family income) in independent schools? It is worth noting that while the median income for a family of four in the U.S. is in the $50,000 range (hence "middle class," as defined by demographers), independent schools tend to define the "middle class" in the $75,000-$125,000 range, what demographers define as "near affluent" ($75,000-$100,000) and "affluent" (over $100,000). So while schools do want "middle class" families, they are having difficulty even defining what that means in terms of income. And increasingly, they are meeting the needs of those over $100,000 in family income at the expense of the real middle class (those at $40,000-$60,000).

Financial Modeling

Schools in the 21st Century require, among other things, thoughtful leadership in the domain of financing. Such leadership will engage schools in serious financial modeling, projecting forward five years to produce differing financial scenarios in an attempt to develop the preferred script for the future. In this light, independent schools looking toward the future will undoubtedly consider the following critical questions based on the data of the past 10 years:

1. Is it really so important to hold tight to the 9:1 student:teacher ratio -- one of the sacred cows in independent schools? What could schools pay teachers if the ratio were 10:1 or 11:1? And would this higher ratio enable schools to attract and retain teachers with greater success?
    
2. If schools can't or won't reduce the size of the faculty, why don't they at least freeze the size of the faculty for the next five years? It would only require schools to adopt the discipline of not adding a program without sunsetting something else. You want to add a course in Chinese? Great. But which current foreign language do you drop?
    
3. Let's declare an armistice in the race to build the biggest and best facilities. New buildings are actually a liability in terms of expense, rather than an income-producing asset. So you want a new media center and field house? OK, but don't dig the hole until you've raised the cost plus 25 percent to endow its operation and replacement. At the same time, you should consider the ways you can turn your facilities (an expense) into an income-generating asset by much more aggressive programming on evenings, weekends, and summers.
    
4. If your greatest untapped resource is your intellectual property (independent schools actually do know what to teach and how to teach better than anyone else), why don't you capitalize on that, literally, and enter into the online home school market?
    
5. If equity means, in part, a socioeconomically diverse class and not just a racially or ethnically or religiously diverse class, what would it take to expand financial aid to 25 percent or more of the student body with a large segment of the middle class enabled to access your school?