School Leaders Wrestle with Cutting Costs and Raising Revenue to Ensure Financial Sustainability
Editor’s note: This is the last in a two-part series examining tuition trends in independent day schools. This blog focuses on schools’ efforts to cut costs and generate revenue. Part one covers how school leaders make decisions on tuition and compensation. Independent school professionals William Daughtrey, Will Hester, and Kevin Weatherill authored this series, which is distilled from their study "Tuition Trends in Independent Day Schools” at Vanderbilt University’s Peabody College, conducted in partnership with NAIS.
The steady rise in independent school tuitions has motivated NAIS to focus on the steps schools are taking to curb costs, pursue alternative sources of income, and examine other business models to ensure schools’ financial sustainability.
In our study of independent day schools on behalf of NAIS and Peabody College of Vanderbilt University, we surveyed 993 heads of school and chief financial officers and interviewed 26 of those leaders to understand schools’ efforts in these areas. Our research shows that school leaders are wrestling with how to control costs without addressing the small-class-size model that many feel characterizes independent schools.
Independent school leaders believe that families have chosen to enroll their children in their schools to make a significant investment their educations and expect high quality and value for the cost. One leader said, “It’s not a financial challenge; it’s a value proposition challenge.”
Moreover, schools are not willing to entertain any cost-cutting approach that would threaten their school’s value proposition. One CFO put it plainly: “We do not compete on price… We are a product/process school.”
So the question is: How are leaders seeking to contain costs? The options appear limited on the surface. Leaders are universally opposed to cutting salaries, and not much more willing to consider slowing the rate of salary increases, our survey showed. (Many leaders reported that they are acutely aware of the extent to which independent school teacher pay still lags public school teacher pay.)
There’s a greater readiness to tinker with benefits, perhaps because of the skyrocketing cost of health insurance. Altering benefits includes changing the options offered and reducing employer contributions to benefit plans.
School leaders said they are willing to consider certain changes to their programs, such as limiting additions to academic and extracurricular programs. However, many said they are unwilling to cut existing programs, often because they’re considered central to the value proposition and important to a subset of families. It’s worth noting that this is not “cost cutting” in the strict sense of the term.
School leaders expressed some interest in using technology to control instructional costs, and some noted they could offer certain courses with niche appeal more economically through online teaching arrangements. Given the weight independent school families place on both individual student attention and quality of faculty, it seems unlikely that many schools would choose to turn to online learning as a primary cost-cutting measure if it would result in a perceived decrease of the positive impact of small classes and student-teacher relationships.
For schools, the central cost driver stems from employing caring, qualified teachers to lead small groups of students in a traditional classroom setting. One school leader compared attempting to cut costs without looking at this small-class-size model to changing the U.S. government’s budget without touching spending on entitlements.
The vast majority of school leaders reject increases in class sizes or teaching loads. When asked to consider how important a series of measures would be in decreasing costs over the next five years, 80 percent of CFOs noted that “increasing teaching loads” would be “not at all important” or “slightly important.” That number dipped slightly to 74 percent of CFOs when asked how important it would be to “increase[e] class sizes.”
We found a negative correlation between self-reported school-health indicators and cost-containment measures. The few school leaders who identified the above cost-containment measures as “very important” (less than 10 percent) were also more likely rank their school’s “overall financial health” as “poor” or “fair.”
The hesitation to adjust class sizes or teaching loads likely arises from the preeminent value the independent school community places on nurturing relationships in the traditional classroom; cost-cutting measures that appear to detract from that tenet are unpopular.
Independent schools have been discussing other ways to cut costs, including joining consortia and outsourcing services. However, school leaders do not consider these significant in balancing their budgets, our study found. Of the CFOs we surveyed, 27 percent reported that their school is currently in a healthcare consortium, and 17 percent said they participate in a consortium for employee benefits other than healthcare. Comparable shares of CFOs whose schools were not currently in those types of consortia expressed interest in joining one; their ability to do so may be constrained by state regulations regarding the purchase of insurance.
In general, those schools that rely on outsourcing say they do it to keep their school focused on the core mission of teaching and learning. Many school leaders who report outsourcing food service or janitorial services do so because existing staff do not have expertise in those areas, and local companies can provide services at a reasonable cost. Some leaders said they rejected outsourcing certain services, such as nursing, because they were concerned about maintaining a consistent relationship between adults and students.
Generating Auxiliary Revenue
If it is difficult to cut costs, can schools develop sources of auxiliary revenue? The short answer is that most schools simply don’t find auxiliary revenue, beyond summer programs and after-school programs, to be significant support for the operating budget. When faced with a list of potential sources of auxiliary revenue, slightly less than half of chief financial officers identified after-school and summer programs as significant sources of revenue. Schools run many of these programs on a break-even basis, according to our interviews. They are often set up to provide supplementary income opportunities for faculty or to generate goodwill and recruit applicants. However, they are generally not run with significant revenue goals in mind.
Although schools do not currently consider these programs as major earning opportunities, they do hope to increase certain sources of auxiliary revenue. Seventy-five percent of chief financial officers said they expect to increase revenue from summer programs. CFOs hope to increase auxiliary revenue in other ways, too. Forty-eight percent desire to raise revenue from after-school programs, 41 percent seek revenue from facilities rentals, and 35 percent expect revenue from affiliated enterprise fees on farms, inns, etc.
However, school leaders cast an important caveat on these findings: Market pricing for non-school programs and facility rentals often does not fully reflect what it costs to operate those facilities. For example, the cost of keeping athletics facilities in top shape may increase enough to cancel out any marginal revenue from these activities.
Our research shows that cost cutting is a persistent challenge for schools. As one leader noted, “It’s like moving deck chairs on the Titanic. You have to do so much of that to put a dent in the operating budget.”
While schools do generate auxiliary revenue and employ some cost-cutting measures, leaders admit that neither significantly “moves the (financial) needle.”
At the end of the day, schools are creatures of habit. Tuition — which continues to rise — remains the primary source of revenue, financial aid attracts and retains families, and faculty and administrator compensation is essential to programmatic quality.
In the face of such clear and present trends in tuition increases, costs, and spending, independent schools must grapple with an existential tension. Some school leaders say the priority focus must be cost. Others see cost as a tangential concern; they say leaders must address the issue of value.
One school leader poignantly captured this tension: “As long as teaching is 18 kids in a room with a teacher, you’ve taken care of the [cost] variables. You’re working on the margins then. Our challenge is to find a way to talk about the model of 18 kids in a room, or pivot to the place where we say in the 21st century, 40 percent of disposable income goes towards education.”
For ideas about strategic planning for financial sustainability, check out NAIS’s five-part series “Under Pressure” on Independent Ideas.
Has your school instituted any cost-cutting measures or alternative revenue ventures that had a dramatic impact on the bottom line?
If small classes were not a characteristic of your school, how would you define your value proposition?
Has your school clearly identified indicators of value? That is, how does your school know a program is truly associated with your value proposition?
Has your value proposition changed over time? Can your board, administrative team, and community identify your value proposition currently? How do you know?
How does your school account for the cost of a program?