The Independent School Financial Model is Broken

Fall 2012

By John S. Farber

All of us who work in independent schools have read a variety of material regarding strategies to improve our financial model. But as I see it, in our current economic conditions, there are really only two possible solutions for improving our financial structures. We can no longer rely on our traditional strategy of increasing tuition year after year and fund-raising often for our endowments and programming. Even families that love what we do for their children are clearly tired of paying higher tuition bills annually and writing check after check for philanthropic activities and events. Many of them simply can’t do it anymore. Therefore, it is imperative that we all start looking at ways to cut costs and add revenue to our operations via non-tuition revenue sources.

Cutting Costs

Pat Bassett, president of NAIS, notes in his presentation on “The New Normal” that most regions of the country are experiencing a flattening or decline when it comes to families who can afford to pay independent school tuitions. NAIS reports that, on average, 84 percent of an independent school’s budget is currently derived from tuition. What is going to happen when this demographic trend expands and there are even fewer families able or willing to invest in an independent school education for their child?

The good news is that many schools have already been successful in reducing their expenses as much as possible. Given that the typical independent school spends 75 to 85 percent of its budget on people, they have focused their cost-cutting measures on the other, non-personnel expenses. 

In 2006, for example, I had the good fortune of working with a handful of business managers and heads of school to create the Independent School Benefits Consortium (ISBC). We all realized that health benefits for our employees are one of the major expense items in school budgets. We wanted to do whatever was possible to continue providing a great product but also reduce our risks and costs. After an extensive search, we selected an excellent local agency that has guided us and helped us achieve our health-benefit goals of choice, price, and service.

We started the ISBC with 24 Ohio schools, but it has since expanded to 52 schools in six states. We recently celebrated the fact that our efforts had resulted in more than $2 million in overall premium savings, while expanding plan offerings and enhancing customer service for all schools. Perhaps the greatest measure of the consortium’s value to schools is that none of the original member schools has chosen to leave our consortium. 

To keep our expenses as low as possible, members of our ISBC Steering Committee meet quarterly or participate in conference calls with our agent of record. Premiums and increases are controlled based on an individual school’s track record from a previous year. We also created a wellness program that encourages school and individual engagement by providing renewal discounts to schools that achieve wellness results. By identifying the top health risks and employee interests, ISBC provides focused education and resources to assist employees to improve their health. 

ISBC’s results have been terrific, and we look forward to continued expansion. This collaborative effort is just one example of how school leaders can collaborate, learn from one another, and save operational costs all at the same time. The New York State Association of Independent Schools (NYSAIS) has a similar consortium for health care benefits. I’m sure, when we get in the habit of focusing on cutting costs rather than raising tuitions, we’ll find numerous other creative ways to reduce expenses, either as individual schools or as consortia of schools.

Non-tuition Revenue

We have always held the assumption in independent schools that we could provide all of our services at less than cost and then employ fund-raising to make up the difference. Those days are over. Studies indicate that the top 5 percent of our country’s wealthiest individuals feel “less wealthy” today than a decade ago. This is a result of the economic downturn, increasing health care costs, loss of planned retirement income, etc. Consequently, these former prime targets for donations are now cutting back and decreasing their philanthropic support across the board. 

This is truly scary for independent schools. How do we change from our traditional model focused solely on tuition and fund-raising to a new one focused more on non-tuition revenue, knowing that most nonprofit organizations are risk-averse and take a very conservative fiscal approach? Part of the answer lies with the board. One of my past board members gave me some great advice several years ago as we were searching for new volunteers to serve on our school’s board. He said that, in the old days, schools used to seek board members who could contribute one of the three “T’s” — time, talent, or treasure. Now, he said, you have to find individuals who can contribute all three. We still need board members who will contribute their time and treasure, but equally important today, our boards must be filled with as much talent as possible — especially strategic, forward-thinking members who can support the exploration of new, connected entities that provide an income stream to the school.

Without question, increasing non-tuition revenue is more difficult than cutting costs. Thus, this area of school finance is clearly the one that needs the most strategic thought and development. Allen Proctor,1 an economist and former CFO of Harvard University, is a strong proponent of nonprofit organizations finding a new business model. He claims that we cannot assume that philanthropy will play a more significant role than it currently does. We don’t know what the future holds, of course, but we do know that, in every decade over the past century and a half, we’ve experienced a recession. So, in order to stay steady through the economic ups and downs, we need to look at entrepreneurial development of profitable activities based on the expertise and business infrastructure of a school’s core activities — and use those profits to sustain our key missions. In other words, Proctor believes that a nonprofit organization should do anything possible to increase revenue while staying true to its mission. The goal should not be just to “break even” or “not lose too much.” The goal should be profitability.

Wait! You’re probably thinking that you already have non-tuition revenue generators in your school. Correct? I bet your mind went right to summer camp, auctions, extended-day programs, facility rental, and parents’ association events. These are wonderful ways to add non-tuition dollars to your operating budget. The problem is that the people who are writing checks for these “extras” are mostly part of our existing school families. If we keep going back to the same well over and over again, one day we are going to find that it is dry. The smart move today is to reach out to new constituents/customers who are not already making major financial investments in our schools.

In this regard, we need to look at our schools as two businesses operating under one roof. One business will be totally mission driven — educating our students in ways that we believe will serve them best — while the second will create and run profitable activities whose profits are then reinvested in the school. The second group of activities can be mission-related, but they don’t have to be. If there’s a good way to raise revenue that is not mission-focused, it’s fine to do so because that revenue will primarily be dedicated to supporting the school’s mission.

Many independent schools have instituted successful non-tuition revenue streams, such as expanded summer programs, adult education, tutorial centers, teacher institutes, online curriculum, and a host of other ideas related to education. I believe that these all have merit, but I am not convinced that they are the long-term solution — or at least not the only solutions. 

Proctor sums it up best by saying that we must find a new business model. He gives the example of the Columbus Zoo in Ohio, whose nonprofit mission is the conservation of endangered species. In order to serve its mission well, the zoo owns a golf course and a water park and is building a hotel. None of these secondary endeavors will save endangered species, of course, but they will generate money that can be used to save endangered species. An obvious example in independent education is the Kamehameha Schools (Hawaii) whose income generated from substantial real estate holdings subsidizes the education of hundreds of native Hawaiians every year. Albuquerque Academy (New Mexico) also has significant real estate holdings that support the school’s educational mission.

Of course, there are other ways to generate revenue besides through real estate holdings. Calvert School (Maryland) has had enormous success with its home-school curriculum and new virtual middle school. Elmwood Franklin School (New York) has done well with its on-campus tutorial center for students outside its school’s community. Lexington School (Kentucky), a K–8 school, has created several revenue-generating initiatives, including a learning center for students with dyslexia (essentially a school within the school) and a college counseling service for the broader community. The School in Rose Valley (Pennsylvania) has created a profitable mini-camp program, which it runs during the local public school vacation weeks and in other weeks in the year when families need activities for their children. These are weeklong, theme-based learning camps focused primarily on the arts and sciences. Sandy Springs Friend School (Maryland) has developed what it calls The Adventure Park. Open all summer, and aimed at families, the park is essentially a sophisticated ropes course that the school describes as “an aerial forest adventure.” 

Meanwhile, a number of schools have opened, or are in the process of opening, overseas sister schools. In some cases, the schools generate revenue, but they also generate international name recognition and valuable educational opportunities for their students. Schools building revenue globally include Wasatch Academy (Utah). In June 2009, the Chinese Ministry of Education granted the very first license in the history of China for the joint cooperation between Wasatch and Ruian High School. Through this cooperative effort, Wasatch is able to provide a dual diploma program to students at Ruian High School.

In the fall of 2010, Beijing National Day School also started a dual diploma program with Wasatch. Most recently, the school has established a partnership with Shishi High School in Chengdu, China. Shishi, often cited as one of the oldest schools in the world, was founded by Wen Wang in 143 BC during the Han Dynasty. Wasatch has also agreed to work with Steven Zhou, founder and owner of Federal International English Language Testing System (IELTS), to establish a fully private high school for Chinese students based on Wasatch Academy’s curriculum and pedagogy. In addition, the school is working on partnerships in India, Ecuador, and the United Arab Emirates.

Shattuck-St. Mary’s School (Minnesota) is in discussion with potential partners in several countries to open international schools. The models vary from completely new, stand-alone campuses funded by investors to school-within-a-school partnerships with existing foreign schools seeking to enhance their offerings to local students. They all share many common elements, however. Students will graduate with a Shattuck-St. Mary’s degree, having satisfied the school’s graduation requirements; classes are taught by native English-speaking teachers who are trained at Shattuck-St. Mary’s; and students are offered intensive ESL support wherever needed. The result will be a degree and a transcript that has credibility with U.S. colleges and universities. Not to mention the net revenue that will go to Shattuck-St. Mary’s bottom line.

“International Shattuck-St. Mary’s School campuses offer an opportunity for our school to leverage our skills in educating international students, while at the same time developing very appealing revenue streams,” says Nick Stoneman, the school’s president. Formerly the head of school, Stoneman took on the newly created position of president this past July. The position was created to focus on developing international school opportunities.

Allen Proctor argues that, in good economic times, nonprofits must generate surplus revenue because, in a recession, they will likely have to operate with a deficit. For the past two centuries, every decade has had a recession — so we know that recessions will come around again. To weather these ups and downs well, we need a new business model that takes non-tuition revenue seriously. 

I hope that all of us in the independent school community can help each other and head out into this new territory together. Before we created ISBC, no one had considered the idea of a health benefits consortium as a solution for decreasing school expenses. I’m convinced that many exciting and lucrative business opportunities are available for our schools if we are brave enough and committed enough to embrace this challenge and share our knowledge.

I have been successful in convincing my board that this is such an important issue that we are about to leap headlong into the “for-profit fray.” We have hired a director of new business development on a part-time basis for the upcoming school year. By this time next year, I hope that I will be writing a second installment to this article describing the mind-expanding process we are about to embark upon — and the revenue we need. Stay tuned.


1. See Allen Proctor’s TEDx Talk at
John S. Farber

John S. Farber is head of Old Trail School (Ohio).