By Jeff Mitchell, Head of School, Currey Ingram Academy, Brentwood, TN
It is always a good time to take stock of your financial picture. The forces of the pandemic have expedited and accentuated the need to do so. As a complement to the guidance SAIS President Debra Wilson provides in her article on financial health indicators, this FastStats presents data on trends for several important financial health indicators. SAIS schools are compared with all NAIS schools, with the goal being to consider your school’s position relative to these benchmarks.
Enrollment & Tuition
Figure 1a shows the median enrollment trend over the past 20 years in both NAIS and SAIS schools. For NAIS schools there has been a 5% decrease in the median enrollment and in SAIS schools the median enrollment has not changed.
With enrollment being the primary revenue source in our schools, this clearly presents a financially healthy headwind. As a rule, schools have not been able to rely on the benefits of scale associated with increasing enrollment to support their financial well-being.
The next most obvious place to look is at tuition trends. Figure 1b represents the median tuition in NAIS and SAIS schools over the past 20 years. Also represented is the trend for median tuition, assuming it aligned with the cost of living (COL) over the past 20 years. If the median independent school had increased in line with the COL, the 2021-2022 median NAIS tuition would be around $20,000 and the median SAIS tuition would be around $15,000. This represents about a 50% increase, based on an average annual COL of about 2.25%.
However, by 2021-2022 the NAIS median tuition has increased to $28,538 and in SAIS schools to $22,158. This represents about a 115% increase in NAIS schools and a 120% increase in SAIS schools. Without question, above inflation tuition increases have been the most significant variance in the financial health indicators conversation for independent schools.
A useful analysis is to compare the increases in gross tuition revenue versus net tuition revenue. Gross tuition revenue is the sum of the sticker price for tuition and fees multiplied by the number of students. Net tuition subtracts tuition “discounts” such as financial aid and tuition remission. Net tuition revenue essentially reflects how much income you actually have.
Figure 1c compares gross and net tuition revenue. Notice that 20 years ago gross and net tuition were practically indistinguishable. However, over time, the gap between gross and net tuition revenue has grown significantly. For the years 2002-2003 to 2005-2006 net tuition revenue was on average about 98% of gross tuition revenue. By 2020-2021, net tuition revenue was 83% and 88% of gross tuition revenue respectively for NAIS and SAIS schools. The influence of tuition discounts mostly explains this trend.
The conversation takes an interesting turn as shown in Figure 1d. The graph represents per year tuition increases. This data shows that although tuition increases remain above the 2.25% COL average, they have generally softened over the past 10 years with a clear dip in the pandemic era.
Despite the increasing impact of tuition discounts on net tuition revenue and more modest increases in tuition in recent years, tuition increases are still the main driver of revenue and therefore the operational health of our schools.
Operational Revenue & Expenses
Figure 2a shows the trend for net surplus / deficit (total operating income over total operating expenses). As expected, both operating income and operating expenses have shown steady increases over the past 20 years. Figure 2a shows those increases tend to mirror each other with some variation along the way. The conclusion from this high level and very basic analysis is that our schools have generally run modest surpluses and except for a couple of anomalous times, (economic downturn of 2008-2010) this has been consistent.
Figure 2b shows the trend for auxiliary revenue. This revenue is generated through offerings such as after school, summer programs, and rental income. Note that there has been a steady increase in program revenue. A simple comparison of the relative increase in program revenue versus the increase in net tuition revenue shows the proportional impact of program revenue on the overall budget. For NAIS schools, program revenue accounted for 4.56% of the operational budget 20 years ago, and last year it accounted for 4.44% of the budget. Similarly for SAIS schools, 20 years ago the figure was 3.67% and last year 3.07%. Although not a big player in the typical independent school budget, I might have thought there would have been a relative increase in the impact of program revenue on the operating budget.
Giving, Endowment & Debt
In Figure 3a we look at annual giving as a financial health indicator. For NAIS schools, median annual giving was $362,309 in 2002-2003 and has increased by 82% to $658,594 in 2020-2021. For SAIS schools, median annual giving was $320,830 in 2002-2003 and has increased by 90% to $610,925 in 2020-2021.
Has annual giving increased proportionally with expenses? When we compare the percentage increase in annual giving with the percentage increase for total operating expenses, we find that for NAIS schools the percentage increase in total expenses has been about 80%. Thus, about the same proportional impact on the budget. For SAIS schools, total operating expenses have increased at a slightly higher rate at 110%. Therefore, for SAIS schools it seems that annual giving is contributing less proportionally in 2020-2021 than in 2002-2003 to offset expenses.
Endowment and debt are important financial health indicators to consider, as well. Figure 3b shows median endowment growth. A good news story, it seems. Over the past 20 years the overall median endowment is up 183% ($2.8 million to $8.1 million) in NAIS schools and a whopping 432% ($1.9 million to $10.1 million) in SAIS schools.
Perhaps a more meaningful measure is endowment per student. Figure 3c tells an even better story because, per student, endowment is up even more proportionally: 210% for NAIS schools and 450% for SAIS schools.
But don’t pull out the party favors just yet. Endowment in relation to debt should be considered. Figure 3d shows the median total debt over the past 20 years. Notice that there has been a large increase in the total debt in our schools. An interesting observation from this trend is that huge amounts of debt were taken on from 2004-2010 and the median amount has not changed much in the past 10 years. The percentage increase in debt is 690% for NAIS schools and 700% for SAIS schools. More than offsetting any endowment gains.
Similar to endowment, the more precise measure is to determine total debt per student. Figure 3e shows this trend. As with endowment per student, debt per student is proportionally greater. For NAIS schools there’s been a 769% increase and for SAIS schools a 727% increase. Again, clearly counteracting any endowment gains per student.
Figure 3f takes this one step further and shows the endowment to debt ratio per student trend. It seems that 20 plus years ago independent schools were more debt averse. The endowment to debt ratio for NAIS schools was 3.58:1 and for SAIS schools 2.12:1. For the past 15 years, the average endowment to debt ratio for NAIS schools has been 1.16:1 and for SAIS schools 098:1. Essentially, the same amount of endowment as debt. However, the average for the past five years is closer to 1.25:1 for both NAIS and SAIS schools. Best practice and recommendations from ISM and NBOA would see this ratio at least 2:1, or higher.
Independent School Management (ISM) Stability Markers
Independent School Management (ISM) provides very useful school sustainability indicators, called Stability Markers. The Stability Markers are a comprehensive quantified list of operational and cultural targets that schools can use to assess their long-term sustainability and viability. For example, the Hard-Income Driven Stability Marker is pertinent to this analysis. This indicator of financial health shows how well a school is paying for its expenses with reliable “hard income” from tuition, fees, and program revenue, after tuition discounts are applied. For this measure of financial health, we divide net tuition revenue by total operations expenditures. Figure 4a shows the data trend for our schools.
Points are awarded for each of the 15 Stability Markers. The sum of all Stability Markers results in a “stability score.” In this FastStats, I am only using the two Stability Markers that speak to financial health most directly.
For the Hard Income-Driven marker, points are awarded as follows:
The more points the better — it is a sign of a healthier financial picture for the school.
Note that the median net tuition ratio over total operation expenses in our schools has hovered around 80% for the past 20 years, with no appreciable movement. Although the Stability Markers are aspirational and few schools score high on all of them, it is quite a statement that the median for our schools has not really approached the scoring range on this marker.
Another financial health indicator is ISM’s “No. 1” Stability Marker: Cash Reserves, Debt, and Endowment Mix. For the first step in this multi-step calculation, “sum all cash reserves and express as a percent of operating expenditures.”
Figure 4b shows the cash reserves of NAIS and SAIS schools as a percent of operating expenditures. DASL has collected data relevant for this analysis for the past four years. The data seems clear. For NAIS schools, total median cash reserves relative to operating expenditures has trended from 12% to 14%. For SAIS, cash reserves are about 5% of operating expenditures. ISM awards points (0-15) as follows:
Thus, NAIS schools score in the middle range and SAIS schools score in the low range.
For the second step in this calculation, compute the ratio of total endowment to total debt. As noted already in Figure 3f, for the past 16 years the ratio of endowment to debt has been essentially 1:1.
On ISM’s Stability Markers the median for NAIS and SAIS schools rank at the bottom of the points scale where:
For the third step, ISM states “express annual debt service as a percent of operating expenditures.” Figure 4d is informative. There’s a clear trend that both NAIS and SAIS schools are allocating proportionally more of their operating expenses to service debt, from around 2% 20 years ago to over 4% in 2020-2021. ISM awards points as follows:
At around 4%, the median for both NAIS and SAIS schools is clearly low on this measure, as well.
As a final step, ISM then suggests that you average (B) total endowment to debt and (C) debt service as a percent of operating expenses.
For NAIS schools in 2020-2021: B + C / 2 = 11.37 + 4.18 / 2 = 7.76
For SAIS schools in 2020-2021: B + C / 2 = 5.17 + 4.45 / 2 = 4.81
Then take the average of B and C and average it with A, reserves as a percentage of operating expenditures.
For NAIS schools in 2020-2021: A = 1.28
For SAIS schools in 2020-2021: A = 1.41
For NAIS schools in 2020-2021: A + BC / 2 = 1.28 + 7.76 / 2 = 4.52
For SAIS schools in 2020-2021: A + BC / 2 = 1.41 + 4.81 / 2 = 3.11
ISM then says to award points out of 15. NAIS schools land at 4.52 and SAIS schools get 3.11 out of 15.00 points. Although a lofty financial health indicator, our median performance seems to leave room for improvement.
Assets & Liabilities
This section compares assets and liabilities and provides a snapshot of our school’s net value when all assets and all liabilities are considered.
Figure 5a shows the median total assets for NAIS and SAIS schools. Again, DASL only has data on this measure for the past four years. Note that the median total assets for all NAIS schools is around $20 million and for SAIS schools, close to $30 million — with a sharp increase in assets in the past three years.
Figure 5b shows the median total liabilities for NAIS and SAIS schools. For NAIS schools, median total liabilities have increased from about $8 million to $9 million. For SAIS schools, the increase in liabilities have been more dramatic, from about $8.5 million to $12.5 million. The quick conclusion seems to be that there has been a disproportionate number of capital projects that have hit the books in SAIS schools.
Figure 5c shows the ratio of total assets to total liabilities. This might be the most useful analysis in this section. The NBOA and other authorities, recommend an asset-to-liability ratio of at least 1.5:1. Over the past four years both NAIS and SAIS schools have been at a seemingly healthy 2:1.
Step 1: Express cash reserves as a percent of operating expenditures.
Step 2: Calculate the ratio of total endowment to total debt.
Step 3: Compute annual debt service as a percent of operating expenditures.
Step 4: Compute the Cash Reserves, Debt, Endowment Mix Stability Marker from the above.
There has been a sharp increase in both assets and liabilities in the past four years, especially in SAIS schools. When total assets to total liabilities is calculated both NAIS and SAIS schools have maintained a ratio above 2:1, exceeding the baseline recommendation of 1.5:1.
Overall, the message is one of caution. Although there are indicators of financial health, there are several red (or at least yellow) flags, highlighted by our cumulatively low performance on the Stability Markers. All measures used in the analysis are medians, and representative of the “middle values” in the distributions of scores. This is not an analysis pointing to what’s happening in those schools experiencing the most financial challenges, rather describing what is happening in typical schools.
Additionally, we might be concerned that being in a 30-year high inflationary period will expose our vulnerabilities even more. As pointed out in the analysis, beyond inflation tuition increases have been the primary reason why our schools have kept abreast of steep increases in operational expenses. Considering the long-term trend for enrollment in independent schools has been essentially flat, what would a tuition increase that matched or exceeded current inflation (around 6% currently) do? Tuition increases beyond inflation might cause an exodus, but tuition increases below inflation might lead to even more financial instability.
As noted at the beginning of this piece, it is always a good time to take stock of your financial picture. Although I am concerned about our schools as we head into a higher inflationary period, the pandemic has spurred modest enrollment growth in our schools in the past two years, which bucks the long-term trend. Perhaps schools will wisely use this mini boom to make sound financial decisions that will brace them against what may be ahead.
In addition to the good work of SAIS, including its intentional and thoughtful integration of financial health indicators into the accreditation process, there are some very useful resources out there. Here’s a short list of some I have found helpful in recent years:
In this recording, we joined SAIS President Debra Wilson for the new Trustee Education Series focused on best practices in independent school governance, including boundaries, confidentiality, committee structure, and more. The curriculum is designed for heads of school, board chairs, and trustees.