Financing Independent Schools – An Introduction

During every one of my discussions with parents in the Community Meetings this fall the issue of rising tuition came up. Parents asked with genuine worry what should they expect, and is there any alternative to steadily rising tuitions? These questions were consistent with the comments made in the surveys conducted by the Strategic Review Task Force last year. The Board of Trustees has been asking these very same questions as it reviewed the findings of the Financial Task Force in 2007 and again at the January 2008 meeting.

This blog entry explains why tuition increases every year, and addresses how our school can mitigate these increases in order to maintain our commitment to the core value of socio-economic diversity.

Following is a summary of the financial issues:

1. Salaries and benefits make up 69% of all expenses.
2. Salaries and benefits rise every year by 5-7%.
3. There are three sources of revenue: tuition, annual fund, and endowment income.
4. The more we have in annual fund & endowment income, the less we need in tuition
5. With tuition rising at 5% per year, more and more families will qualify for tuition assistance.
6. This additional revenue to fund expanded tuition assistance will come from increases in endowment and annual fund income
7. Because socio-economic diversity is a fundamental core value of the School, the Board of Trustees has an institutional imperative to raise these additional funds

The Necessity of Cost Increases
The financing of an independent school education requires tuition increases of 5% - 7% annually. The revenue is needed to meet rising annual costs such as salaries, benefits (health insurance), utilities, and liability insurance. Salaries and benefits make up 69% of all expenses. Unlike many other professions, teacher salaries are structured like an apprentice model. They start at a low level, Step 1 is $50,000, and increase annually in small increments. There are no large increases when they achieve a mastery level. At SFDS a teacher with 15 years experience earns $70,000. These annual increases should meet or exceed the rate of inflation so that eventually teachers have a wage that enables them to live in San Francisco. It is these annual increments plus escalating insurance costs that increase total annual expenses and necessitate revenue increases.

The Financial Structure of Independent Schools
The components in this simple chart are the three main sources of revenue that SFDS, and every other independent school in the nation, must manage.

lllllllllllRevenue Sourcelllllllllllllllll% of Total Revenue
lllllllllllTuitionlllllllllllllllllllllllllllllllllllllllllllllllllllllllllllll79%
lllllllllllAnnual Fund Raisingllllllllllllllllllllllllllllllllllllllll14%
lllllllllllEndowment & Investment Incomelllllllllllllllllllll6%

The Importance of Non-Tuition Revenue Sources
The only way to mitigate annual tuition increases is to increase the revenue from non-tuition sources: fundraising and endowment. From FY 2006 through FY 2009, thanks to the generosity of our community, both annual fund and endowment income will have increased significantly.

lllRevenue Source lll% Cum. 4 year Inc. llDollar Inc.
lllAnnual Fund lllllllllllllllllllllll48% llllllllllllllllllll$394,000
lllEndowment Incomelllllllllllll66% llllllllllllllllllll$288,000
llllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllll________
lllTotal Non-Tuition Revenue lllllllllllllllllllllllllllll$682,000

As you can see in the chart above, by FY 2009 the annual fund will have increased by 48% and our endowment income will have increased by 66%. During the same time period, the cumulative tuition increase will be 21%. Clearly non-tuition revenue is increasing at a rate much higher than tuition revenue. This additional non-tuition revenue has effectively lowered the magnitude of current and future tuition increases.

Full Per Pupil Costs and “The Gap”
Tuition for the next school year will be $22,310. However tuition income does not reflect the full cost per pupil. The total budget for 2008-09, not including funds for tuition assistance, is $9,861,000, making the full per pupil cost of an SFDS education $24,650 per student. This difference or “gap” between the full per pupil cost and tuition ($24,650 vs $22,310) is $2,340. Non-tuition funds, primarily the School’s annual fund and endowment income, make up this difference. In a purely financial sense, each student and family receives a discount on the full cost of the educational program at SFDS through the allocation of non-tuition revenues.

A Strong Commitment to Socio-Economic Diversity
SFDS is fundamentally and intentionally committed to socio-economic diversity. We must provide access to our school to families from a wide range of family incomes and adult work careers. We understand that diversity of background and experience is a pre-condition for creating a dynamic academic culture that teaches critical thinking. When students are analyzing texts, probing critical questions, and listening to opinions from diverse frames of reference, that is when they learn to think.

Access to and participation in our community by this broad spectrum of families is a cornerstone value of SFDS. Therefore, it presents us with a financial imperative. As tuition continues to increase, more families will qualify for tuition discount. We are committed to providing that opportunity. Funds to support this discount will come from increases in the annual fund and endowment.

The Board fully understands and is committed to pro-active efforts to increase non-tuition revenue even more than the recent past. We understand that in order to be successful, we will have to create a clear and compelling case and present it to potential donors in personal conversations. Personally, I am very optimistic that our community has both the spirit and resources to make this crucial aspiration a reality in the near future.