By Dr. Harry Bloom, Director of Planning and Performance Improvement
After the financial meltdown of 2008, banks were subjected to so- called “stress tests” by banking regulators. These were designed to determine how resilient the banks were, how they might fare if subjected to additional adverse circumstances, such as renewed recessionary conditions. At the YU School Partnership, we have adopted the principle of “stress testing” relative to helping ensure our Jewish day schools can sustain themselves under challenging conditions. The findings from our Benchmarking program with fifty Jewish day schools indicates that over half of our schools need to work on improving their scores!
Stress Testing Jewish Day Schools for Sustainability
With the generous support of The AVI CHAI Foundation and Federations and foundations in schools and communities around the country, we have built an aggregate database of 50 Jewish day schools of widely varying sizes and all denominations. Collectively these schools educate over 22,000 students and have operating expenses of in excess of $300 million. We believe that a key day school financial stress test measure should be the ratio of current year Revenue relative to current year Expenses.
Revenue is defined as the sum of Net Tuition (Gross Tuition minus Financial Aid) + Mandatory Fees + Annual Fundraising + Non-Tuition Income (grants, endowment income, and net fees from facilities rentals and value added services (e.g., summer camps).
Expenses are defined as Compensation Expenses + Purchased Services + Purchased Goods (but not accounting charges such as for depreciation).
First, the good news: just under half of the schools in our sample had Revenue to Expense ratios in excess of 1.0. On another key ratio, Net Tuition plus Mandatory Fees divided by Expenses, they averaged 0.8, meaning they were covering 80% of their expenses with “hard income.”
What we found less encouraging was that 1/3 of schools had ratios of 0.90 to 0.99, meaning they were falling short of matching Expenses with Revenue by between 1% and 10%. Their ratio of Net Tuition plus Mandatory Fees to Expenses only averages 67%, meaning they need to raise very large amounts of money from donations and non-tuition sources including foundation and government grants, endowment income, and fee for service income.
Unfortunately, the remaining 10 schools fell short of the 0.9 ratio, some, well short of it. Just over half of their expenses are covered through Net Tuition and Mandatory Fees. Sadly, two of the schools in this category recently announced plans to close their doors and a number of others are in precarious, hand to mouth, condition. How these schools manage to keep their doors open is not “pretty.” Robbing next year’s tuition to pay this year’s expenses, delaying payroll commitments to staff and payments to vendors, overextended lines of credit, and emergency bailout calls to last resort funders: This is a sad way of life for such schools, their leaders, employees and families.
Those schools with wider stress test gaps than 10 percent should seriously consider more radical changes including mergers because their fundamental operating models are simply unsustainable. Fundamental strategic re-thinking and planning by the Board is an absolute requirement in such cases. Facing into the challenges will maximize the choices available to the families and communities served by schools in this condition and is not something to avoid, but rather something to embrace.
Net Tuition + Fees/Expenses
Number of Students
Annual Expense Budget
|Most Sustainable (23 Schools)||1.0 or Higher||80%||
|Moderately Sustainable (17 Schools)||0.9-0.99||67%||7,200||$103 million|
|Least Sustainable (10 Schools)||Under 90%||55%||2,200||$45 million|
A Disciplined Method for Enhancing Sustainability
Fortunately, schools can take steps to purposefully improve their ratios. Implementing benchmarking analysis can point schools to specific areas to focus on. For example, schools can focus on the revenue side of the equation and/or the expense side of the ratio. Many do both.
Revenue boosting “moves” can include:
- Raising tuition in some grades to better mirror the cost per student.
- Professionalizing the recruitment of students by sharpening brand image and focusing parent ambassadors on specific target market segments.
- Improving the sophistication of fundraising—becoming more donor– and less event– focused and better managing the cultivation of major gift prospects.
- Pursuing fee based and rental income, increasing endowment funds, and securing foundation and government grants.
On the expense side of the equation schools can:
- Reduce educational administrative expense by asking senior faculty members to assume administrative roles or administrators to assume teaching roles.
- Lower teaching costs per student through modest increases in section size enabled by teachers trained in differentiated instruction and blended learning, plus the more effective use of teaching assistants.
- Reduce non-faculty costs through outsourcing and joint purchasing.
Schools involved in the YU Benchmarking and Financial Reengineering program have successfully attained ten or more percentage points of ratio improvement over a period of several years, making steady progress each year.
A recent publication “Sustaining Your Day School: 50 Strategies from the Field,” catalogues additional concrete tactics that schools are using.
In the coming weeks, we will post additional blogs that illuminate a number of these key strategies and include case studies featuring schools that have employed them successfully. Stay tuned!