Marianne felt prepared to take administrative leadership of her remote campus, in every area but one. She had come up through the teaching ranks and so was perfectly comfortable with issues around student support, services, and discipline, the curriculum, courses, and instruction, and faculty supervision, evaluation, and support. Marianne also knew that her remote campus had a skilled facility and custodial staff, with central university support. The one area where Marianne had little idea what she was doing was in the campus budget and finances. Fortunately, she had no real budget input and only a little budget responsibility, for which she relied heavily on central university support.
Budgets
Schools, both public and private, operate on annual budgets. To some members of the school community, it may seem like money is neither an object nor a constraint in the operation of a school. Think again. Schools, both public and private, have limited budgets. Spending more on one program can mean spending less on another program. Indeed, school finances can affect everything from a school’s ability to attract and retain skilled instructors, administrators, and staff members, construct new facilities or improve old ones, hire adequate student services and support staff, upgrade or maintain library resources, and improve technology services. If you see cracks in your school’s facade such as programs short-staffed, equipment not repaired, and furnishings deteriorating, the problem may not be simple neglect. It may instead be a budgetary constraint. Schools need sound financial management and skilled financial administrators to maintain their programs. Watch the money. It matters.
Profit
In theory, profit is not an object in American schools at all levels attended by the vast majority of students. About ninety percent of elementary and secondary school students attend public schools. And about ninety percent of private elementary and secondary schools attend non-profit schools. For-profit elementary and secondary schools make up only a tiny fraction of schools at that level. Likewise, about ninety percent of students in higher education attend either a public college or university or one organized as a private non-profit school. Only about ten percent of students in higher education attend a for-profit school. Private non-profit schools generally qualify as tax exempt, giving them the same financial advantage as public schools. Public and private tax-exempt non-profit schools do not pay federal or state income tax on net revenue over expenses. Private tax-exempt non-profit schools have no shareholders and instead operate for charitable and educational purposes. Only private for-profit schools, representing a small fraction of schools, have shareholders with ownership interests and an incentive to operate schools to provide a financial return on investment.
Revenue
Despite that few schools operate for profit, school administrators at all levels, even of public and non-profit private schools, make at least some decisions to increase or sustain revenue. Just as finances are definitely a constraint on school operations, both in the public and private school sectors, revenue is also an object of school operations, and not just in for-profit schools but also in public and private non-profit schools. For reasons explained further below, school revenue generally depends on enrollment. The more students a public school has, the more revenue it generally receives in per-pupil state and local funding. The more students a private school has, the more revenue it generally receives in tuition. Both public and private schools at all levels thus make decisions to attract and retain students. Those decisions can run the gamut from attractive marketing programs and larger advertising budgets, to attractive cafeterias, gymnasiums, and other student amenities, popular new majors and minors, and high-profile, winning athletics programs. Public rankings can also make big revenue drivers. The cost and quality of the education can also be factors.
Efficiency
Revenue, though, isn’t the key metric for a school’s financial survival and thriving. Every financial administrator knows that as revenue goes up, costs can go up faster. Organizations of all kinds, including schools, seek the sweet spot where they fully utilize fixed costs while keeping down variable costs, to maximize revenue against expenses. For schools, that formula generally means filling classrooms. At the higher education level, adding small new majors and programs to recruit a few more students may be tempting, but the costs of hiring additional specialized faculty members to teach small classes may outweigh the revenue gains. At the elementary and secondary school level, enrolling a handful more students may be tempting for the additional revenue, but if the class size exceeds the maximum 25 or 30 students, and the school must split the class into two sections of 16 students each and hire another teacher to cover the extra section, then the cost may substantially offset the revenue gain. Increasing enrollment isn’t the financial strategy. Maximizing facility and labor usage is the financial strategy. Increased enrollment may serve that strategy but only if carefully managed.
Public
Public schools at the elementary and secondary school level generally receive per-pupil state funding as their primary revenue source. State legislatures generally set statewide per-pupil funding at a specific amount, so that local districts and their public schools receive revenue based on their enrollment. Districts, though, may supplement their funding with local property tax revenue. They may also receive federal funding, although generally focused on low-income families and special needs and services. State legislatures may also adjust per-pupil funding to provide revenue floors and ensure adequate funding for impoverished districts. Enrollment, though, remains the key metric for local public school funding. Public colleges and universities likewise receive annual state allocations of taxpayer funds while also depending on tuition revenue, tied to enrollment. Public schools may also derive revenue from endowments, although less common in the public sector than among private schools.
Private
Private schools at all levels receive their funding primarily from tuition revenue, dependent on enrollment. Private schools, particularly at the elementary and secondary schools, may supplement tuition revenue with annual and seasonal fundraisers, effectively reducing tuition costs, especially for families needing relief to maintain their children in private schooling. Private schools also commonly pursue endowments out of which to draw earnings to supplement revenue and reduce or control the tuition burden. The endowments at some private schools are substantial, enabling the schools to reduce tuition costs while increasing program quality. Private elementary and secondary schools may qualify for federal funding, especially around services for special-needs students and meals for students from low-income families. Federal funds may also provide services for private-school special-needs students through local public school districts. A growing number of states have approved voucher systems for parents to choose private elementary and secondary school education for their children, using state taxpayer funding. In the absence of a voucher program, private schools do not generally receive state funding.
Cycles
Schools can face cycles affecting their finances, although the economic cycles for schools may differ from the cycles other organizations face. At the higher-education level, a downturn in the economy can mean an uptick in enrollment in some programs and a corresponding increase in school revenue. Conversely, a strong economy with plentiful jobs can mean a downturn in college and university enrollment in some programs and a corresponding revenue decrease. At the elementary and secondary school level, enrollment in public schools is generally immune to economic cycles. But an economic downturn can affect state tax revenues, causing the state legislature to reduce or refuse to increase per-pupil funding. Enrollment in private elementary and secondary schools can substantially decrease in a sharp economic downturn, when families must send their students to free public schools if unable to afford private school tuition.
Demographics
Demographics can also affect school enrollment and finances. A population surge in a local area because of new employment opportunities, immigration, or other attractions and events can quickly affect elementary and secondary school enrollment at all levels. Local population declines due to plant closures or other demographic shifts can likewise affect elementary and secondary school enrollment. Schools at all levels also generally educate the young. A baby boom nationally, regionally, or locally can substantially affect lower-elementary school enrollment, after which school administrators may see the swell in enrollment work its way up through grade levels and into higher education. Conversely, declines in fertility rates can have gradual impacts up through grade levels. School administrators may, in other words, see enrollment increases and decreases based on fertility rates, local economic factors, population shifts, and other demographics, sometimes from a relatively long way off.
Constraints
Enrollment swings and economic factors can stress school finances and affect their programs. Schools can also have a harder time responding to those financial stresses than organizations in other fields. Schools can have relatively substantial fixed costs around things like facility financing, utilities, and maintenance, other bond and loan servicing costs, pension obligations, and contract and professional services. The largest school costs are generally labor costs for faculty and staff members, often composing 55% to 65% of a school’s budget. Union labor agreements, contractual pay scales, and faculty tenure obligations may make it difficult for a school to quickly reduce labor costs in the face of a revenue downturn. In other fields, labor costs may be more adjustable than for schools. School administrators can have fewer options for responding to financial stresses than financial administrators in other organizations.
Reserves
School administrators should plan for the above economic cycles and trends, whether they can see them coming at a relatively specific time or not. One thing is sure, and that is that downturns in enrollment and revenue will eventually come. School administrators need to prepare for that day. The primary way of doing so is to build reserve funds. The prudent amount of a reserve fund can vary. A typical way to measure a reserve fund is by the number of months of operating costs the reserve fund can carry a school. In the nonprofit sector, a reserve of at least three months, and preferably six to nine months, of operating costs is a common metric. The metric for public schools may be substantially less, more on the order of two months, while the reserve for private schools may be more like the six-months metric for other nonprofits. Building a reserve fund generally requires planning and retaining excess revenue from year to year.
Strategies
Reserve funds can carry a school through a sudden downturn. Yet the school must still have strategies for adjusting their budgets in a downturn. One strategy is to use discretionary costs to balance budgets. Belt tightening out of discretionary budgets may bear the brunt of necessary cutbacks in an enrollment or economic downturn. Those discretionary budgets may include travel and conference expenses for professional development, hospitality expenses for fundraisers and staff celebrations, annual bonuses or merit pay, technology or equipment upgrades, and replacement or supplementation of course and library materials. Leaving vacant positions open and unfilled is another strategy, as hard as that may be on the remaining personnel who must pick up the slack. Discretionary costs are generally small and few, though, and thus often inadequate to manage economic downturns. The other main strategy for responding to financial stress is a tuition increase, although a tuition increase may spur an enrollment downturn, further increasing the financial pressure on the school. Skilled financial management is thus critical to a school during times of financial stress.
Tuition
Tuition is a singularly important financial consideration for all schools at the higher-education level and for private elementary and secondary schools. Students paying tuition, or their parents at the elementary and secondary school levels, have choices. Students in higher education may choose a less-expensive school, and parents of elementary and secondary school students may send them to public rather than private school. Schools thus generally need to prove a value proposition to recruit and retain students. Schools must also provide greater value to justify higher tuition. Schools must also manage costs carefully so as not to drive tuition up to a non-competitive point. School financial administrators are thus wise to be aware of what competitor schools are charging for tuition and offering students and their parents in value. Schools are thus not entirely different from businesses in their concerns for attracting and retaining customers. Ensuring that your school has business-savvy leaders and financial administrators, and respecting their judgments, may ensure your school’s success.
Reflection
Is your school a public school, private non-profit school, or for-profit school? How does that status affect its financial management? How well or poorly managed are your school’s budget and financial operations? Does your school generally have excess revenue over expenses at year end, to add to reserves or fund capital projects? Does your school have an endowment? If so, what is the endowment’s balance, and what percentage of your school’s annual budget does the endowment contribute? What percentage of your school’s annual budget does tuition fund, relative to other revenue sources? What are your school’s other revenue sources beyond tuition? What demographic and economic trends should your school be planning its finances to address? What strategy does your school follow for responding to financial pressures? How does your school demonstrate its value proposition to students and parents? What other schools are your school’s primary competitors?
Key Points
Schools must operate within budgets like other organizations.
Most schools are public or non-profit, committed to educate, not profit.
Schools must still ensure adequate revenue against expenses.
Schools must operate efficiently with respect to their resources.
Public schools depend on state appropriations for their budgets.
Private schools depend on tuition revenue for their budgets.
Endowments, fundraising, and public funds can serve private schools.
Schools must plan for and respond to cycles and demographic trends.
Schools can face budget constraints in adjusting to downturns.
Reserve funds are thus important to school financial management.
Raising tuition, freezing hiring, and cutting costs are other responses.
Schools must show the value for tuition to recruit and retain students.