NonPublic Schools: Part VI--More Detail on Financial Issues: IRS Status, Financial Stability and Business Practices

• NonPublic Schools: Part I--Overview
• NonPublic Schools--Part II Evaluating Mission, Values, & Goodness of Fit for Your Child
• NonPublic Schools--Part III Faculty and Staff Qualifications
• NonPublic Schools--Part IV: Evaluating Academic Program
• NonPublic Schools:Part V--On Accreditation
• NonPublic Schools:Part VI--More Detail on Financial Issues: IRS Status

This too is rather a technical post--but it can't be summarized.

IRS Status
Is the school for profit or not for profit?   If the school is not-for-profit, the school should have available a "determination letter" from the IRS. 

The school should also publish an annual report (typically within 6 months of the end of the fiscal year, which may not be the calendar year). The annual report typically outlines the sources of funds (tuition, other revenue, and donations) and uses of funds (the operating costs of the school.

Financial Stability: Reserves and Endowment
 
Both for-profit and not-for-profit schools should have reserves.  
 
Reserves are funds that are available for unexpected shortfalls in income.  They are somewhat akin to a household's savings account.  Most of us have heard that we should have 3-6 months' expenditures in an account that can be readily tapped (as opposed to certificates of deposit, CDs, that might not be available for emergencies).
 
How much should a school have in reserves?  That is a great question, without a really good answer. If at the end of the fiscal year  (typically July 1 for schools) the reserve fund is less than (total budget/12 = 1 month's expenses) the school's reserve fund is probably too small.  Likewise, if at the end of the fiscal year, the reserve fund is  more than (total budget/12 > 6 months' expenses)  the reserve fund is likely too large, meaning the financial advisors for the school are asleep at the switch, and are foregoing the opportunity to put that money to work by investing in less-liquid assets, such as certificates of deposit. 
 
An endowment is a collection of funds that produce income for an organization.  Most not-for-profit private schools have endowment funds of various sizes.  The funds themselves aren't spent, but the income is.  Some endowment funds are restricted, meaning that the income can only be spent for a defined purpose (for example, financial aid, or athletics, or faculty professional development); other funds are unrestricted, meaning that the institution can decide where to spend the fund.
 
An example of endowment: suppose there's a school that has a tuition of $1,000 per year, and I want to endow a scholarship for one student in perpetuity.  In order to know how much to endow the school, I have to make an assumption on how much revenue will be generated.  I assume that my gift will be invested in mutual funds or stocks, which will generate revenue, at some percentage -- let's say an average of 5% per year.  I also assume that tuition will go up over time, so the size of my original gift will also have to increase.   I decide to give the school an endowment of $25,000, which I expect at the outcome to generate $1,250 per year.  The school will spend $1,000 the first year on a scholarship, and reinvest the $250. 
 
In general, younger schools, those more recently established, will have smaller endowments than older schools.  Also, the idea of building endowment for day schools and k-12 schools is relatively new, gaining popularity in the late 1970s as school costs started to increase.
 
Financial Policies and Practices
 
Private schools all have specific policies and practices governing financial matters. Parents are encouraged to ask the following questions:

• What is the history and financial stability of the school?
 
• Are all expectations regarding tuition payments and fees published and part of a contract that parents sign? (There should be no surprises)
 
• What are the policies and practices concerning payment of tuition? (Examples might be: Is tuition paid monthly or in a lump sum?  Is there a discount for lump-sum payment?  Does the school do its own billing, or does it contract with an outside firm?  How are payment disputes resolved?)
 
• What is the policy on tuition refunds, should the student leaves during the school year? (In general, private schools do not refund tuition in the event a student withdraws, as operating costs do not dimiinish appreciably with the withdrawal of an individual student. The individual school's policy should be very clear. )
 
• Is tuition insurance available? What is covered, and what is not covered? (For example, if you lose your job, does the tuition insurance kick in?)
 
• What is the school policy on unpaid tuition or fees at the end of the school year? (Example: does the school withhold transcripts or recommendations if tuition or fees are still owing?)
 
• Are there tuition discounts for families having multiple children enrolled in the school ("sibling discounts")?
 
• Is financial aid available?
• Are the policies and procedures for applying and receiving financial aid clearly spelled out?
   
• Does the school adhere to NAIS's Principles of Good Practice for Financial Aid Administration?
  
• If not, does the school have another set of Principles of Good Practice?

 

• NonPublic Schools: Part I--Overview
• NonPublic Schools--Part II Evaluating Mission, Values, & Goodness of Fit for Your Child
• NonPublic Schools--Part III Faculty and Staff Qualifications
• NonPublic Schools--Part IV: Evaluating Academic Program
• NonPublic Schools:Part V--On Accreditation
• NonPublic Schools:Part VI--More Detail on Financial Issues: IRS Status

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[Mark Vane]

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