February 2nd, 2009
A Harvard Business Review article, “Managers and Leaders: Are They Different?” distinguishes between managers who embrace procedure, compromise, consensus, and a passive attitude toward goals arising from necessities rather than desires; from leaders who adopt a personal and active attitude toward goals, develop fresh approaches to long-standing problems and open issues to new options.
Another HBR article I read in graduate school (and for the life of me, I cannot find the title) discusses the application of situational management: a more autocratic “leadership” style for organizations in a transitional environment, versus a democratic, consensus style during relative equilibrium.
In my opinion, the single greatest impediment for many, if not most, independent schools will be the need to dynamically adapt in a new world order, from within the traditional not-for-profit culture of procedure, consensus, and, well, resistance to change. But it does not take a Harvard Business Review study to address problems and solutions that are more easily approached with common sense.
Anyone genuinely interested in serving on a not-for-profit board does so for one reason: a desire to contribute. To work with a like-minded group toward a common vision. To achieve definable goals. To accomplish something.
And what are the universal complaints? Getting nothing done. Wasting time. Being constantly pestered to write checks. No purpose.
Symptoms of dysfunction
- The prima donna board. In the corporate world, board membership is based on expertise, relationships, or some specific attribute that directly contributes to the management of the organization.
In contrast, the assembly of most not-for-profit boards is somewhat random: a friend of a friend, a lawyer/stockbroker/accountant/ banker (who often join to network for their own business), and anyone who looks like they can write a check. Absent a discrete board structure, too often such members individually contribute little, but nonetheless gum up the collaborative decision-making process by adding one more voice to accommodate.
More is not the merrier, more can be less, much less. It is better to leave a seat unfilled and work with a smaller board, than to invite someone who will not provide tangible value.
- Power struggles. Leadership is most effective when originated within a strong headmaster (executive director, or whatever the principal executive is called). Or, said differently, I have never met a strong school with a weak headmaster. It is a difficult role. The headmaster is the standard bearer; and must engage and develop the board to mutually work toward achieving concrete objectives. Without a distinct and shared sense of purpose, the headmaster is usually eaten alive by the board.
- Too many decisions made collectively. A productive board is a structured board, divided into sub-committees, each with its own mandate, objectives, and timetable. An unstructured board is managerially sloppy; prone to paralysis by analysis, passing the buck, and ultimately dumping on the staff.
- The board ends up writing all the checks. There should be no such thing as a non-fundraising board. However, fundraising is a systematic process, and something is wrong if the board (and their friends) are routinely pressed for the preponderance of contributions. A common flaw is the stockbroker board member who heads up planned giving, but no one wants to point out that good old Charlie hasn’t originated a gift in five years.
- Over-reliance on board consultants. A board development consultant is generally someone who asks the board a lot of questions, and then delivers a report outlining everything the board just told him. They will not provide leadership.
January 27th, 2009
The Wall Street Journal
by Mary Pilon
Trinity Episcopal School survived Hurricane Ike last fall. But then another storm hit — the economy.
The Galveston, Texas, school, where tuition is between $5,000 and $8,000 a year, has seen its enrollment drop 12%, says David Dearman, the head of the school. Many parents of its students were among the 3,000 workers laid off by the area’s largest employer, the University of Texas Medical Branch. At the end of 2008, the school’s endowment was $800,000, down about 20% from July.
The school has ramped up donation efforts through its Web site, and held car washes and bake sales. It stopped using substitute teachers — other staff members now step in when a teacher is out sick. “Our school will survive, but it will take years to recover,” Mr. Dearman says.
Trinity Episcopal School is one of many kindergarten-through-12th-grade private schools caught in the middle of an economic tempest: anemic endowments, dwindling donations, financially strapped parents slashing tuition from the family budget, and an exodus to suburbs with more appealing public schools where costs are lower.
“The discourse has shifting from sustainability to survivability,” says Myra McGovern, a spokeswoman for the National Association of Independent Schools.
The association also has seen more applications from families seeking financial aid. The association processed 146,000 of the School and Service for Financial Aid forms for the 2007-2008 academic year, up from 140,000 the year before. It anticipates the number will climb as parents begin to receive their letters of commitment for the 2009-2010 school year in coming weeks.
Parents also are donating less to private schools. Jessica Gottlieb of Sherman Oaks, Calif., pays $34,000 in tuition to send her 7-year-old and 10-year-old to the Wesley School in North Hollywood. She sees that expense as “a non-negotiable part of the family budget.”
Financial Fallout
How some private schools in the U.S. have been hit by the recession:
- Significant losses to endowment portfolios and decreases in charitable contributions.
- Reports that more parents are seeking financial aid.
- Evidence that some parents are moving their kids to public schools.
Not so for her charitable contributions to the school. Ms. Gottlieb, concerned about the general outlook of the economy, has cut her donations this year to just a fifth of what she gave last year. “It’s not because I believe in the school less; it’s just what we could afford to do. And I know others are doing the same,” says Ms. Gottlieb, whose husband is a movie-industry executive.
To help with the tuition bill, the Gottlieb family has scaled down vacations, opting for camping trips. She ditched her larger car for one that guzzles less gasoline. Ms. Gottlieb started to do her own gardening and handiwork around the house and plans to re-enter the work force.
Schools are feeling the squeeze in their budgets. Many are opting for pot-luck dinners for staff and PTA meetings in lieu of catered events. More endowment mailers are being sent out electronically rather than on paper.
At Phoenix Country Day School, where annual tuition ranges from about $16,000 to $21,000, “airplane portions” of pretzels have replaced muffins and cookies at staff meetings. Seven of the school’s administrative employees have moved into a new office: a “1960s-era former locker room made of corrugated metal and located in the maintenance area,” says Joan Risley, a spokeswoman for the school.
The Phoenix Country Day School’s endowment, like many other portfolios, fell about 30%, to $13 million from $17 million, says Geoff Campbell, the head of school. “Independent schools are challenged at a time like this,” he says. “That will make us be very thoughtful on how we spend it.”
Even though the school has been pounded by a grim local housing market and job losses, Mr. Campbell refuses to cut programs. The school has curbed some routine spending, and Mr. Campbell has pulled in staff members one by one to assess their talents. “I discovered a potential softball coach in the administration,” Mr. Campbell says. “I had no idea.”
Private schools in areas particularly hard hit by the economic downturn are also facing changes. Some children of recently laid-off Wall Street employees in the New York City area and those in the auto-making hub Detroit have been pulled from schools or reneged on contracts for the 2009-2010 school year.
Cornerstone Schools in Detroit doesn’t have an endowment, but relies heavily on corporate and individual donations to subsidize the $3,500 tuition. “Some parents can’t afford that,” says Clark Durant, the founding chairman and CEO of the schools. In 2007-2008, the school raised $7 million in fund-raising events, Mr. Durant says. This year, he estimates donations will be down about 30%.
Mr. Durant is looking into corporate donors outside of the Detroit area and possible “hybrid” programs with other schools to help alleviate costs.
“Nobody likes to have to deal with these difficult circumstances,” he says.
And as if those challenges weren’t enough, some private schools were hit by Bernard Madoff’s alleged Ponzi scheme. Ramaz School in New York City lost $6 million through Madoff investments, according to a letter sent to students and parents. The administrators at SAR Academy in Riverdale, N.Y., also sent out a letter, notifying families that a third of its $3.7 million endowment was lost through Madoff investments.
One option for many families is schlepping to the suburbs, where the public schools are often more highly rated than in cities. Montgomery County School District, which serves Washington, D.C., suburbs Bethesda, Rockville and Silver Spring, Md., has seen an “unexpected” spike in public-school enrollment this year, according to Chris Cram, operations manager with the school district. This year, it received 1,500 new students and anticipates an additional 1,300 for 2009-2010, for a total of 139,000 students. Many of the new students previously attended private schools, Mr. Cram says.
Some parents are opting for loans to help fill the financial-aid gap, says Ms. McGovern of the National Association of Independent Schools. She’s also hearing stories of grandparents stepping in to help pay tuition bills.
The future remains uncertain, even for those who are able to pay for private school. The daughter of Marisol Aviles receives almost $8,630 in scholarships to cover the cost of her education at Cristo Rey High School in Sacramento, Calif. But it will be difficult for the family to pay the tuition for a younger son, who hopes to attend the Catholic school next year as a freshman. Ms. Aviles says she prefers the private school, concerned about gang violence in public schools nearby.
To supplement its scholarship fund, Cristo Rey has ramped up its grant-writing efforts to reach a one-year fund-raising goal of $1.5 million by the end of June. “We still have a long ways to go,” says Joan Evans, an administrator at Cristo Ray.
In September, the home the Aviles bought in 1997 went into foreclosure. Since then, Ms. Aviles has found work part-time cleaning hotel rooms and her husband is putting in overtime as a plumber. They struggle to keep up with the $55-a-month tuition payments.
“The economic situation is hard,” she says. “But we want the best for our kids.”
January 27th, 2009
The Wall Street Journal
By John Hechinger
College endowments have suffered a sharp blow in the financial crisis, with aggregate investment losses of at least $94.5 billion, according to a new survey.
The losses, covering the period between July 1 and Nov. 30 of last year, likely understate the severity of the hit schools have taken, since they don’t include losses in illiquid, hard-to-value investments that many schools have loaded up on. Schools warned that the declines could lead to cutbacks in financial aid.
Endowment income is a critical part of budgets at colleges, especially at private schools. Many schools large and small have already announced budget cuts, including hiring freezes and the curtailing of construction projects.
![[Colleges Rich and Poor Lose Big]](http://s.wsj.net/public/resources/images/PJ-AO316A_ENDOW_NS_20090126191225.gif)
The survey, by the National Association of College and University Business Officers and Commonfund Inc., a Connecticut nonprofit, covered 435 schools and is the broadest tally to date of the markets’ toll on colleges, which held $413 billion in endowment funds as of June 30, when most schools’ fiscal year ends.
The $94.5 billion loss amounts to a decline of 23% during the five-month period, which was less than the 29% drop in the Standard & Poor’s 500-stock index. But if results don’t improve by the end of the collegiate fiscal year, the loss would be the biggest since the association began tracking returns in 1974. And many colleges may be putting off a more severe reckoning by excluding likely losses in private-equity funds and real estate from their figures.
The college business officers’ association, along with TIAA-CREF, a financial-services firm that focuses on educators, also released its annual list of the biggest U.S. endowments as of the end of the schools’ 2008 fiscal year, generally ended June 30. Harvard led the list with its $36.56 billion endowment. At that date, a record 77 endowments had assets of more than $1 billion. Their wealth has drawn recent attention from the Internal Revenue Service, which monitors schools’ nonprofit tax exemption.
The IRS interest follows an inquiry by Sen. Charles Grassley, the senior Republican on the Senate Finance Committee who has been examining the business practices of hospitals and universities. Mr. Grassley has questioned repeatedly whether schools were hoarding their money at a time when tuitions were placing a heavy burden on middle-class families.
Mr. Grassley has suggested requiring the largest college endowments to make the same 5% minimum annual payments as private foundations. The new survey found that schools, on average, spend 4.6%, though many of the wealthiest have spent considerably less in recent years. Terry W. Hartle, senior vice president for the American Council on Education, which represents 1,600 college presidents, said he expected the spending rate at many colleges will rise to 6% because of endowment losses.
On Monday, Mr. Grassley said colleges shouldn’t use their endowment losses “as an excuse” to raise tuition or freeze student aid. “Contrary to what colleges might argue, the weak economy makes a strong case for more endowment spending,” Mr. Grassley said. “If an endowment is a rainy-day fund, it’s pouring.”
January 26th, 2009
For the last few years, I’ve assisted independent schools and other NPOs to borrow by privately placing their tax-exempt bonds with just one mutual fund. For the smaller, or less credit-worthy borrower, a private placement is much cheaper, and much more dynamic, than the overused public offering proposed by every bond industry participant. As such, I am able to converse directly with the mutual funds, instead of relying on an intermediary for feedback on market conditions and buying interest.
For the last few years, I’ve pleading with clients: if you are ever going to borrow long-term, do it now while money is cheap and easy. About fifteen months ago, I worked with a school to place the first tranche of BB-rated, 30-year debt, at a true interest cost of 6 3/8%. We attempted to place the second tranche in August, 2008 at an interest rate of 7 1/4%, but there were delays until October, at which time the mutual funds were unable to buy unrated paper at almost any price. We put the bond issue on hold until after year end. The interest rate today: 14%.
Currently, there are virtually no buyers for bonds with less than an A rating. Credit enhancers are also reluctant to underwrite at lower levels. Incredibly, underwriters are still proposing swaps and other derivative products. I would view all such proposals with extreme skepticism.
January 25th, 2009
My daughter’s middle-school English paper was dreadful; which did not surprise me, since she wrote it in front of the TV while watching Sponge Bob. I said nothing, and let her turn it in (as is) to the teacher at her college preparatory independent school. I assumed that the teacher might be more constructive, my daughter might actually listen, and that one bad grade was a small price for her to learn to be more diligent.
She got an A.
I took the paper to the headmaster. He assured me that the highest standards were upheld, and that he would address the issue with the entire English department.
Subsequently, my daughter turned in another Sponge Bob-quality paper. She got another A, and a special note of commendation.
Later in the year, the school had Career Day, which I thought was a great way to introduce the kids to the world of opportunity outside of our small town. None of the represented careers required more than a two-year vocational degree. Among the speakers: a magician and a paramedic.
Eventually a group of dissatisfied parents met with the headmaster and several board members, who discussed the challenges of running an independent school. It was noted that our small school was about 30 students short of financial stability. At that, one of the parents voiced what we all were wondering: was the school, inadvertently or deliberately, playing to our vanity by lowering the bar (in spite of our insistence that they not), to ensure an uninterrupted stream of tuition payments?
The leadership(?) bristled at the suggestion, but did acknowledge the difficulty of attracting tuition-paying parents in light of the competition from the burgeoning number of charter schools.
I was shocked: if the school actually considered the local charter schools to be their competition, then they had already lost the race.
Subsequently, 75% of the graduating middle school students did not return for high school.
I disagree with some of the “facts” circulating within the independent school community. One is that enrollment is largely unaffected in an economic downturn, since parents will make any sacrifice for their child’s education. That may be true for a core of true believers. But the bulk of the target market, the full tuition-paying parent who is the financial engine for most independent schools, is either utterly priced out of the market, or must make a profound choice of sacrifice. And that dollar is extremely discriminating.
Revlon understands that their customers do not buy make-up, they buy beauty. So what are parents buying when they commit to a five-figure tuition per child?
Posterity. The dream that their child will be better than they are, however “better” may be defined. And quality is an ephemeral quality; certainly more than just learning to multiply. It is teaching a child to reach beyond his grasp; to not just survive, but to compete and win in a global economy.
To become what we ourselves could not be.
As such, I am also ambivalent about the discussion to lower tuition in the current economy. I do not believe that is how parents think. The decision to send a child to private school, to make the extreme financial sacrifice, is largely an emotional one. It the parents perceive value, they will find a way to make the payments. If not, there are plenty of cheaper alternatives.
January 23rd, 2009
» … assist many families in making tuition payments more affordable by providing the funds up front and spreading the payments over a longer period of time than tuition payment plans allow. Tuition payment plans are typically coordinated between a particular provider and the school. However, due to recent financial turmoil, most providers of loans for private school tuition have suspended or canceled lending to the K-12 markets.
Source: National Association of Independent Schools
January 21st, 2009
Ten years ago, my employer suddenly called me back to the company headquarters. My division had been sold to another firm. The industry was consolidating, and the new firm would almost certainly layoff the majority of us upon completing the acquisition. And to be laid off at that time meant a long stretch of unemployment.
As I sat in a meeting with my colleagues, suit jacket buttoned, listening to my soon-to-be new boss, my cell phone vibrated. It was a call I was waiting for: the headmaster of an exclusive private school, one in which I hoped to enroll my two children.
I slipped into an empty office. The headmaster told me he was happy to accept my youngest (entering kindergarten), but that my older son was too far behind, after years in public school, to catch up. If I was interested in enrolling the youngest, he would need a check for $16,500.
The public schools in my area were considered some of the best in the State. It was logistically impossible for my wife to drive two kids to two separate schools across town from each other. And if I lost my job, I wasn’t sure how long I could even pay the mortgage.
I paused, and then told the headmaster that it was an all or nothing deal. I knew he really wanted my youngest to enroll, and I also knew that he had too many empty chairs in my older son’s grade level. I committed to extra tutoring over the summer, so that my son would be prepared by the fall. I asked a secretary to fedex a check for $33,000. And then I went back into the meeting, with all the charm I could muster. (P.S. I kept my job. And that tuition was some of the best money I ever spent)
Last year, my youngest completed her last year of middle school at another private school, one in our new hometown. I am self-employed now and can readily afford the tuition. My youngest had her group of friends, she knew the teachers, and we were part of a carpool. It would have been very easy to stay. And yet my wife and I were so disgusted, we could hardly wait for the school year to end. My youngest is now a freshman at the local public high school. And we could not be more pleased.
Private school unaffordability is not a new phenomenon. Wealthy friends of ours have relied on home equity lines to pay tuition, for years. It has always been too expensive, we will always complain. But when we perceive value, we find the money. Otherwise, there is no easier check not to write.
This time is unquestionably different. Many schools will not survive. There will be many reasons, but ultimately it is a question of perceived value. The successful schools will mine their niche, as they meld marketing with fundraising, endowment growth and management, and the market (read: parental) acceptance of their tuition structure.
January 19th, 2009
A year ago, I started this blog on financial planning for independent schools. It was my professional observation that too many schools approached finance in a somewhat simplistic and fragmented manner, that a comprehensive and integrated approach was critical in the new economic environment, and that I was in a unique position to offer a new voice on the topic.
After a year of blogging, I learned a few things. Blogging is a lot more time-consuming than it looks. Even a short piece can take most of the day to write properly. And with a busy schedule, that weekly output can easily become two months, losing any continuity in the storyline.
I also learned, through questions, site hits, and Google search terms, that I simply did not succeed in my mission. The material was presented somewhat randomly to encourage interest, but by doing so, I did not connect the dots, and failed to illustrate the value of a comprehensive, tactical approach.
I’d like to try again, especially since this year, I believe the subject matter will be more important than ever. Most schools have a sense of foreboding about admissions for the 2009/2010 school year. The debt markets will take time to thaw (especially for those schools who are less than investment grade), and foundations simply cannot meet demand. Something else must be done to bring in dollars right now.
My goal is to write a series of articles, presented by theme, perhaps three-four times a month. For those interested in the content, subscribing by email or reader may offer the most convenient method of notification of new material. If I can expand on any topic, please feel free to comment, and I’ll do my best.
Nick
November 12th, 2008
It was so easy. Follow the Yale/Harvard model of endowment investing. What could go wrong? Barons article can be read here
November 10th, 2008
When to say No
At a time when every school is eagerly soliciting every possible funding source, it is worth remembering that every gift cannot and should not be accepted. Gift solicitation, acceptance and administration should be determined by a predetermined Gift Policies and Procedures.
- Some donors may wish to attach restrictions to the use of their funds that are impractical, illegal, or incapable of fulfillment.
- The gift may be restricted to fund a program that clearly does not serve the greater mission of the school.
- The donor may want recognition out of proportion to the size of the gift.
- The school may not have the expertise to administer the gift; i.e. life estates, unique or illiquid real estate, other illiquid securities.
Gift policies and procedures must reflect:
- Time, resources, and expertise of staff
- A budget
- What types of gifts will we accept?
- What is the process for approving gifts?
- Who will negotiate gift terms?
- What are the due diligence procedures
- Who authorizes gift restrictions?
- Who facilitates transfer of assets?
- Who accounts for the gift and reviews planned gift documents?
- How is the donor recognized?
