Lessons Learned from a School’s Closure
DISCLAIMER: This blog is written by parents for parents. The author is neither an accountant nor an attorney, but merely a concerned parent. It is intended as a resource for parents who are navigating the special education system in Connecticut and New York and searching for an appropriate educational placement for their child with specific educational needs, with an emphasis on independent special education schools. This blog is not intended to provide legal support, advice, guidelines, or assistance to families seeking outplacement to a special education school or program for their child. This blog is not intended nor should it be used as a replacement for the advice of a qualified special education attorney. Families in need of legal advice, support, and assistance should contact a special education attorney licensed in Connecticut or New York to discuss the specific needs of their individual student.
Understanding Independent School Financials
I’ve spent a large part of the last ten years looking at public and independent schools in Connecticut and Westchester County, New York. In a previous blog, I mentioned Kildonen, an independent school for students with learning disabilities that closed last year due to financial issues related to low enrollment. In January 2020, the school my son was attending, Soundview Preparatory School in Yorktown Heights, NY, had to close unexpectedly due to financial issues. This caused tremendous stress and turmoil for the students and families of Soundview, who had to scramble to find new placements and enter new schools midway through the academic year. More recently, Giant Steps in Southport, Connecticut recently announced that the school would be closing as of June 30th due to new social distancing requirements of COVID-19 and the school’s inability to put in place satisfactory protections to safeguard its students, faculty, and staff. The closure of these three schools is a stark reminder to parents that you can find the most appropriate placement for your child yet have circumstances beyond your control exert an outsized influence on your child’s academic career.
Most of these lessons I learned after the fact when Soundview closed unexpectedly midyear due to financial issues. I will explore these lessons in detail below, but for now, here they are in abbreviated form: (1) Read the Form 990 (2) Where does my financial aid come from? (3) Does the school have an endowment? (4) Does the school have a mortgage? (5) Has the Head of School changed recently? (6) Has the Board of Trustees changed recently and materially? (7) What is the trend in donations at the school? (8) What are the salaries of senior staff at the school?
(1) READ THE FORM 990.
What is a Form 990? Independent schools that are established as nonprofit organizations must file a Form 990 every year with the Internal Revenue Service, and these Form 990s – essentially a tax return for a nonprofit organization – are publicly available. You can get a copy through a number of online resources like the Internal Revenue Service, Guidestar or from the organization itself, either through a written request or in person. If you make a written request of a nonprofit organization to receive a copy of their Form 990, the organization has 30 days to comply with your request. You also can request the three most recent 990s that the organization has filed, as well as their Form 1023 – the form they filed with the IRS in applying for nonprofit, or 501(c)3 status. The Form 1023 will also include the bylaws and charter of the organization.
What should I look for in a Form 990? The first thing one should look at when viewing a Form 990 is the financial trend over time over a period of years. Is there an operating loss in the most recent fiscal year? Have there been operating losses over a number of years? Have there been large fluctuations in operating performance over several years? While many independent schools operate with a “gap” between the tuition they receive and donations that make up the difference, a multiyear operating loss at any institution is cause for concern. Other trends that can be concerning at nonprofit institutions are volatility – spikes in revenues over different years, or spikes in expenses. Volatility, while inevitable sometimes, is almost never a good thing for an educational institution as it makes planning difficult on a year to year basis.
Was the Form 990 filed on a timely basis? Nonprofit organizations operate on a different fiscal year than your regular tax return. The tax year for most individuals runs through December 31st of each year. For nonprofit organizations, the fiscal year runs from July through June of each year. Therefore, instead of having taxes due on April 15th like the rest of us, nonprofit 990’s are due on November 15th.
(2) WHERE IS MY FINANCIAL AID COMING FROM?
Financial aid is a vital component of a vibrant independent school community. By making education accessible to students who might otherwise not be able to afford it, the independent school provides the whole student community with a richness of perspective and diversity that would not and could not exist without financial aid. If you are receiving financial aid for your student from the school, it is important to understand where that financial aid is coming from. Is the school discounting the tuition for your family, or is your student receiving aid from a financial aid fund that will make up the difference between what your family pays to the school and the headline tuition number?
However, financial aid without a financial aid fund to support such aid is “discounted tuition.” If the school maintains a financial aid fund and supplies funds to the student from that fund, to the school that student looks like any other – they are receiving the full amount of tuition for that year for that child. However, if the school offers financial aid in the form of discounted tuition, that discounted tuition can be withdrawn from the student at any time if the school’s financial situation merits such a withdrawal.
You can figure this out, broadly, on your own. If you know how much tuition the school is charging for your student to attend and you know how many students are in attendance at the school, you can multiply TUITION x NUMBER OF STUDENTS = EXPECTED TUITION REVENUE. Then you can compare this number to Part VIII “Statement of Revenue” in the Form 990, which breaks down tuition and fees under the revenue line item.
(3) DOES THE SCHOOL HAVE AN ENDOWMENT?
What is an endowment? Does the school you are looking at have an endowment? An endowment at an independent school represents financial assets that have been donated to the school for the purpose of investing in order to grow principal and generate investment income over time. Broadly speaking, the endowment of an independent school represents its “savings” which are used to generate additional income through investing. An independent school can choose to tap its endowment in the event of a major purchase or capital requirement, although many independent schools will fundraise for this purpose. An independent school with an endowment may also choose to tap that endowment if it encounters difficult financial times, declining enrollment, or an unexpected expense for which it cannot fundraise independently.
Many independent schools do not have an endowment. Soundview did not. This is not a rarity among independent schools; often only the most financially robust schools are fortunate enough, through their long histories and because of generous alumni, to have developed and grown endowments over time. But the lack of an endowment means a lack of financial cushion during times of declining enrollment, financial strain, or other monetary stressors; it also lacks a pool of investable financial assets which can generate income over time.
(4) DOES THE SCHOOL HAVE A MORTGAGE ON ITS PROPERTY?
Soundview did have a mortgage on its property and buildings. A mortgage on the school’s property is an interesting item. Many independent schools are not fortunate enough to have achieved the financial stability of an endowment. For those schools, their primary assets are physical – land and buildings. But those physical assets are also non earning assets. So what to do, if you are an independent school heavy on physical assets and light on financial ones? The answer is to take a mortgage out on the physical plant of the school, invest the money from the mortgage, and hope to make a spread on the investment return on that money over the cost of the mortgage itself.
(5) HAS THE HEAD OF SCHOOL CHANGED RECENTLY?
Take especial note if he or she was let go during the school year. An independent school community is just that – a community. For a Board of Directors to fire its Head of School in the middle of the year is exceptionally destabilizing to the community. Generally speaking, a school would never fire a school head midyear unless there were serious allegations to warrant such a decision. And also, take note of how long the school takes to hire a new Head of School. A proper Head of School search can take a year, or longer.
The hiring of a Head for an independent school is one of the Board’s most important responsibilities. Generally, this decision, because of its importance, involves input from multiple constituencies in the school community – teachers, parents, alumni, the Board. Most schools engage an independent firm to conduct the search for a new School Head and bring candidates to the search committee who are then vetted by the committee and then the entire Board of Trustees. The process is long and involved, and can take up to a year. For example, Villa Maria School in Stamford Connecticut recently announced the hiring of a new Head of School after over a year in the search process. Soundview, by contrast, terminated its previous Head and hired a new Head of School in spring 2019 during the space of a month’s time.
(6) HAS THE BOARD OF DIRECTORS OR BOARD OF TRUSTEES FOR THE SCHOOL CHANGED RECENTLY AND MATERIALLY?
The Form 990 is required to list the members of the Board of Trustees for the independent school. The Board of Trustees is an incredibly important group and they are crucial to the successful governance and management of the school. They are ultimately the responsible party for the independent school community; they have oversight of the school administration, the finances of the school, strategy, investment, financial assistance, long-term planning, admissions, and so much more. Here, there are lots of questions you can ask yourself about the Board, its composition, and history. Is the board small? Is it composed of just a few members? Has the member of the board changed significantly in recent years? Is the board composed of current parents, past parents, alumni? Is the Head of School a member of the Board of Trustees? How long have the members of the Executive Committee (Board Chair, Vice Chair, Treasurer, Secretary) been in their roles on the Board of Trustees?
There are other questions to consider about the Board of Trustees at an independent school that you can’t answer with a Form 990. But often, it is important to ask them, and endeavor to discover the answers, on your own. Are there connections between trustees and employees of the school? By “connections” here, I am referring to personal connections (family, marriage) or business ones (consulting, financial). Most boards of nonprofit organizations have procedures for proposed new board members. Some boards have Director committees, which is a group on the Board dedicated to recruiting and onboarding new members. In addition, most nonprofit organizations, schools included, have procedures for adding new members to the board; independent schools, for example, very often invite the President of the Parent’s Association to join the Board of Trustees for the duration of their term. A final item to note for independent school trustees is the makeup of the Board itself – how many members are alumni, past parents, and current parents? A board overly comprised of past parents or alumni might not have current concerns or issues for the school at the forefront of their mind when making decisions on strategy and planning.
(7) WHAT IS THE SCHOOL GENERATING IN DONATIONS?
Donations are the lifeblood of any nonprofit organization. Donations fill the gap for an independent school between the tuition revenues and the expense of running the school on a daily basis. Independent schools are more fortunate than most nonprofit organizations, as they have a built-in pool of donors to draw from in terms of current student families and alumni. This assumes, of course, that current families, alumni, and alumni families are willing and able to give to support the school.
(8) WHAT ARE THE SALARIES OF SENIOR STAFF AT THE SCHOOL?
The Form 990 lists the salaries and compensation of everyone employed by the nonprofit organization whose compensation exceeds $100,000 per annum in Part VII of the document. Obviously the list of employees who make more than $100,000 will be longer if the school is larger and older and has more substantial operations. So the best way, in my view, to evaluate whether the school you are looking at is spending a lot on its senior staff is to look at the numbers in comparison to total revenue and compare that number to other comparable schools in the area. To do this, simply add up the total compensation of the employees’ receiving salaries and compensation of over $100,000 and divide that number by the school’s total revenue. That should give you a percentage. Then look up the 990s for a couple of other schools in the area that you think are reasonable comps and do the same math. Then compare. In my experience, a percentage in the low single digits is a much more acceptable number than a percentage in the high teens or above.
CONCLUSION. I share this story with the hope that parents and families looking at independent schools – whether for neurotypical children or for children with special education needs – will follow the advice that I did not, when my family and I first looked at Soundview Preparatory School. I hope that parents and families ask the questions that my husband and I did not. I hope that parents go online and look at the trove of publicly available data on these and other schools for a better sense of how these schools operate on a day to day basis – not just how they educate and nurture our children, but how they preserve that legacy for the long, medium, and in some cases, short term.
Visit the school and walk around. If you find yourself wondering how they support their staff and grounds with the students they have, there’s probably a reason for that. I remember visiting Soundview before we chose to send our son there, and looking around the campus. We saw the the students and the low student-teacher staff ratio, and I remember having a fleeting thought wondering how the school was functioning operationally. If you find yourself asking yourself this question, perhaps it’s worth the effort to explore in more depth.
Ask if you can pay the tuition in installments. I didn’t even know this was a thing until a couple of parents told me they were on an installment plan. Most private schools issue fairly standard contracts that require a deposit payment, unless the school has rolling admissions, is generally due by the end of January, and the deposit payment due with the signed contract can be up to 10% of the forward year’s tuition in order to secure that student’s place in the coming school year. Half of the yearly tuition is usually due in June (three months before school begins) and the second payment is due in December (three months into the school year). Now, of course, many more independent schools are offering installment plans in lieu of the traditional payment plan in light of COVID-19. Paying tuition in installments doesn’t mean you aren’t liable for the tuition for the year in which you signed a contract for your student; however, it can protect you from losing the upfront tuition that you paid if your school suddenly closes due to financial difficulties, as was the case with Soundview.
Ask if the school offers tuition reimbursement insurance. Tuition reimbursement insurance, if available, can provide some protection to a family if your child is forced to withdraw from school prior to the completion of the term due to illness or some other issue. This can be a smart purchase for a family especially if your child is matriculating into a new environment and you are not sure if it will “stick.” It’s not always available and you have to check the insurance exclusions carefully but it could be a good option to have if the school offers it. And if the school doesn’t offer tuition reimbursement insurance, that in and of itself can be a telling sign.
RESOURCES: For nonprofit financial statements, please visit IRS.gov, Guidestar, ProPublica, or request the Form 990 and Form 1023 directly from the nonprofit organization, either in person or via written request. For resources and information about independent schools, please visit the National Association of Independent Schools (NAIS). In New York, for resources and information about New York-based independent schools, please visit the New York State Association of Independent Schools (NYSAIS). In Connecticut, for resources and information about Connecticut-based independent schools, please visit the Connecticut Association of Independent Schools (CAIS). Finally, for a listing of state-approved private special education schools (APSEP) in Connecticut, please visit the Connecticut Department of Education.