The Profit in Being a Not for Profit School - Updated

A little over two years back I wrote a blog about 10 L.A. area private schools and how they show surpluses most years.  

Here is the list of the ten schools:

Archer School for Girls

Brentwood School

Buckley School

Chadwick School

Crossroads School for Arts and Sciences

Harvard-Westlake School

Marlborough School

Milken Community School

Wildwood School

Windward School

Each of these schools is a not for profit organization, recognized by the Internal Revenue Service as such under the provisions of Section 501(c)(3) of the Internal Revenue Code.  Each of them does an annual fundraising drive, commonly known as "Annual Giving" which is marketed as necessary to close the "gap."  That gap refers to the difference between the amount of tuition these schools charge and the amount that they claim it costs them to provide the outstanding education they provide to their students.  My question is how real is the gap given the surpluses these schools recognize year after year?

These are the numbers from that blog, along with updates on the two years of tax returns these schools filed in the interim.

Average annual surplus:

2012 - $3,771,152
2013 - $4,271,705
2014 - $4,576,092
2015 - $7,125,818
2016 - $8,018,211

Compensation of the person at the top of the organizational chart:

2012 - $482,453
2013 - $595,335
2014 - $548,445
2015 - $543,791
2016 - $574,501

This time around I'm adding the average compensation of the five highest-paid employees:

2012 - $218,397
2013 - $256,399
2014 - $301,813
2015 - $317,238
2016 - $325,572

In case it seems that those average annual numbers of those five highest-paid employees are outpacing inflation, you're right.  Those increases work out to an average annual increase of 11%.  During that same period, inflation was only 1.3%.

I remember back in 1988 when I was working at one of those schools.  Inflation was 4.4%.  Our raises were 9% for faculty and 7% for other staff.  Private school salaries outpacing inflation is not a new thing.  But it seems the gulf between inflation and so-called cost of living adjustment raises in these institutions may be growing.

There is no IRS regulation that bars these organizations from showing a surplus year after year.  But one wonders why there is that push for "Annual Giving" when these schools are running at a surplus year after year?  Why not just fundraise for endowment as USC recently did in raising $6 billion for their endowment?

The unquenched thirst of colleges and universities

Much of the commentary about the college admissions scandal that topped the headlines recently is that this is nothing more than "business as usual."   Was Jared Kushner's admission to Harvard based on his merits, or the merits of a $2.5 million gift from his father?  Did George W. Bush get into Yale based on grades and test scores, or on the strength of his family name?

Yale University is one of the colleges and universities where students were admitted based on applicants being identified as athletes who were no such thing.  A former soccer coach there accepted bribes to allow applicants who were not soccer players to be designated as recruited athletes.

Money is important to Yale as well as the people who took bribes to "help" applicants.  Look at their three most recent Forms 990 (tax return of a "non-profit")  Their net surplus/deficits for those three years were:

2015 - $1.95 billion
2016 - $1.13 billion
2017 - $774 million

Much of those surpluses come from the huge endowment of Yale University, which according to U. S. News and World Reports stood at $27.2 billion at the end of fiscal year 2017.  The highest paid employee that year at Yale was David Swensen, the university's Chief Investment Officer.  In addition to his base salary of $844,579, he received a performance bonus of $2,974,672 and other benefits/pay that brought his total compensation to a staggering $4,683,382.

Private education depends on more than tuition to thrive.  A certain Los Angeles "Westside" private school that will remain nameless got 25% of its total revenues of $62.9 million for the fiscal year that ended 6/30/2017.  BTW, they had a surplus of $12.2 million for that year.

To do the cutting edge research, hire the best educators and so on is not cheap.  The need to raise money for such institutions is never-ending.  USC had one of the smaller endowments among leading private universities.  So in 2011 they launched an ambitious plan to raise $6 billion in additional endowment.  They achieved their goal 17 months ahead of schedule.

This is one of the factors that has been instrumental over the long-standing tradition of the well-heeled being able to "buy" admission for their offspring through contributions.  California Governor Gavin Newsom called people contributing enough money to put their name on a building "legal bribery" and in a Los Angeles Times story said, "Do you think, seriously, does anyone think someone who writes a $100 million check to a university doesn't have a cellphone of someone who's influential?"

He is correct of course.  But there is another issue here.  Private means private.  A private university, as long as they are not discriminating in violation of the law, can choose who to admit and who to reject.  Legacy admissions, sibling priority and all of those things are in fact legal.

* * *

But that doesn't excuse those who paid outright bribes to cheat the process by claiming their offspring were something they were not.  Who paid to facilitate cheating on SAT tests.  Who claimed a tax deduction for a contribution to a charity that was actually payment for entrance through Rick Singer's "side door."

Speculation is that those parents who are accused will cut deals to avoid jail time.

Stay tuned.

It is a matter of degree...

When I first heard of the college admissions scandal that had resulted in the arrests of 50 people; including actresses Felicity Huffman and Lori Loughlin, I thought back to a movie I saw in 1970.  Mostly because of this image.

That is Ali McGraw and Ryan O'Neal in the 1970 film Love Story.  Ryan O'Neal's character was "Oliver Barrett IV" and the sign Barrett Hall is supposedly pointing to a building donated to the university by his great-grandfather.  Was it donated to get Oliver's grandfather in to Harvard?  Is there a Kushner Hall in Harvard's future?

Making large donations to a school has long been a traditional (and legal) way to influence admissions decisions.  When it comes to the elite private universities, the deck is stacked in favor of the well-to-do from the outset.  Preference in admissions is given to applicants who are the children or siblings of alumnae.  This is something that is not limited to college.  At the best private elementary schools the children of graduates move to the front of the line in the consideration of applications for kindergarten.  As do the applications of those potential students who have an older sibling who was/is a student at that school.

I have personal knowledge of a situation where the parent of an unqualified applicant to an exclusive Westside private school pledged a donation of $50,000 if the school would admit that student.  Ironically, after the student was admitted, the parent reneged on the pledge.  In fact, the parent failed to pay the full amount of tuition.

* * *

The specifics of the allegations matter.  Lori Loughlin and her husband Mossimo Giannuli are accused of paying bribes that total $500,000 to have their daughters identified as recruits to the crew team at USC.  Neither took part in crew before applying to USC.

Their combined net worth is between $90 million and $100 million according to online estimates.  Maybe they felt they couldn't give enough to the university to influence an admissions decision, so they decided to opt for this way of getting their daughters in.

Felicity Huffman is accused of paying $15,000 to arrange cheating on her eldest daughter's college entrance exam.  A cooperating witness claims in the indictment that they proctored that daughter's SAT exam and corrected her answers afterward.  Her score on that exam was 400 points higher than on a practice exam she took herself one year earlier.

Rod Lurie is a former film critic turned movie director/producer.  I am a big fan of his work.  He tweeted this:

I only hope that #PaulManafort does more time than #FelicityHuffman

— Rod Lurie (@RodLurie) March 13, 2019

I wholeheartedly agree with this sentiment.  But the question is, what kind of punishment should Ms Huffman and Ms Loughlin get?  Since they allegedly took tax deductions for the expenses mentioned above, tax fraud comes into play.  Add bribery and this isn't just a misdemeanor.  The fact that the alleged crimes were committed solely to benefit their children isn't a mitigating factor in my view.

How will justice be served in this case?  Stay tuned.