Transcript Slide 1

Financially Sustainable Schools
Six Steps to Re-engineering Your School’s Financial Future
Corey McIntyre, NAIS Chief Financial Officer
Your Financial Challenges
?
2
Independent School Goals
Sustainable, Excellent, and Affordable?
 NAIS school tuitions increasing faster than cost of living
– Average of CPI +3% 1995 - 2005
 Parents demand highest quality
 Improve quality = add cost
 Add cost = raise tuition
 Accessibility threatened
 John Maynard Keynes: “Animal Spirits” of uninformed
optimism or pessimism
3
Cost Disease Model – W. Baumol1
Activity
Industries
Characteristics
Annual productivity
improvement averages
General inflation
Market wage increases
Less: productivity
improvement
Price increases required
1 1966 William
Dilemma
Productivity stagnant
Theater, Heath care,
Legal Services, Fine
Dining, Education
Labor intense
Hands-on commitment
Personal attention
Independent schools:
0%
Productivity enhancing
Manufacturing,
Technology, rest of
economy
Automated production
Economies of scale
Consistency
US economy:
2%
3%
3%
0%
3%
3%
-2%
5%
1%
Baumol, William Bowen. Performing Arts: Economic
4
Group Problem-Solving Approaches
Less formal
Inputs
Processing
Speculation
Hear-say
Reaction
Emotional
response
Potential
Outcomes
No new info
Treatment of
symptoms
“Rinse and
repeat”
More formal
Opinions
Anecdote
Facts
Data
Casual analysis Systematic analysis
Judgment
Analytic rigor
Style preference &
“Clean slate”
assumptions
framing
Modified views
Course
New views
Complete
adjustments
overhaul
Measurable plans
5
Data-driven Decision Making
 19th century Rx: Leeches
 Pierre-Charles-Alexandre Louis
(1830)
 Mortality Rates for Treatment
of pneumonia 77 patients:
– Leeches used early: 44%
– Leeches used late: 25%
6
RIGOROUS ANALYSIS &
INFORMED DEBATE
DATA
STRATEGY
& Other
Sources
FEEDBACK
7
Truth
“Truth never damages a cause that
is just.”
Mahatma Ghandi
8
The Six Steps
1. Trend analysis
2. Ratio analysis
3. Ten financial planning assumptions
4. Data markers of school success
5. Re-engineering strategies
6. Projecting alternative & preferred
financial futures
9
Step 1: Trend Analysis
Where have you come from, where are you going?
 Key questions:
–
–
–
–
5 and 10 year trends
Projection of trends into future
Defining benchmark group
External trends
 Tasks:
– Run your numbers
– Compare to others
– Collect environmental data
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Core Sample Trends
25%
* Dollars
adjusted
for inflation.
20%
15%
10%
5%
Average
Total
financial aid
headcount
grant
0%
Median
teacher
salaries
Median
tuition day
% Chg 2000-2005
18%
18%
7%
20%
% Chg 1995-2000
22%
10%
4%
17%
11
National Admissions Trends
350
300
250
Apps
Accepted
Enrolled
Log. (Apps)
Log. (Enrolled)
Count
200
150
100
50
0
2002
2003
2004
StatsOnline Survey Year
2005
2006
12
Shifting Aid Applicant Pool
10
12.5
12.6
18.1
17.1
17.2
17.9
17.6
22.5
21.3
20.3
19.8
11.8
12.4
15
10.8
10.3
10.2
10.1
20
18.7
18.4
25
20.2
21.7
30
15.4
00-01
01-02
02-03
03-04
21
22.2
35
5
0
0-20K
20-40K
40-60K
60-80K
80-100K
100K+
Income Range
Source: School and Student Service for Financial Aid (SSS) processing system data
13
Sample Trend Analysis
 NAIS Trends understood
 What about your school
 Extending StatsOnline with Excel
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Long Term Trends
 Annual giving average up 24% 2002 to 2005
Average gift and participation rates:
– Current parents
$1,000
– Trustees
5,150
– Alumni
358
– Grandparents
705
63%
93%
16%
0.3%
15
Sample NAIS School
16
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Step 2: Ratio Analysis
Snapshot of ratios vs. benchmarks
 Key questions
– Establishing benchmark measures
– Understanding differences
– Strengths/weaknesses
 Tasks
– Run reports - Online Financing Schools Calculator
– Pursue resulting lines of inquiry
18
19
20
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Honor success with caution
“Even if you're on the right track, you'll get
run over if you just sit there.”
Will Rodgers
1879-1935
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Data-informed questions
 Tuition and financial aid lower than peers
– Charging too little?
– Charge more and increase the number of students
receiving aid and the aid amounts?
 Annual giving per and special events income lower than peers
– Opportunity?
 “Other income" better than peers
– Why? Can this continue?
 Salaries and benefits expenses competitive even with smaller
budget
– How. Can this continue?
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Data-informed questions
 Higher student per faculty ratio than your benchmark schools.
– Sustainable? How do you know?
 Efficient student to teacher ratios and lower average salaries.
– Why? Younger faculty? Clever scheduling? Faculty morale
and recruiting time-bomb?
 Lower student to administrator ratios
– Why? Advantage or inefficiency?
 Annual giving participation for parents and trustees favorable,
but average gifts are lower. Why? Improving?
 Alumni participation rate is extremely low. Opportunity?
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Data-informed questions
 Admissions funnel less competitive; student
attrition is slightly higher.
– External and internal surveying and marketing
needs?
 Non-compensation expense per student (i.e.,
program and instruction-related budgets) is
nearly 25 percent lower. Concern or strength?
 Endowment per student is significantly lower.
Improvable?
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Step 3: Ten Financial Planning Options
Objective assessment of your position on ten key continua
 Key questions:
– Where do you fit in the market?
– Where to want to be?
– What fits your mission and inherent strengths and
opportunities?
 Tasks:
– Study, interpret and debate all of the above
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Ten Planning Assumptions
1. Market position and
pricing
2. Affordability
6. Class size
7. Facilities, equipment &
technology
3. Tuition dependency
8. Debt
4. Staff salaries
9. Giving
5. Program and staff
10. Alternative revenue
streams
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Market Position and Pricing
•
Factors to understand:
• Demand, demographics, family incomes
• Attrition, signs of pushback on price
• Mission imperative relative to tuitions
•
Pricing strategy options:
• Higher:
5% and above
• Moderate:
3 to 5%
• Low:
Less and 3%
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Affordability
Tuition
“Full pay”
Income*
% of Families in
US at income
Level
% of Income
for tuition
Lower
$13,635
$99,390
13.7
Middle
$15,675
$106,112
14.8
17 – 18%
Upper
$17,450
$111,963
15.6
*Minimum income to pay tuition at amount listed. Assumptions: Using SSS
Methodology for a family of four, two parents, two children, parents age 45,
both work, no assets - parent or student, DC state/other taxes, no COLA
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Selected Planning Assumptions
 Faculty salaries
–
–
–
–
–
Market trend, future expectations
Competition from public schools
Climate advantage
Attrition, age of faculty
Hiring practices
 Class size
– Scheduling options
– Faculty load
– False perceptions and sacred cows
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Selected Planning Assumptions
 Facilities, equipment, technology
– Age, deferred maintenance
– Maintenance cost
– Technology integration
 Giving
– Capacity
– Friend raising, seed planting
– Expectations and objections
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Step 4: Ten Data Markers of Success
Define numerical markers to measure progress toward
goals.
 Key questions:
– Measures of educational success
– Alignment of budget to those measures
– Proxies from successful schools
 Tasks:
– Determine where you stand relative to markers
– Define your basic assumptions
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NAIS Data Marker Guidance
 Use to provide context
 Indicators that inform, not goals themselves
 Understand inter-relationships
 Learn to reconcile adjust accordingly
–
–
–
–
Mission
Location
Endowment
Market position
 Avoid ratio envy
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Ten Data Markers of Success
1. Market demand
– Greater than 2.5 applications per opening
2. Annual attrition
– < 7% day students; < 10% boarding
3. Giving
– Parents: > 65% participation, $1,000 average gift
– Alumni: > 20% participation, $300 average gift
– Trustees: > 95% participation, $5,000 average gift
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Ten Data Markers of Success
4. Competitive faculty salaries
5. Affordable tuition, moderate increases
6. Financial aid
20% to 25% students receiving aid
Average award 50% of tuition
7. Students ratios
> 10:1 to faculty > 6:1 total staff
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Ten Data Markers of Success
8. Professional development and technology
> 1% of budget for professional development
> 2% for technology
9. Value of endowment
> $25,000 per day student
> $250,000 per boarding student
10. Student outcomes
> 95% matriculate to college
> 95% graduate from college, less than 6 years
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Step 5: Re-engineering Strategies
Develop plans to pursue the objectives you have set
 Key questions
– Priorities, biggest vulnerabilities
– Communication strategies
 Tasks
– Team or task force formation
– Entrepreneurial opportunities
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Possible Strategies
 Grow enrollment (without growing staff)
 Capitalize upon intellectual property
 Full utilization of physical assets
 Enhanced fundraising to build endowment
 Increase “productivity”
 Moderate the arms race for new facilities
 Sunset programs. Undertake periodic “sacred cow” hunts.
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Revenue Enhancement
 Grow enrollment (without growing staff)
 Capitalize upon intellectual property
 Calvert School (MD): curriculum for home-schoolers (net
$1.5m/yr). Now one version of website in Russian.
 Elmwood Franklin (NY): Achieve! Storefront Tutorials
(projected $100K/yr.)
 St. Richard's School (Indianapolis): auxiliary education
center for tutoring, technology, adult education, testing
preparation (SAT), GED
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Revenue Enhancement
 Capitalize upon intellectual property (con’t)
 The Norman Howard School (NY) -- EnCompass:
Resources for Learning, struggling learner assessment,
coaching, tutoring, college LD assessment & guidance;
training/consultation for schools; community workshops
and seminars.
 San Francisco School (CA): Kids Battle the Grown-Ups trivia
game co-authored by 6th graders. Net $70K royalties so
far. 2nd game, Kids Rule, now carried by Wal-Mart and
Toys “R” Us.
40
Revenue Enhancement
 Full utilization of physical assets:
 Lake Forest Academy (IL): Outsourcing to Sodexho weddings ($500K/yr);
sale of adjoining property to high-end developer for endowment
 Shattuck-St. Mary’s (MN): Building a golf course on adjacent property and
selling lots (Net $2M in first year). Also rentals of ropes course for
corporate outings.
 Many schools: adult ed in evening; sports clubs during class time &
weekends (See the “Money” issue of Independent School-Fall 2003.)
 Georgetown Prep (MD): Luxury apartments on 3 acres of leased
property (Income = $1.3M year on 99-yr lease.)
 Hilton Head Prep (SC): Women's wellness Retreat (Summer Session for
Moms and their teenage daughters); also: homeschoolers can take one
course at the school for 1/5th tuition.
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2006 Non-Tuition Revenue Survey
 Key Findings
– Most common: summer programs (78%), auctions (72%),
and extended day programs (63%)
– Least common: adult learning (5%), intellectual property
(1%) and franchising (0.6%)
– 36% cited auctions as most significant source of income
– Only 2% exhibited net loss from operating the
program(s)
– 75% cited “operations” as the program financed by the
revenue; 2nd most frequent was “financial aid” (23%)
 Full report www.nais.org. More research to follow.
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Revenue Enhancement
 Enhanced fundraising to build endowment
 Serious deferred giving programs: e.g., most boarding
schools.
 Grow endowment via a combination of allocating to
endowment 1/3rd of all capital campaign, annual giving,
and special event proceeds to endowment and/or a
commitment of 1-3% of annual budget contribution to
endowment.
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Step 6: Projecting Preferred Scenarios
Project financial alternatives; quantify impact of various strategies.
 Key questions:
– Impact of plans to bottom line
– Likely, possible, and preferred financial futures
– Decisions required to reach preferred financial future
 Tasks:
– Run numbers using NAIS Financing Schools Calculator
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Step 6: Projecting Preferred Scenarios
Different assumptions for different projection runs:
 First: Change nothing. Last five years' budgetary trends for the
next five years.
 Second: Reflecting all your goals from step 4 (Data markers of
success)
 Third: Balancing and making choices
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Sample NAIS School, Anywhere, USA
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47
Sample NAIS School, Anywhere, USA
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49
50
51
First sample
projection based
on preliminary
assumptions.
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53
Sample NAIS School, Anywhere, USA
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55
Deficits in
Year 3?
Typical
Response:
Hit the
“back
button” to
increase
tuition
more.
56
Sample NAIS School, Anywhere, USA
Results:
Higher
tuition
income
stream…
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…and good
surpluses for
five years. But
falling back
into the same
pattern of
high tuition
increases. The
challenge:
create surpluses
by changing
other variables.
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The End
Appendix: Related Slides
Moody’s Update 2005
• “Moody’s continues to believe that the majority of independent schools in our
portfolio retain pricing flexibility and will continue to grow total net tuition
revenue and net tuition revenue per student. However, this pricing flexibility is
finite, and already you have heard some cases where pricing is becoming more
sensitive as parents consider lower cost day schools and church-related
institutions as an alternate to the more expensive boarding schools. Tuition
flexibility is greatest at highly rated schools which typically hold premier
academic reputations nationally and increasingly internationally.”
• NAIS: Price is related to demand which is driven by PAVS factors:
• Prestige (i.e., perceived “rank” and “status” of school)
• Affordability (i.e., perceived affordability)
• Value (i.e., perceived outcomes)
• Sacrifice (i.e., willingness to use discretionary dollars on education
Often schools price themselves by their desired market position rather than
the real market position—and therefore “discount” more heavily.
61
Financial Equilibrium
 Revenues equal or exceed expenses.
 Year after year, the rate of growth in revenues equals
or exceeds the rate of growth in expenses.
 The value of financial capital is preserved or
augmented over time.
 The value and functional efficiency of physical
capital (i.e., plant, equipment, and technology) is
preserved or augmented over time.
62
Financial Equilibrium
 The effectiveness of human capital is preserved or
augmented over time.
 The ability to maintain or improve delivery of the
school's stated mission is preserved.
 Resource allocation is aligned with mission
imperatives
63
35
10
12.5
12.6
18.1
17.1
17.2
17.9
17.6
22.5
21.3
20.3
19.8
11.8
12.4
15
10.8
10.3
10.2
10.1
20
18.7
18.4
25
20.2
21.7
30
15.4
00-01
01-02
02-03
03-04
21
22.2
Shifting Aid Applicant Pool
5
0
0-20K
20-40K
40-60K
60-80K
80-100K
100K+
Income Range
Source: School and Student Service for Financial Aid (SSS) processing system data
64
Middle Income Perspectives:
Income Distribution of US Family Quintiles
2003
Lowest 5th
up to $24,117
Second 5th
$24,118 - $42,057
Third 5th
$42,058 - $65,000
Fourth 5th
$65,001- $98,200
Highest 5th
$98,201+
Top 5%
$170,082+
Source: U.S. Census Bureau web page,
http://www.census.gov/hhes/www/income/histinc/f01ar.html
65
Affordability Index
Tuition
“Full Pay”
Income*
% of Families in
US at That
Income Level
% of Income for
Tuition
Lower
$13,635
$99,390
13.7
Middle
$15,675
$106,112
14.8
Upper
$17,450
$111,963
17 – 18%
15.6
*Minimum income to pay tuition at amount listed. Assumptions: Using SSS Methodology for a
Family of four, two parents, two children, parents age 45, both work, no assets - parent or
student, DC state/other taxes, no COLA
66
Income Demographics from 19972020
The rich getting richer, the poor poorer… and the middle
class losing ground
120000
over 150
125 to 150
100 to 125
75 to 100
60 to 75
50 to 60
40 to 50
30 to 40
20 to 30
10 to 20
0-10
100000
80000
60000
40000
20000
0
1997
2000
2005
2010
2015
2020
Impact on Independent Schools? Is this good news or bad news for us?
Bad News: trend is for fewer kids at higher income levels—so plan for
lower prices…or rightsizing for lower enrollments.
67
The Disappearing Middle Class
If independent school
tuition is still “the price of a
Ford,” why is everyone
feeling so pinched now
rather than 30 years ago?
The Middle Class: Dual
Income Family
@$75,000 (Source: Harvard
Magazine, Feb, 2006 “The
Middle Class on the Precipice”)
The Ford Analogy - a
“crime of logic”: one
payment every 3-5 years
vs. 13 consecutive annual
payments for each of two
kids.
68
Should Tuition = “Cost of a Ford”?
Day Tuitions vs. Cost of a Domestic Car
1981-2005 (adjusted for inflation)
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
1981
1984
1987
1990
Day Tuitions
1993
1996
1999
2002
Domestic Car
The problem: Pay for the Ford one time over five years; pay for
69
tuition for 2 kids, for 13 consecutive years.
Costs of Losing the Middle Class?
Resource: “Accreditation & Class Issues” ~Ruby K. Payne
 Loss of the value set that the middle class brings to the mix:
drivers of work ethic, achievement orientation, and sacrifice
for material security.
 Absence of balancing tonic for ills of affluence: over-
involvement of the parents; intense academic and social
competition; misguided parental intervention in student
consequences.
 Potential barrier to attracting young, idealistic “Teach for
America” talent who seek diversity.
70
The Data on Class Size
Preschool
K-5
6-8
9-12
All
Student:
Fac Ratio
All NAIS
Schools
15.5
17.5
16.0
14.2
16.3
8.6
Catholic
NAIS
Schools
17.0
17.0
18.0
16.0
17.7
9 .3
Public
Schools –
Now
21.1
23.6
15.6
Parochial
Schools
23.6
23.2
17.2
Public
Schools 1950s
30.0
22.0
71
Shattuck-St. Mary’s – Supplemental
Sources of Income (SSI) Analysis
SSI
Traditional
Revenue
Impact?
Facility
Development
Ropes Course
YES
NOT YET
YES
Weddings/Banquets
YES
NO
NO
Golf Course Development
YES
NOT YET
YES
YES
YES
YES
Sports Complex Facility
YES
YES
YES
English Language Institute
YES
YES
NO
YES
YES
NO
YES
YES
NO
Summer Theater/Dance Workshops
Learning Differences Symposium
Sports Camps
72
Shattuck-St. Mary’s – SSI Details
Was Facility
built (B) or
Enhanced
(E)?
Financed
(F) or
Donated
(D)
Program
Impact?
Ropes Course
B
D
Leadership
Development
Weddings/Banquets
E
D
-
E&B
F&D
Golf
E
D
Recruitment
E&B
F&D
Athletics
English Language Institute
-
-
Recruitment
Learning Differences Institute
-
-
Faculty Training
Sports Camps
-
-
Recruitment
Golf Course Development
Summer Theater/Dance Wisps
Sports Complex Facility
73
SSI’s: Inspiring Donors to Fund Facilities
 Design the program and SSI that a new facility will provide
the school. (Soccer development program; lease revenue; Dane Family
Field House)
 Prepare presentations for donors that show both the
program for the students and the SSI.
 Fund the program and facility through donations and SSI
revenue. (Dane Family Field House: $1.2 mm in donations, $1.6 mm in
financing)
74
Shattuck-St. Mary’s – Looking Ahead
Under Consideration
Existing Asset
Fiber Optic Substation
Location, Available Space
Wind Turbines
Location, Electrical Usage
International Summer Travel
Faculty, H of S relations. Alumni
Hotel Stay Rebates
School visitation
Summer Film Festival for students
Alumni body
Independent School Credit Card Program
Staff credentials
Non Profit Accounting Services
CFO experience
Faculty Placement Service
Administration’s experience
Incubator for Start Up Businesses
Parent body, State interests, HS program,
campus, alumni body
75
The Demographics of Charitable Giving
Source: NewTithing Group, from IRS 2003 Tax Returns
Adjusted Gross Income (AGI)
Avg Total Giving
Under $50,000
$
277
$50,000 - $74,999
$
1,336
$75,000 - $99,999
$
2,153
$100,000 - $199,999
$
3,471
$200,000 - $499,999
$
8,236
$500,000 - $999,999
$
20,790
$1,000,000 - $1,499,999
$
39,817
$1,500,000 - $1,999,999
$
58,376
$2,000,000 - $4,999,999
$
100,345
$5,000,000 - $9,999,999
$
288,540
$10,000,000 or more
$ 1,744,229
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Title
Testing Hypotheses
Source: The McKinsey Quarterly: 4/20/2006
Which pair would you choose given an opportunity to flip over just two
cards to test the assertion, "If a card has a vowel on one side, then there must
be an odd number on the other side"?
Confirmation Bias: Most incorrectly choose U & 7; 7 offers no new info with a
vowel on the back: answer is U & 8. Related to “possession bias”: people 2 to 3
times more likely to prefer what they have to what they may get: coffee mug vs.
77
chocolate experiment: charge $7 to switch, would offer $3.50 to buy.
Data-driven Decision Making
 19th century Rx: Leeches
 Pierre-Charles-Alexandre Louis
(1830)
 Mortality Rates for Treatment
of Tuberculosis :
– Leeches: 44%
– No leeches: 25%
78
Grounding Principles of “Six Steps”
 Data-driven rather than subjective
 Ongoing rather than start-and-finish
 Interactive among school constituencies, board, and
staff
 Flexible in process, structure, and language
 Separates what an organization does (strategy)
from how it is structured (design)…
…so that re-design is possible to achieve financial
sustainability
79
Markers of Success: 5 – 7*
Albuquerque Academy
Iolani School
Sidwell Friends School
Belmont Hill School
John Burroughs School
Springside School
Breck School
Lakeside School
St. Albans School
Brunswick School
Lick-Wilmerding High School
St. Paul's School
Buckingham Browne & Nichols School
Marin Academy
St. Sebastian's School
Chadwick School
Mary Institute & St. Louis Country Day
Tenacre Country Day School
Christ Church Episcopal School
Memphis University School
The Brearley School
Cistercian Preparatory School
Milton Academy
The Buckley School
Convent of the Sacred Heart
New Canaan Country School
The Columbus Academy
Dana Hall School
Newton Country Day Sacred Heart
The Dalton School
Episcopal High School
Noble and Greenough School
The Head-Royce School
Flintridge Preparatory School
Pace Academy
The John Thomas Dye School
French-American International School
Phillips Academy
The McCallie School
Gilman School
Phillips Exeter Academy
The Pingry School
Girls Preparatory School
Polytechnic School
The Potomac School
Greenwich Academy
Princeton Day School
The Roxbury Latin School
Harbor Day School
Punahou School
The Taft School
Hathaway Brown School
Saint Mark's School of Texas
The Westminster Schools
Hawken School
San Francisco Day School
The Winsor School
Horace Mann School
Sidwell Friends School
University School of Nashville
80
*0 schools with 8-10 markers; 60 schools with 5-7 markers; 968 schools with 1 – 4 markers (98%)
Truth
“Truth never damages a cause that
is just.”
Mahatma Ghandi
81