Nonpublic schools have strong incentives to identify total costs because the information is used to set appropriate tuition and reimbursement rates. They must also operate with the amount of public funds they receive, plus funds raised through charitable contributions, if any. Parents or private parties rarely, if ever, pay tuition at nonpublic schools.

Rate setting, where a government agency determines a standard payment for a certain type of nonpublic service or school, can have the unintended consequence of raising costs when services could be provided at a cost below the rate set by government.

Although they are privately owned and operated, nonpublic schools do not operate in a free market. Consumer choice is largely absent (with the possible exception of at-risk education in some localities). Competition is limited. And funding is at government expense. Additional regulations, financial reporting requirements, and licensing requirements all increase the cost of nonpublic school operations above the cost they would experience if they operated as purely private organizations. (See discussion of cost drivers on page 39.)

In general, nonpublic schools which operate in the absence of special legislative entitlement or judicial protections tend to be the most aggressive in controlling costs. Nonpublic schools and programs serving at-risk students are a good example of the unprotected sector. Since these nonpublic schools cannot depend on consent decrees, IDEA, or parent litigation to help ensure student enrollment, they must win business from the public agency based on their ability to offer quality services at a competitive price. (Note: As monopoly providers, public agencies do not necessarily have a strong incentive to seek out contract providers. Contractors do not have the opportunity to compete for services in many areas of public education.)

By contrast, some nonpublic schools may find they have a captive market in the public sector. Under IDEA, if the public schools can not serve a student with a disability, they must pay for the student’s placement in a nonpublic school without regard to its cost. In some cases, parents have litigated for a nonpublic placement as being the only appropriate placement for their child.

State or local governments operating under judicial consent decrees may also be forced to place students in nonpublic schools regardless of cost. To remedy prison overcrowding, one court ordered the local juvenile-justice authority to turn its inmates loose or place them elsewhere. At the time, few private providers existed. Said one provider, "the court order took away the government’s power to negotiate and gave the provider the ability to say, ‘That’s our price.’"

Nonpublic schools, because they operate in the context of public education, also may not have as much flexibility in program design. Class size and student-teacher ratios for special education are often regulated in public and nonpublic schools alike. The Rochester School for the Deaf in New York, for example, must provide one teacher for every three students in each grade level. In practice, some classrooms end up with one teacher per student. At times, says Rochester School for the Deaf executive director Fred Koch, "We had adults tripping over each other."109 Such government-mandated staffing regulations may unnecessarily drive up costs.

Rate setting, where a government agency determines a standard payment for a certain type of nonpublic service or school, can have the unintended consequence of raising costs when services could be provided at a cost below the rate set by government. Providers might charge lower rates if pricing were subject to competition. Evidence from Milwaukee indicates that competitive rates might be preferable in some cases to rate setting. Nonpublic schools serving at-risk students in Milwaukee are all paid the same amount per student, equal to $5,042 in 1993-94.110 Some of the nonpublic schools in Milwaukee for at-risk students also accept regular students under the Milwaukee Parental Choice Program using government-funded vouchers worth $2,984 in 1993-94, less than half the amount of funding for at-risk students. (Note: The voucher amount is payment-in-full.)111

Another area of potential wasteful spending may be found in district-administration. The public contracting agency may withhold a larger-than-necessary share of funding from the nonpublic school for administration. Minnesota and Wisconsin, for example, allow local school districts to retain both the local share of funding and between 10 and 25 percent of the state per-pupil basic revenue funds allocated to nonpublic at-risk schools. While public oversight is a necessary expense, excessive overhead costs at the district level reduce the amount of funds available in the classroom. For example, in 1994-95, Sobriety High School, a nonpublic school which contracts with Minnesota public schools for at-risk students, received roughly $3,600 per student.112 By contrast, average per-pupil funding for Minnesota public schools was $6,400 in that same year.113 Numerous charter schools report similar problems with excessive district-overhead fees.