As Protevi likes to keep reminding everyone on Facebook, it's been awhile now since I first started arguing that we haven't been paying sufficient attention to the role of institutional debt as a driver of the increasingly alarming developments in U.S. universities, especially those in the public sector. I've gestured in this direction before on NewAPPS, but the appearance of a new piece on the subject by Josh Freedman on Forbes.com provides a perfect opportunity to develop the point a bit more.
Let me begin, then, by making a fairly bold claim. Taking the problem of institutional debt seriously makes it possible to provide a consistent account of many of the major problematic trends in U. S. higher education: rapidly accelerating tuition costs; significant declines in financial aid coverage; cuts to or elimination of low-enrollment departments and programs, experiments with mass-market distance learning and online education, and a general move toward 'Responsibility Centered Managment' (RCM) administrative models; dramatically increasing pressure on faculty at the level of compensation, workload, job security and working conditions; the outsourcing of many university functions to private contractors; building booms, especially those aimed at increasing campus amenities or leveraging university owned real estate for commercial purposes; and finally, continuing increases in administrative spending, especially in development offices and other areas concerned with financial management and business operations.
All of this, which may otherwise seem contradictory and difficult to make sense of, can consistently be referred back to the urgent pressure that rising institutional debt imposes upon university operations: the need to maintain a sufficiently robust revenue stream to satisfy credit rating agencies and thus keep borrowing costs, and the costs of servicing existing debt, from exploding. Freedman provides, especially in the later parts of his article, an excellent discussion of how this works.
Freedman's article is not just a discussion of the mechanics of the debt problem, or of its operational consequences. He also makes important contributions to a genealogy of the current debt crisis, discussing the structural and historical factors that set the stage for the move to institutional borrowing—factors which in some cases institutional borrowing also reinforces in a relay relationship.
Thus he begins by pointing out the one structural factor that forms the major enabling condition for the movement I describe above: "the financial model of many colleges and universities—based on high tuition and high financial aid—has put the educational and financial goals of universities at cross purposes." Under the current conditions of financial crisis, this factor alone has made a very significant contribution to the erosion of public institutions' ability to fulfill their designated roles of serving in-state students (who provide less revenue) and of providing an education accessible to poorer students (who are more expensive to serve because they require more financial aid).
Indeed, without even turning to the factor of rising institutional debt, it is hardly surprising that declines in state funding (median 10% since 2008, but ongoing for much longer than that) can be seen to correlate to moves by public institutions to maximize revenue (by raising tuition and pursuing out of state students) and minimize financial aid expenses (by pursuing wealthier students or students who are ineligible for financial aid).* These consequences are to some degree already more or less baked into the structure of the U.S. public higher education funding model as the likely—and entirely predictable—outcome of any significant decline in public funding. Neither of them, in other words, strictly requires the additional factor of rising institutional debt to come about. And all of them should have been foreseen by the policymakers who have instituted cuts in public funding for higher education in advance of and in response to the crisis of 2009.
Nevertheless, the depth, intensity, and durability of the systemic fiscal problems remain remarkable—as does the ability of any new fiscal shock to produce a new, apparently existential crisis in many institutions. It is at this point that institutional debt arises as a more significant consideration
As both Freedman's article and this earlier study by The New York Times both show, there has in fact been a significant increase across the board in institutional indebtedness. And in many cases, this debt has been taken on precisely for the purpose of making improvements to campus amenities that will, it is hoped, benefit institutions in college rankings or otherwise make them more attractive to precisely the sorts of wealthier, out of state students our analysis above shows that institutions in fiscal difficulty will likely be seeking to attract.** Indeed, taking on debt seems to be something that very often initially comes about as universities try to reposition themselves to better compete for a relatively small pool of fiscally 'desirable' students, an enterprise which is seen to be urgent enough that it cannot be pursued through the slower, but less risky mechanism of capital campaigns.***
But if such debt is initially taken on as a way for universities to acquire more flexibility to reposition themselves on a sounder footing, it quickly becomes a trap, forcing them to move their operations further and further away from an education-centric model and making it almost inevitable that public universities, in particular, find themselves with very little choice but to significantly depart from their traditional missions.
Freedman sees this very clearly: once the process of debt-accumulation gets started, and indeed however it gets started, it will substantially increase the pressure on university administrators to maximize and diversity their revenue streams in ways that will be pleasing to credit ratings agencies.
Colleges issuing more debt face this paradox even more starkly. To keep their borrowing rates as low as possible, colleges want to keep their credit ratings as high as possible. But credit rating agencies, like Moody’s, could not care less about how accessible the school is to low- and middle-income students when they are assigning a credit rating. What they do care about is how stable a school’s revenue source is, which means encouraging a higher percentage of wealthy and out-of-state students.
This first move, and borrowing to make oneself more attractive to wealthy and out of state students who are fiscally easier to serve, thus leads to an increased pressure to tailor a unviersity's operations to those students—and beyond that, to make those operations pleasing to the ratings agencies. Thus the first move often leads to many others that are driven by the same pressures (and reinforce their effects): to keep the borrowing and the debt service manageable. Curcial among these moves is one to which Freedman devotes considerable attention, that of seeking to shift risk by pledging some of universities' general funds, including future tuition revenues, as collateral for loans (see also Bob Meister's piece on this). But we should also note the increasingly common practice of universities pursuing non-educational sources of revenue (and often taking on even more debt to do so): "rather than put funds into education, [universities] are investing in areas with potential income streams. New buildings like medical centers, sports stadiums, or dorms can bring in fees and sales, regardless of educational value – and therefore create new openings for more money to come in." Nor should we forget the increasingly common moves to outsource administrative functions that universities had previously fulfilled themselves to private contractors, who pay universities for the privilege of charging fees to students (thus converting an operating expense into a stable revenue stream, all at the expense of students). A bit more reflection should make it clear how some of the other phenomena I listed at the outset can also arise from the same sources.
And finally, there is the endless squeezing of faculty, the perpetual demands on them to be more 'efficient,' the constant multiplication of sites of precarity, the ever-present threat to increase their workload, the multiplying demands that they cover much of their own salaries in grant funding, the attempts to claim ownership of their research and any royalties proceeding from it, and the increasing refusal on the part of institutions to support or maintain academic programs that are not merely sustainable but indeed wildly profitable. We have seen any number of instances of this over the past few years, and proof that we are far from done seeing them has been supplied to us this week by the awful circumstances at The University of Southern Maine, where many programs have been gutted, many faculty essentially forced into retirement in order to save the jobs of some, but hardly all of their younger colleagues—and not just already visibly precarious faculty, but tenured faculty who, if they were fortunate enough to survive this round, now face the more or less permanent specter of "retrenchment."
Many of us have likely heard administrators at our institutions tell us that all of these things, where they are happening—and most of us have seen at least some of them happen—are matters of institutional survival. The terrifying part of it is—if the fiscal consequences of slipping credit ratings are as extreme as they seem to be, and if many institutions are so substantially leveraged that their ability to service their debt is meaningfully in dobut—those administrators may not simply be lying to us.
Having said that, however, we should also return to the genealogy which Freedman provides above, and take note that the origin of this problem is not simply to be found in institutional debt. The circumstances which have more or less forced many institutions to submit themselves to the whims of the credit market are the result of a set of deliberate policy decisions. This is true across the board, and it is certainly true in Maine, where the conservative governor has appointed a number of trustees to The University of Southern Maine's board, and thus to exercise considerable control over how the crisis that administration's cuts has created has played out for that institution. The immediate crisis, there and elsewhere is a result of policy choices. And more far-reachingly, the fact that unviersities—even public universities—are made to operate on a structural model that exposes them to a such a basic contradiction with respect to their mission as centers of education, scholarship and research, is also the result of policy choices. Such choices, having been made, can be unmade—and indeed, if we are to get anything like a sustainable resolution to the crisis in which we now find ourselves, it is almost certain that they must be unmade.
*Indeed, Freedman notes that "[u]nder the high tuition, high-aid model, schools with fortress-sized endowments (think: Harvard, Amherst, Stanford, etc.) are under less pressure. They can dip into their deep pockets to subsidize more low-income students." So that, paradoxically, rich private institutions are increasingly in a better position to cultivate robust diversity among their student body than public institutions. At a systemic level, this is a catastrophe, since there are by no means enough schools in the 'rich, private' class to subsidize the students who need it (as of 2008, roughly a quarter of U.S. undergraduate students were in private institutions)—and thus we find ourselves confronted with one of the aspects of this problem that politicians have taken notice of, declining access to higher education for large segments of the population.
**Tangentially, one can easily argue that the perceived marketing value of big-time Division 1 sports programs provides much of the rationale for the exorbitant and not otherwise visibly profitable spending on them which many universities undertake.
***The fact that this sort of construction is being treated in many cases as a matter of urgent necessity, and thus funded by endowment spending and debt issue rather than a capital campaign is part of why I found the story of La Salle's new business school such a telling example. If one wanted to find another case more directly pertinent to the question of public universities, one might consider Temple's new $216 Million, 26 story luxury dorm, which is part of a larger plan to remake the university's urban campus to be more traditionally 'campus like' and so attractive to suburban, out of state, and foreign students. Needless to say, this sort of facility is hardly aimed at the lower-income students from Philadelphia that it has historically been Temple's mission to serve.