RIPTIDE
The NEW NORMAL for HIGHER EDUCATION
By DAN ANGEL and TERRY CONNELLY
SMASHWORDS EDITION
Published by:
Dan Angel and Terry Connelly on Smashwords
Riptide:
The New Normal for Higher Education
Copyright © 2010 by Dan Angel and Terry Connelly.
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Riptide:
The New Normal for Higher Education
“There is a tide in the affairs of men. Which, taken at the flood, leads on to fortune: Omitted, all the voyage of their life Is bound in shallows and in miseries. On such a full sea are we now afloat, And we must take the current when it serves, Or lose our ventures.” Shakespeare, Julius Caesar
Foreword
Dan Angel and Terry Connelly have pooled their considerable experience and insights in higher education and high finance to provide a unique, outside-in, three-dimensional probe into the complex, confusing, and convoluted world of higher education.
As proven change agents, they put their fingers precisely on the pulse of our times to identify the converging forces that beg for change in our aging and unresponsive university model: the Great Recession, Graduation Gridlock, competition from abroad, the power of online, the rise of the for-profit universities, multi-generational concerns, and much more.
Mixing direct, personal experiences in business, politics, and higher education against a backdrop of individual and at-large societal needs, they pinpoint how and why American higher education has lost its edge: failing to provide a cost-effective path to degree completion for the 85 percent of today’s students who don’t fit the traditional model, and thereby robbing our nation of the talent needed to maintain our economic standing and our standard of living.
The pair then present a clear, simple and focused plan of action to allow colleges to live within their financial means and save the American taxpayer real money, while delivering on America’s three “A-word” higher education needs: access, affordability and attainment.
Angel and Connelly pack quite a wallop with their fresh and feisty, no-holds-barred commentary on the continual “talk, talk, talk” that surrounds, retards and inhibits meaningful, broad-based higher-education reform.
From a RIPTIDE sense of urgency, we are urged to TOUCH THE THIRD RAIL and go far beyond the usual cosmetic and routine to embrace a new THREE-YEAR NO FRILL PUBLIC OPTION that fully delivers on our country’s promise of educational opportunity.
Their case is compelling.
If you’re looking for clarity in the current quagmire of American higher education, you will be both surprised and delighted by the bold approach and action plan proposed in these pages.
Les Schmidt, CEO3, SONGBIRD, San Francisco
TABLE OF CONTENTS
RIPTIDE
HEAT THE HIGHER EDUCATION AWARENESS TEST
PART ONE: THE VIEW FROM THE DEAN’S OFFICE
I. THE BIG SQUEEZE ON ALMA MATER
II. GRADUATION GRIDLOCK
III. ONLINE GAINS TRACTION
IV. TAXPAYER U
PART TWO: THE VIEW FROM THE PRESIDENT’S OFFICE
V. WAITING FOR GODOT
VI. GENERATIONAL BARBELLS
VII. LESSONS FROM “OVER THERE”
VIII. THE CALIFORNIA BELLWETHER
IX. AMERICA’S COLLEGE
X. SKIING BAREFOOT
PART THREE: THE WAY FORWARD
TOUCHING THE THIRD RAIL
THE THREE-YEAR PUBLIC OPTION
HEAT THE HIGHER EDUCATION AWARENESS TEST ANSWERS
BIBLIOGRAPHY
INDEX
ABOUT THE AUTHORS
RIPTIDE
“Why should colleges be immune to the changes sweeping just about every other industry in the country?” Brian Kelly, Editor, US News & World Report
A few years ago, on a fundraising visit in my capacity as president of Marshall University, I made a memorable stop in California. We were picked up in a black, stretch limousine and whisked off toward Malibu Beach.
As we left the narrow and crowded highway, a private gate parted revealing a breathtaking home that backed up to the ocean. On the second-floor balcony, we sipped wine and sampled cheese in the warm, late-afternoon sunlight as the tide began to come in. Rushing ever-closer to the shore it began to extend to the area just beneath our balcony. Our host indicated that if we wanted to walk on the beach, we would need to do so before the tide fully came in.
As we paused at the lower staircase to the beach, our host cautioned that the ocean tide could be exceedingly strong. He suggested that at the right moment, we quickly jog to the halfway point, step back ten yards onto the steps there and wait for the tide to recede before proceeding.
Being from the Midwest, standing six-foot-four, and having my fair share of macho, I decided that I would skip the “halfway” nonsense and jog the full distance.
That was a mistake! The force of the tide threw me like a rag doll into the side of the beach wall. But that was not the worst part: As rapidly as I hit the wall, I was pulled with intense force toward the sea. The water was cold and much more salty than I had imagined. Five yards. . .ten yards. . . It occurred to me that I might be a goner.
Finally, the ocean did release me. I lay there momentarily dazed. My sunglasses, hat and thongs were afloat somewhere “out there” and I made no effort to reclaim them. I had been surprised, unprepared and humbled by what had happened.
My wife Patricia still kids with me about “My Malibu Riptide Experience.”
But now four years into the Great Recession of 2007, there are many similarities between the gripping force that toppled me then and the mega-forces that are now entrapping our national economy and our higher education system along with it.
With a ferocity not experienced since the Great Depression, we were hit by a tsunami-force riptide that has changed everything. According to a Crisis Impact Poll of November 2009, 70 percent of Americans experienced a job loss or a pay cut, or knew someone who had. Two-thirds of the respondents could not believe that “America was in this mess.” The poll concluded that the nation’s spending habits, relationships, hopes and attitudes toward Wall Street, the government, and many trusted institutions were profoundly shaken. In July 2010, an economic survey by USA Today found that 79 percent of the participating experts were “less optimistic” than they’d been just three months earlier.
Make no mistake about the extent of the damage. Bloomberg relates a stunning and breathtaking statistic: “The world’s largest economy shrank 4.1 percent from the fourth quarter of 2007 to the second quarter of 2009.”
More than 8 million jobs have been lost since December 2007, and the Labor Department estimates than half will not be coming back. In August 2010, more than 14 million Americans were without work. Unemployment rose in 30 states at the start of the year and by midyear 2010 the national unemployment rate still hovered in the 10 percent range. First-time jobless monthly claims reached 650,000 in March 2009, but were still at 500,000 in July 2010. By November 2010 fully one quarter of the national workforce was either unemployed or underemployed.
A poll of recruiting officers in spring 2010 indicated that 73 percent of the companies did not plan to hire before the end of year. Federal Reserve Chairman Ben Bernanke predicted that, by December 2011, unemployment would be no better than 7.5 percent. The consensus of the USA Today economic report was that we will not regain the 8 million jobs lost “until 2015 or later.” Amazingly, nearly half (47 percent) of our nation’s individuals and households earned so little income in 2009 that they paid no federal income tax, according to the Tax Policy Center.
Moody’s chief economist Mark Zandi estimates that 400,000 local and state employees could lose their jobs in FY 2010 because of shrinking public tax coffers. That number would double the 200,000 jettisoned in the 2009 fiscal year. State budgets have weathered a quarter-trillion-dollar deficit over the past two years.
In July 2010 the Employee Benefit Research Institute speculated that many Americans would not have enough to pay for their likely span of retirement years. In 2005 one in four senior citizens planned to work past age sixty-five; by 2010, that number had grown to one in three. Today one in seven Americans lives in poverty, one in eight receives food stamps (an increase from 28 million to 40 million since December 2007), and one in six (more than 50 million) are without health insurance.
Adding insult to injury, those fortunate enough to be working pay more for their health care. Average workers saw their share of insurance premiums rise by 14 percent in September 2010, according to the Kaiser Family Foundation and Health Research and Educational Trust. Workers also pay higher deductibles, typically $1,000.
On the housing front, for the first time since 1945 (when data began to be recorded) the total debt of American homeowners was more than aggregate homeowner equity. Sales of new homes dropped like lead balloons after the $8,000 first-time-buyer and $6,500 repeat-buyer tax credits ended on April 30. Realty Trade Inc.’s statistical trend lines show that the rate of foreclosures will likely top the 900,000 homes repossessed in 2009. Indeed, US Census workers found 14 million homes unoccupied in 2010, up a full 50 percent over the 2000 census. The surge in foreclosures pushed home ownership back to 1999 levels.
The stock market has been more ghoulish than bearish. In spite of recording average returns approaching 10 percent since 1926, the average gain over the past decade has been less that 0.5 percent. During the first six months of 2010 the Dow Jones Industrial Average fluctuated more than 1,500 points but showed no gain whatsoever for the year.
Household income took a beating in 2008, dropping almost 4 percent in just one year. Bankruptcies have tripled since 2006. General Motors sold more cars in China last year than in the US. The poverty rate grew to 13 percent in 2008. It’s enough to drive you postal.
Meanwhile, Medicare recipients increased by 3 million over the past three years while Medicaid and its related Children’s Health Insurance Program grew by 7 million over the same thirty-six months. Today those programs cover 106 million Americans–(one in three of us).
Federal stimulus funds are petering out and there is little taxpayer tolerance for extending them. The number of bank failures doubled in the first half of 2010. More than a quarter of voting-age Americans has Tea Party leanings. The federal 2011 budget recorded a $1 trillion deficit in just the first nine months of the year and it will increase by $500 billion more by the end of the fiscal year. Finally, the national debt rose to 60 percent of gross domestic product–the largest US debt in history.
And prospects for the future? Perhaps that is best reflected by a Wizard of ID cartoon strip by Parker and Ross: The ruler of the kingdom of ID goes to a fortune teller. She peers into a crystal ball. “What do you see?” the monarch asks in earnest. The fortune teller waits for a heartbeat and then replies, “I see pain. I see misery. I see woe.” The monarch’s reply: “I know. I know. But what about the future?”
That frustration is evident across our nation.
The general consensus is that recovery will be a slow process. We wouldn’t bet the ranch that it will happen by the 2012 presidential election, although the current administration will argue vehemently that, “It did.” It may be a long time until we see the previously acceptable 5 percent unemployment again.
So with this macroeconomic quicksand all around us, let’s turn our focus to American higher education.
A few years ago, while I was president of Stephen F. Austin State University in Texas, I drove the 200 miles from Nacogdoches to Austin on short notice. There were budget constraints that year. I sat with the presidents of the state universities and we reviewed the depressing situation. All our glasses were definitely less than half full that year.
Immediately after the focused and intense meeting, I hopped into my car and rushed back to campus. We called a campus-wide meeting, and a large number of faculty and staff attended. I meticulously went through the state’s dire economic situation and reviewed what financial morsels might be coming forth for Texas public universities. When the meeting ended, I was feeling a bit better after sharing the bad news. Then, standing by a punch bowl, one of the faculty senate leaders leaned toward me and whispered, “Do you think any of that will affect us?” I was speechless! The answer then was “YES!” for that university just as the answer now is emphatically “YES!” for American higher education.
US News & World Report Editor Brian Kelley lays it on the line: “Of all the industries that profited from the economic bubble of the past two decades. . .higher education would have to be at the top of the list.” He points to massive endowments, soaring tuition that regularly eclipsed the cost of living, extensive campus building, bloated administrative staffing, and says that some professors were being recruited like rock stars. He believes that “the golden age” has passed higher education by and that higher education should change.
We agree. But it is not a matter of should, can or could change; it is now a matter of must change. Higher education, like the automotive industry, has denied and ignored the call for reform for so long that it has painted itself into a corner. The growing forces gathering outside the campus walls for the past couple of decades are about to gain tsunami force and smash the venerable but vulnerable ivory tower into smithereens. Let’s tee-off on the world of golf where a massive shake up is taking place also. As Jon Swartz of USA Today notes, “The business of golf faces an economic outlook that is sinking like a downhill putt.” Swartz says that about three in twenty of the more than 4,000 private golf clubs face dire financial circumstances and that the number of golfers is in a downward spiral.
There is a lesson for higher education in this.
Let’s examine the major reasons for the fall-off in golf.
First, golf is expensive. You can drop $200 a day or considerably more to play on an elite course without adding in the cost of clubs, shoes, balls and accessories which all are costly. In order to become a high-grade golfer, add in the cost of lessons from a golf proeven more expensive. Second, it takes a substantial amount of time to play eighteen holes, not counting travel time to and from the course, and adjusting your schedule to fit with available tee times that seem never to be set at your convenience.
Doesn’t golf sound a lot like a traditional college campus? Tuition, which is already high, continues to rise along with increasing book costs; classes are scheduled at the institution’s convenience; students anticipate studying with a pro but often end up with a graduate-student instructor, while paying the same rate regardless. Worse, the odds are less than fifty-fifty that you will finish the “eighteen holes” with a degree in four years and not much better that you will have developed the level of skill you’d expected to achieve when you first arrived on campus.
Speaking plainly, the academic Model T has been so unresponsive to needed change that it might as well have painted a bull’s eye on its institutional backside. In truth, the holes are greater than the sum of the parts and converging trends are kicking higher education’s butt.
As a result college one student in ten today is enrolled in a for-profit, post-secondary educational institution. Tuition and fees over the past twenty-five years have gone up by 400 percent (even before the 7 percent increase for FY 2010). That’s four times the rate of inflation. (Did anyone actually believe that could go on forever?) University endowments have been particularly hard hit at the Ivy League schools where the average university endowment lost 18 percent in FY 2009.
The online revolution is no longer new, except in the higher education world. The rise of other nations in terms of economy, capability and aspirations hasn’t been internalized; and like the GM Chevy Nova that didn’t sell well in Latin America, leaders in higher education have demonstrated no VA! They cluster in “group think” waiting on federal and state government policy directives and private foundation money to fuel needed changes.
It’s as if American higher education’s hundred-year-old footprints are embedded in cement while the rest of the world is running at warp speed. Higher education has shrugged off the launch of numerous Sputniks when it desperately needs to respond to the challenges of the twenty-first century.
Pick your vantage point and adjustments are being made everywhere else. The domestic airline industry lost 69 million passengers over the past two years. Mounted police have dwindled to less than 100 in the nation. Pay telephones are nearly extinct and will be the next to go. (Have you hunted for one lately?) And hard lines will be the next thing to go.
Meanwhile military recruitment is up. In 2009, the Pentagon announced that for the first time since 1973 (when it became an all-volunteer force), the US military had met all its recruitment goals.
Casinos are returning to penny slots. Over the past two years in Nevada, casinos made way for 7,000 additional penny slot machines while removing almost twice that number for bigger bets.
College textbooks are going rental. With prices soaring four times the rate of inflation since 1994, Follett and Barnes & Noble (the two largest college bookstores in the nation) are making about 40 percent of their titles available for rent. They are also going electronic with Kindles and iPads.
Amazon’s stock is soaring while Barnes & Noble is looking for a buyer.
Netflix has replaced Blockbuster and is in itself now being challenged by Apple
and Amazon.
Lifestyles are changing. The number of commuters driving to work alone has dropped while the number of Americans owning only one car or no car has risen. The number of families living with three generations under one roof has increased.
Even cemeteries are responding. Although the industry may seem recession proof, 40 percent of cash-strapped families are turning to less expensive cremations where they can save more than half of the $7,000 average traditional burial cost.
But even as Americans shift their taste for cars, cruises, clothes and exotic vacations, there are some areas that have not shown signs of shrinkage: ice cream, movies and candy. In fact, Snickers and Three Musketeers were brought to market during the Great Depression. These treat items send a psychological message that says, “We’re okay.”
Deep down though Americans know we are not all right. We know that things have to change in a significant and profound way. It’s paradigm time! One recent cartoon makes the point: In a crowded bat cave, the head bat is leading a meeting. After the issue has been discussed, he says, “All right, all in favor put your hands down.”
This book is not about curing the ills of the Great Recession. It is not about national or international economic policy. It is not about housing, banking or taxation. The issue here is American higher education, which is not immune to the mega-forces affecting our way of life. As the higher education reporter and pundit Jack Stripling observes, there is a gigantic gap between talk and action: “conversations have persisted for decades without substantial changes.”
American higher education finds itself in a condition similar to Oakland California’s Bay Bridge. The bridge was considered an engineering wonder when completed in 1936. More than a decade ago a Caltran’s study warned that the eastern span of the bridge could not withstand a 6.5 earthquake. Consequently, the bridge will not be retrofitted; it is schedule to be replaced. But not until 2013! Most everyone agrees that higher education requires restructuring, but few are responding to this crisis with any true sense of urgency, much to our detriment as a society.
This book explores the current condition of American higher education, making a case for bold and constructive change. The book was not written from inside the university looking out. Rather, the perspective is from the outside looking in by two university administrators who bring a wealth of off-campus and on-campus experience, multi-level business and governmental exposure, and who know their subject well.
We invite you to join us in this unusual and eyebrow-arching journey. But first take our Higher Education Awareness Test and feel the HEAT.
HEAT: Higher Education Awareness Test
(Mark Your Answer True or False)
______ 1. About 40 percent of Americans over age twenty-five have a college degree.
______2. Most college students are under age twenty-two.
______3. Online college courses typically cost less than in-person courses.
______4. For-profit universities are allowed to receive up to 90 percent of their tuition
revenue in the form of federal education loans and grants.
______5. Endowments at private universities were largely insulated from the effects
of The Great Recession by conservative investment policies.
______6. Since the onset of the Great Recession, state colleges and universities have generally held tuition increases below the rate of inflation.
______7. Despite the increase of for-profit and online universities, most US college
students still attend school in the traditional four-year residential setting.
______8. The average “discount rate” (the amount private colleges actually charge
students) is 10 percent less than the sticker price.
______9. The World Economic Forum’s 2010 Global Competitiveness Report lists
America as among the top in all twelve categories.
_____10. China uses more energy than the US.
_____11. In terms of college degrees, younger Americans (age twenty-five to thirty-four) have made significant gains in the past thirty years.
_____12. CalPERS, the largest public employee retirement system in the nation, once
predicted that the Dow Jones Industrial Average would be 25,000 by 2009.
_____13. “iGen” is a major breakthrough in computer technology.
_____14. Community colleges began by adding grades thirteen and fourteen to high
school.
_____15. University presidents supported the start of community colleges.
_____16. Vice President Joe Biden’s wife Jill is a community college instructor.
_____17. Most economists believe that state revenues will be back to normal by 2012.
_____18. Higher education spent more than $90 billion on new construction between
2002 and 2008.
_____19. Consumer spending drives 70 percent of our economy.
_____20. Traditional college students (ages eighteen to twenty-two) comprise 60
percent of today’s college students.
_____21. Until 2010, California was the only state in the nation to require a two-thirds
vote to pass both the state budget and a statewide tax increase.
_____22. Canada is the world leader in the higher education completion rate.
_____23. Forty-five of every 100 students who start college today will not earn a
bachelor’s degree.
_____24. It takes about six years for a student to finish a college degree.
_____25. The current outstanding student loan debt is larger than the entire TARP
“bailout” or the whole Obama Stimulus Package.
Answers found in Appendix A
Part One: The View from the Dean’s Office
THE BIG SQUEEZE ON ALMA MATER
“Forget about business as usual. There is no return to the way we were.”
Greg Roberts, Executive Director, Association for the Promotion of Campus Activities
Although I am a business school dean, most of my professional career was spent as an investment banking executive. But before that I was a lawyer, so I tend to think in analogies. When I first started thinking seriously about the “business” aspects of a university, I tried to find the right analogy in the broader commercial world for what a university does.
We provide a “service” more than a “product.” Higher education really is a “knowledge industry” in a classic sense, delivering its “content transfer” in a relatively discrete period of time with beginning and end points, usually at a “formative period” in the recipient’s life, and focused on enhancing the recipient’s future prospects.
After hours of mental gyrations, my first best analogy was orthodontics: the smile that opens doors for the rest of your life! Reflecting on the focus of this book, however, I knew that orthodontics just wouldn’t do. Flying back to Palo Alto from a visit with family in New York, my brain turned quite naturally to air travel, and ultimately to the analogy I’d been seeking. And so that is where we begin our look at the “university business” one decade into the twenty-first century.
Of course, it would be good business school practice to start with a chapter about the university’s “customer,” the student. But to be fair to the facts, we need to start by looking at the university itself, because the current crisis in higher education is rooted in an institutional failure to focus primarily on its “customer” when the basic operating model was designed.
But for a moment, step back to the airtravel analogy. Suppose you decided to take an around-the-world trip by air. With modern aircraft capabilities, you could make it in less than two days in three legs: say, San Francisco to Tokyo, then Tokyo to London and finally London to San Francisco. The airline, however, responds that you’ll have to take at least four legs, maybe even five or six, because when you complete one leg, there might not be planes available for the next part of your journey. They also inform you that they won’t be flying at all during the summer months. Ask why, and they will explain that the passengers are busy tilling fields and harvesting crops. Never mind that nobody actually does that anymore, the airline doesn’t seem to notice or care. Their attitude is: “We’ve always done it this way and we’re still around, so we must be right.”
When it comes to cost, the airline says your ticket price is subject to upward adjustment at each leg. Of course you won’t know what the increase for each leg is going to be in advance, but lately it’s been as much as 32 percent!
Finally, you learn that you may get an experienced pilot on any particular segment, or you might have a trainee. And, by the way, you won’t be able to use any of your Internet gear while on board. But you will be able to drink alcohol freely en route (although the passengers admitted to first class–the sons and daughters of previous passengers of that airline–will get served first).
Maybe only the last part of this fable sounds at all relevant to what’s going on in US colleges and universities today. But if we look a little more closely a broader pattern of similarity emerges. Obviously you would not give your business to an airline with all these limitations on their service, or so you think. But what if all the available airlines operated on the same basis? Then you and all other would-be passengers would be stuck.
Sooner or later, however, you and the other passengers would understand that there is no reason why you can’t get the service you want, especially given the price you are being asked to pay–and then, along comes an airline with the same planes flying to the same destinations, but offering a more customer-friendly approach to service.
The same thing is happening in the higher education marketplace today. Real competition has entered the picture, and in a big, new way. Of course, colleges have always competed among themselves for the best students, the most brilliant faculty and the most lucrative research grants. But we’re talking here about a different kind of competition, the kind that happens when customers of any enterprise wake up to their power to shape the product they are buying. Up until recently, higher education considered itself relatively immune from this kind of customer-driven market force.
Like many other knowledge-based professions (medicine, law, investment banking) colleges traditionally have considered themselves exceptions to the rule that “The customer is always right”. Colleges think it is their job, after all, to teach their customers exactly what is right. If their stock-in-trade is instruction, then students, like patients or clients, have no business telling them how to run their operation. Nice work if you can get it!
But like those served by medicine, law and high finance, students (and their parents and other “financiers”) have begun to flex their bargaining muscles, especially as the cost of educational services rapidly accelerates beyond the ability to pay without real pain.
At some tipping point (say, double-digit tuition increases), the price of education reaches a level where the students (and their funders) come to understand that they are dealing with what should be–but isn’t–one of the most customer-centric enterprise on the face of this earth. At the same tipping point, some higher educational providers also perceive that there is an advantage in paying much more attention to customer service.
In the heady time of dot-com and housing bubbles, this recognition of “students as customers” focused more on “frills” that could ease students past the sleepy essence of the academic service culture: i.e., the “bread and circuses” of campus life–luxurious, co-ed dormitories, state-of-the-art gyms and health centers, magnificent stadiums and fully professionalized sports programs funded by tax-deducting boosters, TV revenue, university subsidies and hefty student fees. But recessions make a hash of bread and circuses. More importantly, recessions expose rampant inefficiencies in the supply chains of even the most hidebound knowledge-based Enterprises, especially a delivery system that works at capacity only about two-thirds of the “expense year.”
The“Great Recession” has created a perfect storm for the US higher education culture. Just when student/customers began to understand that if they are paying the check they should be able to order the meal, along came a dramatic downturn in state tax revenue and private endowment investment income that brought to an abrupt end the game of buying off students with frills. On top of that, the exclusive “franchise” that state-funded and private nonprofit colleges and universities had enjoyed for decades was challenged, precisely on customer-service terms, by for-profit educational enterprises funded by equity markets that are ever alert to the opportunities presented while established academies slept on their laurels.
While the newer, Wall Street-funded for-profit colleges initially focused their powerful marketing attention on chronically underserved student populations (particularly working adults), they also aggressively reached out to a more upscale population by exploiting the Internet, which most public and private schools viewed (correctly) as a threat to their established service cultures. As Richard Vedder, director of the Center for College Affordability observed, “The for-profits are concentrating 100 percent of their effort on teaching students what they want to be taught, when they want to be taught.”
Nonprofit and state-funded colleges have no shortage of smart people, and many are certainly aware that the ground is shifting under their caps and gowns. Charging their customers ever-rising prices for increasingly outdated service delivery models is no longer as easy a “sell” as it has been. A few schools have been able to use state government and endowment funds to open educational doors to underserved populations (in the middle class and below) and to adopt new Cyber-based learning technologies that bring higher education into the “24/7” reality where customers now expect to be served. But the Great Recession also put a fiscal spanner into these good works, forcing colleges to make difficult choices between what they need to do and what they can afford to do.
This is especially the case with budget-starved state institutions. Recession-struck taxpayers have had enough of subsidizing the education of college and graduate students regardless of their financial need, not to mention paying increasing salaries to tenured faculty who have guarantees against lay-offs that few other taxpayers enjoy. For example, in November 2010 the Chronicle of Higher Education reported that voters in Washington State had rejected ballot propositions that would have authorized a $100 million bond issue for education facilities and an income tax surcharge on individuals making over $200,000 per year earmarked for education services, among others. New Mexico voters similarly turned down a $155 million bond issue for capital improvements in state university facilities.
States long committed to excellence in higher education have radically reduced their direct education funding. In terms of their histories of using college degrees to promote economic development and social mobility, states are shifting from “Mission Accomplished” to “Mission Abandoned.” Many elite nonprofit universities abandoned that mission long ago, and likewise now find it hard to reclaim it as their endowments suffer from wrong-headed financial bets.
The adverse effects of consumer-driven competition combined with the Great Recession have been shared to a considerable degree by public and private universities. But the variances in impact in terms of budgetary and other factors are worth examining separately.
The Big Squeeze on Public Universities
By the start of the first decade of the twenty-first century, the value of a college degree had become so well established in the public mind that taxpayers were beginning to question the commitment of a substantial portion of state budgets to subsidizing the cost of higher education for both rich and poor alike.
The disparity in lifetime income between those with a college degree and those without has been clear for decades. Beginning in the 1970s, however, the link between education and opportunity became both stronger and more transparent in economic and cultural terms. According to a 2006 census analysis in the Chronicle of Higher Education, the earnings differential in favor of those with college degrees over high school graduates had increased from 36 percent to 76 percent, amounting to $1 million over a working lifetime. The wage gap continued to grow even though the supply of college-educated workers increased. The gap between average yearly earnings of college graduates as compared with high school graduates had grown from $18,000 to $22,000 per year, and for those with graduate degrees the gap against high school grads had increased to $45,000 a year.
Other significant advantages have consistently accrued to college graduates. In 2009 almost 95 percent of individuals with college degrees enjoyed employer-based healthcare coverage compared with 77 percent of high school graduates and 67 percent for high school drop-outs. Similarly, almost 90 percent had access to employer-provided pension plans compared with 81 percent for high school graduates and 53 percent for dropouts. In the wake of the Great Recession, those with college degrees were only half as likely to become unemployed as high school graduates.
Even before the recent economic collapse, the college advantage was becoming so clear that across the country state legislatures were increasingly reluctant to continue to fund even their flagship universities at the same levels as before. The message from taxpayers was loud and clear, pushing state institutions to emulate private colleges by increasing tuition well beyond the rate of inflation and by seeking outside (non-taxpayer) sources of revenue, including aggressive recruiting of “full tuition” students from out-of-state. By 2004 for example, 72 percent of tuition revenue at the University of Colorado was being generated by the 30 percent of students from outside the state.
As competition for lucrative out-of-state students intensified, public universities were slowly but surely drawn away from their historic mission of providing educational access to the sons and daughters of their own states’ taxpayers whose modest means might not otherwise provide for a university education. The State of Virginia, for example, had by 2004 reduced its contributions to UVA’s $1.7 billion operating budget to 8 percent from a level of 28 percent two decades earlier. Other states were following suit. A 2004 BusinessWeek article noted that, while no public university had yet been fully privatized, “creeping privatization” was accelerating a broader movement by the top 100 state flagship institutions to increase tuition by double-digit rates, squeezing out the poor. Four-year public colleges had raised tuition by 90 percent on aggregate in the preceding decade.
The overall result is that public universities that were designed to provide broader access to higher education were turning more into private enclaves open primarily to the sons and daughters of relatively wealthy families. At Ohio’s Miami University, for example, the median family income had already topped $100,000 by 2004. In the same year, the entering freshman classes at the nation’s 146 most selective colleges and state flagships, included just 3 percent from the bottom socio-economic quartile, while 74 percent came from the top quartile. Five years later, after the onset of the Great Recession, state universities were moving even more aggressively to cut the financial ties between the taxpayer and academia, while still pursuing the strategy of raising tuition beyond the rate of inflation and pursuing full-tuition-paying students from outside their borders.
In 2009 the American Association of State Colleges and Universities (AASCU) detailed just how adversely the Great Recession had affected state budgets across the country and their ability to continue funding higher education in the face of other priorities. The states, in aggregate, cut $102 billion to address shortfalls in FY 2009, having suffered the largest drop in tax collections in the last half century, and were agonizing over $120 billion in additional shortfall for FY 2010.
That same study also projected a dire outlook for long-term recovery. Revenues based on conservative projections were coming in far below anticipated amounts in most states. Personal income tax receipts, which comprise about a third of state funds on average, were down more than 25 percent. In some states, such as Arizona, that negative percentage was much higher. As the Chronicle of Higher Education concluded in the spring of 2010, “Even when the economy does begin to bounce back state revenues typically lag recovery by at least two years.”
The impact of declining tax revenue on academic resources has been severe for public higher education across the country. In early 2010, Florida State University laid off twenty-one tenured and fifteen tenure-track faculty. In the prior year, the University of Florida had eliminated eighty-one faculty positions (2 percent of the total), and increased its student/faculty ratio to twenty-to-one, among the nation’s highest. Also in 2009, 121 faculty and 123 staff positions were left vacant at the University of Georgia, where some employees were also forced to take six furlough days a year. While at the University of Wisconsin, employees were forced to take eight furlough days and state grants were cut for about 20,000 eligible low-income students.
In 2009, Rutgers University in New Jersey delayed faculty raises to avert hundreds of layoffs. The absence of funding from either state or private credit markets for capital improvements also forced Rutgers to move some entering students into hotels because the crunch of dormitory space could not be relieved without new construction. In 2010 the University of Nevada, Reno announced plans to close its College of Agriculture and other academic departments to meet an $11 million mandatory budget cut. In South Carolina, higher education spending in the state had dropped by 2009 to roughly 1995 levels. The State of Hawaii cut faculty salaries by 6.75 percent, effective January 1, 2010. Although the University of Michigan was able to avoid major cutbacks with tuition increasing private fundraising and general “belt-tightening,” officials considered eliminating a “Promise Scholarship” that had been providing millions in scholarship dollars for needy Michigan residents. Late in 2010, North Carolina Governor Beverly Perdue warned that state’s public universities that they should increasingly rely on private gifts and grants as revenue sources–including to help pay for research–in the face of continuing public budget shortfalls. Even the Texas University System, which had been sheltered from some of the worst impacts of the Great Recession by the state’s oil-based economy, was forced to freeze hiring for many positions system-wide, and UT Austin began laying off staff members in 2009 to free up funds to recruit and retain top professors.
Of course, continuing state budget cuts mean that larger proportions of state universities’ budgets must be funded by tuition and fees, making “full tuition” out-of-state students an attractive target. More state universities accordingly are aggressively pursuing such students. For example, the University of Massachusetts announced plans in 2009 to double out-of-state enrollments and a similar focus is occurring at the University of Wisconsin, which draws 35 percent of its students from beyond state borders.
Douglas S. Greenbird, executive dean at Rutgers University School of Arts and Sciences, noted that “the temptation for us to recruit more out-of-state students is very common and very strong.” But each nonresident place means one less slot for a New Jersey resident, leaving Rutgers with only two options: get bigger or increase tuition. “Every time tuition goes up we increase the possibility that we become more like a private university,” Greenbird concluded.
Moreover, “getting bigger” without attracting full-tuition payers from out of state only increases operating deficits, as schools suffer net losses on their in-state admits. The only other option for many state university systems is continued tuition increases for in-state students. Michigan aggressively pursued out-of-state students while raising in-state tuition 50 percent between 2004 and 2009. Such increases are likely to continue due to an overall state budget shortfall of $1.7 billion. Meanwhile the University of Colorado Regents, while proposing a 9 percent tuition jump for in-state students, held its rate for the out-of-staters it depends on to a 5 percent increase.
In several cases, annual in-state tuition increases have leapt to double digits. Nevada, Florida, Washington and Utah indicated their in-state tuition rates would grow in 2010-11 by 10 to 15 percent–an astronomically high multiple of projected consumer price inflation in the same period. And California, as is its nature, topped them all with a 32 percent increase over two years in its flagship UC system.
Meanwhile, cash-strapped families faced with “operating deficits” of their own have clearly been reconsidering the value proposition of any high-dollar educational investments, whether in-state or out-of-state, private or public. A September 2009 Chronicle of Higher Education report found that colleges that try to recruit more out-of-state enrollments have confronted “sticker-resistance” from middle-class families that might in the past have taken loans to cover tuition at a private university or a prestigious out-of-state public college.
Consumers of higher education are increasingly skeptical that colleges are doing all they can to keep costs in line and tuition affordable, as we will detail in Chapter II. In effect, state institutions are being hit by a “double whammy”: just as they are finding it harder to attract high-tuition-paying out-of-state students, they are confronted with increasing demand from their own in-state residents for additional entry spots, which in turn would increase their operating deficits. As a result, many set in-state tuition as high as they can get away with, while reducing expenses by cutting course availability to the bone, which makes today’s path to graduation a long hard slog.
Nowhere is this situation more acutely evident than in the State of California. Pay cuts of 5 percent for the president of the university system and other senior executives in 2009-10 were a just a token response to the state’s higher-education-budget dilemma. Coming into 2008-09, the California State University System lost 30 percent of its state general funds appropriations. Additional cuts imposed in the 2009-2010 fiscal year meant that the system had lost more than two-thirds of its baseline state support from the early 1990s. By mid-summer 2009, the UC Board of Regents had also approved a furlough plan requiring every employee to take between eleven and twenty-six days off during the school year without pay. Even the 32 percent two-year tuition increase added by the UC Regents will not be enough to make up for the budget shortfall and its dramatic negative impact on student access to the courses needed to graduate.
Taken together, the University of California, California State and California Community College systems were forced to turn away close to 300,000 students in the 2009-2010 academic year. At UCLA alone, 165 courses and 428 staff positions were cut, 162 hiring searches were cancelled and salaries were reduced by an aggregate $37 million, while applications were increasing at the rate of 9 percent, with half the applicants presenting high-school grade-point averages of 4.0 or better.
While lower cost options at local community colleges across the country have generally not been hurt quite as much by state funding cuts as four-year “flagship” institutions, California’s deeply impacted community college system lost $520 million of its aggregate budget in fiscal 2009-2010, translating into more than 95,000 students losing their places. At Foothill-DeAnza College, one of the leading community colleges in California if not the nation, fully one-third of the student population was wait-listed for at least one class in the fall of 2009. At City College of San Francisco virtually the entire 2010 summer class schedule was cut to help close a $12 million budget gap.
At the same time, the California State University system announced that it would reduce its enrollment by 9 percent, or 40,000 students, forcing all twenty-three campuses to essentially close admission for the spring 2010 term. Both University of California and CSU top administrators say that each system needs about $1 billion more in annual funding to restore educational quality to a 2001 level–the last time those university systems were in relatively good fiscal health. But in California as elsewhere, pleas from university administrations to restore state funds have fallen on deaf ears.
While the California State University system received $716 million in one-time support from the federal stimulus package, that funding was only a temporary boost. (Across the country, the stimulus replaced $2.4 billion of the $2.8 billion of state college funding cut in 2009.) The CSU chancellor requested an additional $884 million in state support to supplement stimulus money and to meet an avalanche in applications for FY 2010-2011–up 53 percent over the prior year, as more California families turn to the cheaper options of “home-state” education. But there was virtually no chance that the chancellor’s request would be honored by the state legislature.
In March 2010, the Chronicle of Higher Education headlined that state budget cuts were “pushing public colleges into peril” in California and in many other states. The consequence was that state support for higher education would be reduced to such low levels that the “new fiscal reality” could narrow institutional missions, reduce course offerings, and raise tuition. It came as no surprise then that the California State University Trustees approved another, two-step increase of 15.5 percent in fees to take effect in 2011.
State governments are being forced by their legislatures to begin a new dialogue regarding the specific roles of each element of multi-campus university systems and to tailor accountability measures focused on those discrete missions. Rather than continuing to focus on increasing tuition revenues and out-of-state enrollment growth, state legislatures are now looking to go forward with a “right-sizing” approach that provides low-cost options to low- and moderate-income residents, while at the same time ruthlessly weeding out duplication, inefficiency and procedures that add unnecessary cost.
The “default option” of getting into a fight over out-of-state enrollments with elite private institutions would likely be a fool’s errand for many state universities, as well as a socially undesirable step away from their core missions. While state-supported colleges have been spared the problem of declining endowments common to private, nonprofit institutions, they have not been spared the necessity to revisit how their basic operating models and delivery systems address their missions. Stephen Portch, former chancellor of the University System of Georgia, advises that although “higher education is changing by virtue of 1,000 painful cuts,” it won’t be the same ballgame in the future. “This time,” he warns, “it isn’t coming back to normal.”
Indeed, California may again be pointing the way forward to the “new normal.” The president of the UC System, the state governor and the UC Board of Regents have announced their support for an initiative to create an “eleventh campus” for the system–one in which course offerings would be delivered entirely over the Internet. Although there is little funding immediately available for such an initiative, it introduces many possibilities about once again providing broad access, for both in-state and out-of-state students. For once, it appears, a state system has been forced to rethink itself for the sake of its “customer.”
The Big Squeeze on Private Universities
The too-easy money derived from financial “alternative investments” that triggered the Great Recession in the private sector also enticed the best-endowed private higher education institutions into ill-considered speculation in financial derivatives and private-equity bets. These proved almost as troublesome for them as they did for the “best and the brightest” on Wall Street.
The largest universities in the US faced over $38 billion in collective endowment losses for the fiscal year that ended June 30, 2009. Percentage losses at Harvard, Stanford, Princeton, Yale and the University of Chicago each were in the neighborhood of 20-25 percent. Harvard, which has long held the richest endowment, had the largest one-year loss of nearly $11 billion. A study by the National Association of College and University Business Officers found that overall endowments at 842 institutions of higher learning experienced an average 18.9 percent decrease for that fiscal year.
The effects of the Wall Street portfolio model on investments at five major New England universities “wreaked havoc, jeopardizing the security of academic programs” according to a study by the Center for Social Philanthropy at Boston’s Tellus Institute. The study cited fiscal 2009 losses of 17.5 percent at Boston College, 22.1 percent at Boston University, 21.6 percent at Brandeis, 22.8 percent at Dartmouth and 20.7 percent at MIT. The study suggested that the presence of many financial industry executives on university boards was creating at least the appearance of conflicts of interest, perhaps leading to reluctance to change investment practices. The results of these practices, however, while not out of line with the general effects on other private investments during the height of the Great Recession, did bring on some serious programmatic belt-tightening even at the most prestigious colleges.
In the wake of endowment losses, the Harvard University School of Arts and Sciences announced a retirement program for up to 127 professors, and included options for professors over age sixty-five to wind down their work over one, two or four years, resulting in an 18 percent decrease in the 720-member faculty. Stanford University cut 420 staff positions, including an equivalent of nearly 20 percent of its Development Office of a 250 people. Stanford also asked each department for a 15 percent budget cut, cancelled or delayed $1.4 billion in proposed construction projects, instituted selected hiring freezes, and reduced the number of active faculty searches.
For some of America’s most elite private universities, however, the impact of the Great Recession on their endowments will amount to a “speed bump” that will not seriously jeopardize their ability to provide high quality education for their “highly selective” cohorts of students. The repercussions felt by a broader range of private colleges and universities however are much more severe.
Many independent nonprofit schools followed the elite schools’ pattern of investments in alternative assets, but lacked deep endowment cushions. The spending binges at many of these institutions reflected the mentality of the now infamous housing “bubble.” Many gorged on cheap credit for construction, technology and creature comforts even as their relatively smaller endowments began to decline. As the cost of those new assets began to eat into their operating budgets, they struggled to extract higher tuition and fees from cash-strapped families who were dealing with their own problems from the effects of the Great Recession.
As a result, many private institutions will be forced to change what they do to survive. They may merge with bigger schools or even sell themselves to for-profit institutions to avoid closing down. Sandy Baum, a senior policy analyst for the College Board cited by Bloomberg, put it bluntly: “Small colleges with no reputation could well go out of business particularly the more they are tuition driven.” Others estimated as many as 200 independent colleges lack the capital to meet their expenses in the long run, especially as the Great Recession’s effects persist into the next decade.
Similarly, many private educational institutions must also adjust their own expectations downward in view of the new economic realities. As a report in Barron’s in June 2009 summarized, the “Big Squeeze” has hammered the endowments of colleges that followed an investment portfolio policy designed to provide optimal returns with allegedly relatively low risk through a disproportionate allocation to hedge funds, private equity, real estate and commodities. The simple truth is that there will be no return to their “old normal” in the wake of the Great Recession.
Byron Wien, the respected former senior analyst at Morgan Stanley, was cited by Barron’s as observing that the investment “portfolio model” used by elite universities is now dead. “The idea used to be that every asset had a predictable return and volatility based on history. History, however, is less useful now.” (Emphasis supplied.) Wein’s Observation is an excellent summary of where private universities of a certain size and market presence find themselves today.
In addition to sharply declining endowment values, private colleges are facing a decline in private giving as well. Donations declined by almost 12 percent ($3.7 billion) in 2009. Private liberal arts colleges were the hardest hit, with an 18.8 percent decline. Alumni support fell to an average of 10 percent, the lowest level ever recorded, and the average gift from alumni declined 13.8 percent.
As a result, some prestigious private universities are being forced to “triage” their programs for the first time in ages. A Brandeis University committee, for example, recommended in early 2010 that twenty-four faculty members and a range of academic programs, such as theater design and anthropology, be eliminated due to shortfalls in endowment earnings and donations.
Some colleges are still tempted to bet on a return to the “old normal” in both the financial markets and the economy generally. But more likely they will be faced with adjusting to a “new normal” in their operating plans. The days of floodlit pools and student apartment complexes resembling luxury five-star hotels are trinkets of the past at most private universities.
Many undergraduate schools that had turned to borrowing in order to fund physical and technological amenities to entice students now find themselves drowning in debt that they cannot service. And new buildings and staffing increases intended to achieve specialized accreditations now constitute more of a burden than a benefit with the shift in “family values” toward less expensive state-funded institutions.
During the spending binge before the Great Recession, many schools continued to jack-up tuition at rates significantly above inflation, counting on the bull-market wealth of parents and rising endowment values to fund future operating budgets. When the credit markets collapsed in 2008, schools that had over-borrowed and over-spent faced a sudden, debilitating liquidity crisis. The same credit-rating agencies whose practices and judgments had facilitated the ability of these schools to borrow in easy-credit markets have put a post-recession squeeze on these schools to fundamentally change their business models in order to survive. For example, in April 2009, Moody’s determined that increasing credit risks had changed its general outlook for the higher education sector to “negative” from “stable.” The number of downgrades to college credit ratings in the first three quarters for 2009 was almost twice that of all 2008, and the number of “negative outlooks” published during that year out-paced the number for all of 2008 by 50 percent. Nearly all rated colleges and universities reported weakened balance sheets for the 2009 year.
Smaller private institutions will not have the luxury of time or circumstance to bring their bloated balance sheets back to health. The rating agencies have laid down clear markers for assessing the ability of universities to survive in this new environment. Moody’s called special attention to A- and BAA-rated private colleges, which are far less diversified in their revenue sources than AAA- and AA-rated schools, and are more dependent on tuition revenue. Moody’s noted that while the multi-billion-dollar federal stimulus program was adding funds to help the public sector and research universities in significant ways, a much smaller proportion of such stimulus dollars was passed on to private colleges and universities.
Moody’s identified fourteen specific warning signs that could trigger further rating reviews and downgrades for higher education institutions, including: rising operating deficits; qualified audit opinions; unexpected increases in debt; defaults under bond covenants; and exposure to a high proportion of debt at variable rates of interest. Universities that had invested in derivatives and swaps experienced significant declines in the fair value of those investments and Moody’s observed those universities would be forced to post large amounts of cash collateral with their counterparties (the same problems AIG got itself into in its end game).
In pointing the way forward to mitigate these serious financial stresses, Moody’s identified steps that private universities could take to slow their capital and operating spending and build liquidity. Moody’s especially called for improved disclosure as well as changes in management practices at the top level of universities, including the development of multi-year financial plans.
As Moody’s predicted as early as October 2008, private schools, like state universities, also face emerging resistance to ever-increasing tuition and fees. That prediction has come true as more and more students and their families have adjusted their sights downward in terms of the “cost-value” continuum.
As private colleges in financial distress are forced to rethink their business models, the great temptation will be to mirror the out-of-state tuition hunt underway at public universities by increasing tuition discounting in order to sustain or increase enrollment. According to the Chronicle of Higher Education, freshman discount rates at four-year schools had increased to an average of nearly 40 percent even in pre-recession 2007 (up from 37 percent a decade earlier). More recently, InsideHigherEd.com reported that in 2009 the discount rate for entering freshman had increased to 42 percent, well above the 35 percent level that experts consider to be the trigger for financial risk. (Colleges should bear in mind that such desperate discounting practices could not at the end of the day save the American automobile industry.) Nonetheless, the price of enrollment shortfalls without serious tuition discounting will be severe. Some private nonprofit schools have been forced to suspend retirement contributions for employees, impose furloughs and eliminate administrative and support positions for programs that attract the smallest enrollments. Such traditional “muddling-through” measures were employed after previous recessions, but those did not have the same severity as the 2007-2010 financial meltdown.