How greed, incompetence, and neglect led to bad decisions
The economy may not have hit rock bottom, but the finger-pointing over what went wrong is well under way.
In some ways, higher education has been a victim of the recession — but not a defenseless victim. Smart moves clearly helped some colleges and universities avoid the worst of the downturn. But mistakes have left many others in the lurch.
The downward spiral has brought layoffs, budget cuts, and anxiety to many campuses. With the cuts have come protests and recriminations.
Scores of college presidents have written open letters that describe dire finances and make the case for an era of belt-tightening. But missing in many of those messages are explanations of how colleges landed in their predicaments, and who is to blame.
The Chronicle came up with 13 common mistakes that have put many colleges in the fix they’re in. There’s plenty of responsibility to go around, in the industry and beyond. And the choices that people made are likely to haunt higher education for years.
1. Took on Risky Investments
David F. Swensen is a rock star among endowment managers, and many colleges have tried to duplicate his success.
With a portfolio heavy on hedge funds and private equity, Yale University’s chief investment officer averaged annual returns of more than 16 percent for 20 years. Yale’s endowment reached $23-billion last year.
Times have changed. Yale officials say a quarter of the value of its investments have evaporated. The university is considering layoffs and delaying construction projects.
The pain will be deeper for most imitators of the Yale model, who have far less cushion.
Mr. Swensen has said the diversity of his model will pay off in the long run. But he acknowledges that most colleges lack the resources to have properly followed his lead.
2. Sloughed Off as Trustees
By most accounts, the glory days of rubber-stamp governing boards have passed. But the shocking tale of Bernard J. Madoff and J. Ezra Merkin, two trustees of Yeshiva University who allegedly defrauded the institution — and many other investors — suggest that some boards are still nodding off on the job.
Trustees are fiduciaries, responsible for ensuring that colleges have sound finances. They must push back when administrators take on risky debt or allow an institution to become too tuition-dependent. That clearly has not happened at many colleges. Even worse, some board members (Mr. Madoff was treasurer of Yeshiva’s board) continue to have conflicts of interest.
3. Relied on Cheap Credit
Colleges have assumed tens of billions of dollars in new debt over the past decade in pursuit of better facilities and expectations of growth. Many of them saved millions in interest payments with the bond-market equivalent of adjustable-rate mortgages. But when the credit markets seized up last fall, those low-interest bonds and loans, on which they had banked their futures, suddenly became a lot more expensive to carry. Institutions with healthy reserves have managed their way through — though certainly at a price.
Even under the best of circumstances, there are costs to refinancing variable-rate debt and unraveling complicated "swap" agreements. Some institutions, like the Colorado School of Mines and Simmons College, with fewer resources to fall back on, have seen their credit ratings downgraded. The price of cheap credit may soon be measured in program cuts and job losses.
4. Failed to Play Well With Others
Millions of workers have lost their jobs in recent months. But tenured professors are hard to fire. And some powerful faculty unions have resisted when colleges asked their members to teach more classes, despite what seemed like reasonable requests.
The faculty union at Kean University, for example, balked last year when administrators tried to require professors to teach on Fridays and some Saturdays. The public university, located in New Jersey, was facing a $4.5-million cut in the state’s contribution and was trying to get more use out of classroom buildings.
Faculty members considered the proposal an assault on their autonomy and a retaliation for a previous squabble with administrators. Since then Kean has postponed several construction projects and raised in-state tuition by about 8 percent.
For more than a decade, colleges have had a tremendous appetite for building. According to Sightlines, a company that analyzes space utilization on more than 200 campuses, 14 percent of those colleges’ buildings have been built in the past 10 years. Among research institutions, the proportion is even higher.
Many motivations have led to this building boom, but often a key driver is the quest to impress prospects, whether faculty members or students (and their parents). Energy-intensive research buildings. Swanky residence halls. Climbing walls. Olympic-size swimming pools. They are like the expensive cars that real-estate agents drive — they project an image of success.
What kind of future have these colleges built for themselves? A burdened one. The bulk of the cost of any building comes after it is built — in the energy needed to run it and the maintenance needed to keep it functioning. Those happen to be costs that well-heeled donors are unlikely to support, whether their names are on the buildings or not.
Deferred maintenance is already a problem in higher education, running into the hundreds of millions of dollars at many institutions. In the building boom, many colleges have merely added to infrastructure they already cannot support.
6. Bowed to Boosters
Many voices stoke lofty gridiron ambitions. Trustees and politicians often clamor for a good football team, particularly at flagship public universities. Even governors have been known to meddle in coaching decisions.
But big-foot boosters like Philip H. Knight, at the University of Oregon, and T. Boone Pickens, at Oklahoma State University, often call the shots. Viewing themselves as majority stockholders in a company, some high fliers browbeat administrators into making accommodations for king football.
Scores of fancy facilities were built on donors’ pledges. But with the donors’ bank accounts taking a dive, it’s the universities that will pay.
7. Stumbled at the Statehouse
Even in good times, competition for state money can be tough, as some lawmakers charge that colleges waste tax money on pretty buildings and underworked faculty members.
It can be much worse during economic downturns, when higher education must compete for scarce dollars against elementary schools and health care for low-income families, among other needs.
More colleges are finally waking up to a well-known reality: Politics is the art of compromise. The University of Arizona hopes to appease state lawmakers by consolidating more than a dozen colleges and eliminating dozens of majors that produce few graduates. The university has also assembled a team of economists and policy experts to present budget alternatives to lawmakers.
Not so in neighboring Nevada, where the university system’s chancellor, James E. Rogers, has waged a bitter public battle with Gov. James Gibbons over his proposed 36-percent cut to the system’s budget. While legislators may not go along with the governor’s entire plan, Mr. Rogers’s fiery rhetoric may leave hard feelings after he steps down this year.
8. Led With Unchecked Ambition
Building booms and hiring sprees can be fine during flush times. But a recession requires a president who can say no, not one who pads his résumé at the college’s expense.
Some observers say an abundance of ambition helped bring down John D. Petersen, who last month announced his resignation as president of the University of Tennessee. The system is facing a budget deficit of up to $100-million, which it says could result in 700 layoffs. Apart from Mr. Petersen’s commitment to the university, some critics say he was too focused on research and expensive growth.
"We are really struggling to meet core competencies," says John Nolt, a professor of philosophy on the flagship campus, in Knoxville, and chairman of the Faculty Senate.
9. Failed to Find a Niche
Small private colleges that have failed to differentiate themselves will face increasing obstacles as the student population shrinks.
Tuition-driven private colleges that have not established a firm identity will lose prospective students to those that have staked out a clear market position, as well as to lower-cost public universities, community colleges, and for-profit institutions, which are nimble at marketing.
Pamela Fox, president of Mary Baldwin College, says the key to staking out turf is doing it within the college’s mission. For Mary Baldwin, that means adding a personal touch to both a traditional women’s campus and adult education centers. Colleges must clearly show that they add value beyond their liberal-arts core, she says: "That’s the gravy that goes with your meat and potatoes."
10. Ignored Customers’ Needs
Dormitories and the campus quad are images of America’s higher-education past that now apply to only a minority of students. Today’s college students are older, often have jobs, and are less likely to be white. Many are not interested in a traditional residential experience.
What’s more, as the nation’s population growth has shifted to the South, the numbers of potential students who can pay full freight are now more often located in hot spots like suburban Dallas and Atlanta.
Colleges that have paid close attention to those shifts are generally in decent shape. Leading that pack are for-profit institutions, most of which have healthy bottom lines despite the recession.
The colleges that succeed in this evolving new world will be the ones that aren’t afraid to try new ideas, like setting up out-of-state branch campuses, spending more on strategic advertising, and building partnerships with community colleges.
11. Built Duplicative Centers
Universities love nanotechnology laboratories. Biotech ones, too. And while some of those labs may reap benefits for the institutions and for society as a whole, it’s a safe bet that the country has many more nanotech and biotech facilities than it can support.
So, too, with a host of other research ventures, many of which quickly prove redundant or unproductive. With fewer federal grants available, these centers are often a drain on a university’s finances, drawing resources that could be used for student financial aid or faculty raises.
12. Overcommitted Their Budgets
Much of higher education lived high on the hog for the five years before the credit implosion of 2008. Endowment returns averaged 17.2 percent across the industry in 2007, and state budgets were flush.
While few budget planners could have foreseen the scope of this financial crisis, those who set money aside in recent years are much better off today.
Experts say the most serious mistake colleges made was to commit almost every dollar of their projected income to capital and operating expenses. Institutions that made overly optimistic building plans and other commitments are much likelier to be laying off employees or slashing budgets now.
13. Stymied Accountability Efforts
When the Bush administration’s Commission on the Future of Higher Education aimed to bring more accountability to colleges and universities, the only member of the panel who refused to sign the document was David Ward, who represented the nation’s biggest higher-education group.
It was a clear act of defensiveness.
College lobbyists eventually succeeded in killing the commission’s proposal to develop a national system to track the progress of each student in the country. They also resisted efforts to make the accreditation process more open and to establish a consumer-friendly database that would allow parents, students, and policy makers to compare institutions. Instead, the higher-education associations decided to build their own online tools — except they couldn’t agree on a model. So the public colleges created one system, and the private institutions another.
Left unchecked, college costs have continued to rise, along with student debt. Some for-profit lenders pushed loans that few students understood while some financial-aid officers stood silently by. New York’s attorney general later accused dozens of colleges and alumni associations of taking kickbacks, and financial-aid officers of accepting consulting fees and stock options from lenders. (Inside Higher Ed)