Debt and taxes: Can the financial industry save public universities?

Representations

Volumn 116, Issue , 2011, Pages 128-155

  Meister, Bob ^a  

^a NONE

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EID: 80054104633     PISSN: 07346018     EISSN: None     Source Type: Journal    
DOI: 10.1525/rep.2011.116.1.128     Document Type: Article

References (70)

1. The "revenue theory of costs" at universities was first described in Howard Bowen, The Costs of Higher Education (San Francisco, 1980)
2. Jane V. Wellman summarizes it as follows: "that the institutions raise all the money they can, and spend all the money they have." See Jane V. Wellman, "Costs, Prices and Affordability," Background Paper for Secretary of Education's Commission on the Future of Higher Education," ED.gov, U.S. Department of Education, http://www2.ed.gov/about/bdscomm/list/ hiedfuture/reports/wellman.pdf.
3. Most writings on higher education make a version of this point. See, e.g., Wellman, "Costs, Prices and Affordability,"
4. and Anya Kamenetz, Generation Debt: How Our Future Was Sold Out for Student Loans, Bad Jobs, No Benefits, and Tax Cuts for Rich Geezers-And How to Fight Back (New York, 2006).
5. Public universities expect to get additional funding from the state in return for taking higher enrollments-the total amount is generally negotiated as part of their annual budget process-but they get more revenue from higher enrollments even if the state reneges, as it did in California after 2008. A recent audit of the University of California shows that its total revenue from state support plus student fees actually grew by 22 percent from 2005-6 to 2009-10 despite a 9 percent drop in aggregate state funding due to the recession. The audit attributes this overall revenue growth to a combination of higher enrollments (13 percent) and student fee increases that netted a 47 percent gain. California State Auditor, "University of California: Although the University Maintains Extensive Financial Records, It Should Provide Additional Information to Improve Public Understanding of Its Operations," July 2011, Report 2010-105, chap. 1, Table 1. http://www.bsa.ca.gov/pdfs/ reports/2010-105.pdf. In the two recessionary years (2008-9 and 2009-10), when the state failed to fund enrollment growth, UC generated an additional $568 million from tuition and fees of which $137 million was attributable higher enrollments and $431 million to rate increases. This did not fully offset the cumulative $751 million decrease in state funding during those two years (16-20, and Table 2), even though UC had reached its tuition targets a year or two ahead of schedule as a response to the state's budget disaster. Despite this lag, the audit reports that "over the five years we examined, the amount of revenues in the tuition and fees fund category grew more from a dollar standpoint than any other category" (16).
6. Bob Meister, "Eleven Theses on Growth," http://www.aaup-ca.org/ SCFA-Theses-on-Growth-Final.pdf.
7. Research is part of a public university's mission and should be valued in all fields regardless of cost. It is, however, a fiction that high-cost research generally produces profits that subsidize the rest of the university. Public universities such as UC pursue high-cost projects because they increase gross revenues. They cover net losses on research through enrollment-generated funds and by carrying forward expenses associated high-cost (high-loss) contracts and grants. In my five years observing the UC budget process from the inside, this was rationalized on the grounds that current losses were really investments in a future in which gross revenues from all sources are projected to increase to meet the university's ever-rising costs. There was, however, no projection of a break-even point at which rising revenues would equal rising costs and the university's investment in high cost projects would be repaid. (All of us who study UC finances are indebted to the work of Professor Charles Schwartz. See, e.g., "Who Pays the Hidden Cost of University Research," Minding the Campus, August 9, 2010, http://www.mindingthecampus. com/originals/2010/08/who-pays-the-hidden-cost-of-un.html and, more generally, his blog site, http:// universityprobe.org/).
8. For an example of research available immediately before UC embarked on privatization, see Michael Middaugh et al., "The Delaware Study of Instructional Costs and Productivity," National Center for Education Statistics, June 2003. The Delaware study is being updated by Dr. Heather A. Kelly.
9. See, e.g., Heather Kelly, "Assessing Faculty Productivity: Looking at the Delaware Study," PowerPoint presented at the Association of Schools of Allied Health Professions 2008 Spring Conference, March 14, 2008, St. Pete Beach, FL, http://www.asahp.org/ppt/Heather-Kelly.ppt.
10. For the essential data see Christopher Newfield, "The View from 2020: How Universities Came Back," Journal of Academic Freedom 2 (2011): 3-4, 7-8, http:// www.academicfreedomjournal.org/VolumeTwo/Newfield.pdf.
11. This enrollment-driven business model could be used by universities to get Wall Street to finance their expansion plans. For an elaboration of this point see Bob Meister, "They Pledged Your Tuition," Council of UC Faculty Associations, http://cucfa.org/news/2009-oct11.php. My three follow-up articles are available on the same website.
12. "Those college graduates working in jobs that do not require college degrees are earning substantially less per week (30-40 percent less) than their peers who work in jobs that require college degrees. These substantially lower weekly earnings reduce the private and social economic return to college education for such individuals to close to zero"; Andrew Sum, "The Nation's Recent College Graduates Face Significant Labor Market Problems," Huffington Post, October 19, 2010.
13. The University of California Academic Senate (based on work by its Committee on Planning and Budget) has produced authoritative studies (the "Futures Report" and the "Cuts Report") demonstrating that UC privatization, as a revenue scheme, was never part of a broader plan to maintain the budgetary quality of instruction; Committee on Planning and Budget, "The Futures Report," December 2006, http://www. universityofcalifornia.edu/senate/reports/AC.Futures.Report.0107.pdf;
14. University Committee on Planning and Budget, "The Cuts Report," March 2008, http://www.universityofcalifornia.edu/senate/ reports/cuts.report. 04.08.pdf.
15. Simon Kuznets, "Economic Growth and Income Inequality," American Economic Review 45, no. 1 (March, 1955): 1-28.
16. Elizabeth Hill, Legislative Analyst, "California's Changing Income Distribution," August 2000, 8, Legislative Analyst's Office, http://www.lao.ca.gov/2000/0800-inc-dist/0800-income-distribution.pdf. "Particularly notable has been the shift for wages, where the share attributable to the top 20 percent of returns has increased from 37 percent in 1975 to over 49 percent in 1998. This shift is significant since wages account for over 60 percent of total income reported by households on tax returns" (2).
17. Deborah Solomon, "Questions for Mark Yudof: Big Man on Campus," New York Times Magazine, September 24, 2009.
18. For an indispensable discussion of these issues see, Christopher Newfield, Unmaking the Public University: The Forty-Year Assault on the Middle Class (Cambridge, MA, 2008), part 3.
19. "U.S. Household Deleveraging and Future Consumption Growth," FRBSF Economic Letter, May 15, 2009, Federal Reserve Bank of San Francisco, http://www.frbsf.org/publications/economics/letter/2009/el2009-16.html
20. Reuven Glick and Kevin J. Lansing, "Global Household Leverage, House Prices, and Consumption," FRBSF Economic Letter, January 11, 2010, Federal Reserve Bank of San Francisco, http://www.frbsf.org/publications/economics/ letter/2010/ el2010-01.html.
21. (I thank Joshua Aizenman for sharing these documents.) On the relation of household leverage to higher education, see Kamenetz, Generation Debt.
22. For the 20 years of post-Cold War euphoria (c. 1989-2009) poor people were encouraged to think that borrowing more is a form of enrichment and paying more in taxes as impoverishment. Neoliberal economists, such as Hernando De Soto, thus came to treat third-world poverty as a cash-flow problem: poor people did not have enough to spend. Because revolution and redistributive taxation were off the table, the solution to this problem, at least in city slums, was to allow squatters to borrow against their hovels by pledging them as collateral. For lenders, and increasingly for global capital markets, this was a play against the spread between the growth in urban property values and the overall growth of GDP. Lenders knew that as urban real estate increased in value poor people could pay off their loans out of higher borrowing even if they did not have higher income. And at any point where their income was insufficient to make payments, their previously unowned property could be foreclosed and developed. As long as the price of urban real estate (financial asset) was growing faster than GDP (the underlying economy), lenders did not care whether the proceeds of their loans would actually increase the incomes of the borrower. For a penetrating critique of De Soto, see Timothy Mitchell, "The Work of Economics," Archive of European Sociology 46, no. 2 (2005): 297-320 (and Mitchell's earlier writing cited therein). In the case of student loans (more than 75 percent of which are secured by US Treasury obligations), the issue of foreclosure does not arise, but neither does the problem of lender risk. The parallel with extending credit to thirdworld city-dwellers is that the total volume of student loans has increased, not because of greater ability to repay, but because of a widening spread between two economic indices: the index of income inequality and the index of aggregate economic growth. It is this spread (according to modern finance theory) that would increase uncertainty among potential students and thus raise the price they would pay for any kind of hedge that lenders are willing to finance.
23. The now-standard view that educational attainment explains both aggregate economic development and income dispersion is neatly summarized in Raghuram Rajan, Faultlines: How Hidden Fractures Still Threaten the World Economy (Princeton, 2010), chap. 1 ("Let Them Eat Credit"). Although Rajan believes that the tuition bubble should come to an end through greater public investment in higher education, some economists and business leaders have begun to argue that it is already coming to an end as degrees stop yielding incomes sufficient to repay the debt incurred
24. Paul Krugman, "Degrees and Dollars," New York Times, March 6, 2011, Opinion, http://www.nytimes.com/2011/03/07/opinion/07krug man.html
25. and Sarah Lacey, "Peter Thiel: We're in a Bubble and It's Not the Internet. It's Higher Education," Tech Crunch, April 10, 2011, http://techcrunch.com/2011/04/10/peter-thiel-were-in-a-bubble-and-its-not-the- internet-its-higher -education/.
26. Stanley Fish, "The Value of Higher Education Made Literal," New York Times, December 13, 2010. Fish's article is a critique of the Browne Commission Report on Higher Education in the UK.
27. The possibility is adumbrated in Anya Kamenetz, DIY U: Edupunks, Edupreneurs, and the Coming Transformation of Higher Education (White River Junction, VT, 2010).
28. These thoughts are based on Robert Shiller, Macro Markets: Creating Institutions for Managing Society's Largest Economic Risks (New York, 1993)
29. Robert Shiller, The New Financial Order: Risk in the 21st Century (Princeton, 2003). Some of Shiller's arguments derive from the seminal work of Kenneth Arrow on secondary markets that share the risk of changing income distributions.
30. See, e.g., Kenneth Joseph Arrow, Essays on the Theory of Risk-Bearing (Amsterdam, 1974).
31. California Budget Project, "New Data Show that California's Income Gaps Continue to Widen," Policy Points, California Budget Project, June 2009, http://www.cbp.org/pdfs/2009/0906-pp-IncomeGaps.pdf.
32. Emmanuel Saez, "Striking It Richer: The Evolution of Top Incomes in the United States (Updated with 2008 Estimates)," July 17, 2010.
33. See also, "College Jobs and Inequality," New York Times, December 13, 2010.
34. Andy Xie, "Embarrassment of Riches," Caixin Online, February 1, 2011, http:// english.caing.com/2011-02-01/100223434.html.
35. See Wendy Brown, "Why is UC Borrowing 7 Million to Fund the On-Line Education Pilot Project?" Remaking the University, http://utotherescue. blogspot.com/2011/04/why-is-uc-borrowing-7-million-to-fund.html.
36. Suzanne Guerlac, "Humanities 2.0: E-Learning in the Digital World," in this issue.
37. For the changing role of humanities in making the university experience count as an "education," see Geoffrey Harpham, "From Eternity to Here: Shrinkage in American Thinking About Higher Education," in this issue.
38. Miriam Reimer, "For-Profit Education Stocks: Winners & Losers of 2010," Street, December 15, 2010, http://twitter.com/#!/miriamsmarket/ status/15084222335164416.
39. Alan Michael Collinge, The Student Loan Scam: The Most Oppressive Debt in U.S. History-and How We Can Fight Back (Boston, 2009). According to Collinge, the landmark Higher Education Act of 1965 (HEA), which created student loans, was passed when public colleges were largely tuition-free: the direct loan component of this legislation, later called Stafford Loans, allowed students to borrow for tuition charged by private universities so as to relieve the pressure on public universities in the post-Sputnik era, when ramping up college enrollments had become a national goal. A further policy objective of the HEA was to bring more private capital into the student loan business by offering federal guarantees for private loans. In 1972 the Nixon administration sought to leverage this federal guarantee by creating the Student Loan Marketing Association (Sallie Mae), which bought those loans from banks to make more credit available in the market. Originally, however, Sallie Mae depended on the US Treasury to fund these purchases, so the total amount available to students from both Sallie Mae and Stafford Loans was controlled by the federal government. In 1997 Sallie Mae was allowed to privatize-to become privately owned and self-funding. As a private corporation Sallie Mae could leverage the federal guarantee of nonperforming loans, which still applied, to raise much larger amounts on capital markets that could be lent to students at both the federally guaranteed interest rate and the much higher rate applicable to nonguaranteed loans. Between 2003 and 2008 Sallie Mae and other major lenders were also able to securitize their student loan portfolios by creating debt-backed securities as investment vehicles through which investors, including sovereign funds, could get a return higher than that of US Treasury bonds on a principal that was guaranteed by the US Treasury in the event of default. The creation of these new investment instruments vastly increased the volume of funds available for student loans-and thus, indirectly, the obligation of the US Treasury to fund its guarantee
40. The result, according to Iowa Senator Tom Harken, is that "the schools keep the money, the students keep the debt and the taxpayers lose"; quoted in "Price of Admission: America's College Debt Crisis," CNBC, http://www.cnbc.com/id/39911910.
41. Mamie Lynch, Jennifer Engle, and José L. Cruz, "Subprime Opportunity: The Unfulfilled Promise of For-Profit Colleges and Universities," The Education Trust, November 22, 2010, http://www.edtrust. org/dc/Subprime.
42. "Trends in Financial Barriers to Higher Education by Parental Income and Institutional Type/Control, 1990-2008," Postsecondary Education Opportunity no. 111 (January 2010): 1.
43. Lynch, Engle, and Cruz, "Subprime Opportunity."
44. Full Committee Hearing-The Federal Investment in For-Profit Education: Are Students Succeeding? September 30, 2010, Before the US Senate Committee on Health Education Labor & Pensions (statement of Lauren Asher, President, The Institute for College Access and Success).
45. "Strategic Options for Guaranteeing Long-Term Financial Accessibility for UC Undergraduates," March 2008, http://www.ucop.edu/sas/ sfs/docs/affordabilityrpt2008.pdf;
46. "Report on Financial Aid and Scholarships," October 10, 2010, http://cucfa.org/archive/2010-UCSC-Report-on-Financial-Aid.pdf.
47. UC Office of the President, "Options for Extending Financial Aid to Middle Income Undergraduates," http://cucfa.org/archive/2010-Middle-Income- Options.pdf.
48. Bob Jacobsen, "A Closer Look at UC's 'Tuition-Free Golden Past' and Who's Financially Hurting Today," March 31, 2010, The Berkeley Blog, UC Berkeley Newscenter, http://blogs.berkeley.edu/2010/03/31/a-closer-look-at-the- tuition-free-golden-past-of-the-university-of-california-and-whos-financially- hurting -today/.
49. "California State University Officials Outline Enrollment Cuts and Preview 2010-2011 Budget," Public Affairs, The California State University, http://www.calstate.edu/PA/News/2009/enrollment-budget.shtml.
50. Colleen Moore and Nancy Shulock, "Divided We Fail: Improving Completion and Closing Racial Gaps in California's Community Colleges," http://www.csus.edu/ihelp/PDFs/R-Div-We-Fail-1010.pdf, 10.
51. "New Survey Reveals Twice as Many California Community College Students Are Closed Out of Courses than the National Average," March 28, 2011, Pearson Foundation, http://www.pearsonfoundation.org/pr/20110328-new- survey-twice-as-many-calif-community-coll-students-closed-out.html.
52. Daron Acemoglu and James A. Robinson, Economic Origins of Dictatorship and Democracy (New York, 2006).
53. "Financial Options for Restoring Quality and Access to Public Higher Education in California," Keeping California's Promise, http://keepcaliforniaspromise.org/553/working-paper.
54. It is perhaps ironic that the more progressive state taxes are, the more volatile state revenues become-rising far faster than the economy in good times and falling more sharply than the economy during recessions. California's revenue volatility is the highest in the nation because it is one of the few states that taxes capital gains at the same rate as ordinary income and has a high top rate for ordinary income. (Capital gains tax revenues go up five times as fast as other state income sources during economic recoveries.) A further reason is that California became increasingly dependent on income taxation after 1978, when Proposition 13 indexed property taxes to acquisition, rather than market, value and capped property tax rates. Generally, state tax revenues are more than twice as volatile as gross state products-in California the ratio is much higher (three to four times as volatile) because of heavy reliance on income and capital gains taxes. Excessive revenue volatility (on the downside) is one reason that UC wishes to become less dependent on state funding, but it clearly hopes to benefit from state largesse in good budget years while locking in the tuition increases from bad budget years. For a thorough discussion of revenue volatility as a problem distinguishable from the size of state budgets see David Gamage, "Preventing State Budget Crises: Managing the Fiscal Volatility Problem," California Law Review 98 (June 2010): 749-811.
55. For discussions of high property taxes as a damper on income tax volatility see Jack Citrin and Isaac William Martin, eds., After the Tax Revolt: California's Proposition 13 Turns 30 (Berkeley, 2009).
56. There are broader issues related to the return of debt servitude (indentured labor) that have only recently been raised. See, e.g., Richard Dienst, The Bonds of Debt: Borrowing Against the Common Good (London, 2011)
57. Ross Perlin, Intern Nation: How to Earn Nothing and Learn Little in the Brave New Economy (London, 2011).
58. For a broader perspective see David Graeber, Debt: The First 5,000 Years (Brooklyn, 2011).
59. Most student debt is nonperforming at some point during the repayment period-in 2009 alone repayment rates were only 54 percent at publics, 56 percent at private nonprofits, and 36 percent at for-profits. (See, e.g., Tamar Lewin, "Low Loan Repayment Is Seen at For-Profit Schools," Education, New York Times, August 13, 2010, http://www.nytimes.com/2010/08/14/education/ 14college.html.) A 2011 study by the Institute for Higher Education Policy shows that "within five years of leaving school⋯, 23% used deferment or forbearance at some point (7% of these were because they went back to school), 26% were delinquent on their loans, and 15% defaulted
60. Erin Dillon, "Is College Worth the Risk," The Quick & the Ed, March 17, 2011, http://www.quickanded.com/2011/03/is-college-worth-the-risk. html.
61. For the full report see, Alisa F. Cunningham and Gregory Kienzl, "Delinquency: The Untold Story of Student Loan Borrowing," Institute for Higher Education Policy, March 2010, http://www.ihep.org/assets/files/ publications/a-f/Delinquency-The-Untold-Story-FINAL-March-2011.pdf.
62. Because student loans have negative amortization provisions, many students end up repaying far more than they borrowed even if they qualify for deferments and forbearances that allow them to avoid the added penalties and collection fees charged for delinquency and default; Mark Kantrowitz, "Interest- Only and Negatively Amortized Loan Repayment Plans," November 2, 2010, http://www.finaid.org/educators/20101102interestonlyrepayment. pdf
63. Collinge, Student Loan Scam, esp. chaps. 1 and 3. The Obama administration's "income-based repayment" scheme is a genuine reform that should mitigate the effect of negative amortization on student debt incurred after 2011, but only for borrowers who manage to keep current in their payments. All others will still be subject to the collection abuses allowed since 1998, and documented by Collinge in Student Loan Scam.
64. Carmen Reinhardt and Kenneth Rogoff, This Time Is Different (Princeton, NJ, 2009).
65. Collinge, Student Loan Scam.
66. The Project on Student Debt collects and updates this data, State by State Data, http://projectonstudentdebt.org/state-by-state-data.php; http://projectonstudentdebt.org/files/pub/classof2009.pdf.
67. For the most recent UC data, see http://www.ucop.edu/sas/sfs/docs/ regents-0910.pdf.
68. UC had in fact promised bondholders that it could do this as early as 2004. This means that UC was not "forced" to raise tuition in response to state bud get cuts in 2008: it rather planned to raise tuition regardless of state funding and took the opportunity to do so more rapidly when state funds were drastically cut. UC's original and supplemental bond indentures, demonstrating this point, are posted at The Council for UC Faculty Associations, http://cucfa.org/archive/. My four articles interpreting these documents are posted at The Council for UC Faculty Associations, http://cucfa.org/news/.
69. Cf. "Final Report," University of California Commission on the Future, November 2010, 30, http://ucfuture.universityofcalifornia.edu/ presentations/cotf-final-report.pdf.
70. Are students really paying to be ranked by the college admissions process and, then, for whatever additional sorting occurs while they are matriculated? For a mildly critical discussion of this possibility see Louis Menand, "Live and Learn: Why We Have College," New Yorker, June 6, 2011. See Wendy Brown's piece in this issue for a broader critique.