It’s as if our whole society has forgotten how to budget or live within our means – all of us at the same time.
The U.S. federal budget will be front and center in our politics for the foreseeable future, with the current fiscal cliff negotiations to be followed in the new year by equally heated discussions on the debt ceiling.
But look around. It’s not just the federal government that is having difficulty with the concept of a budget. Household debt continues to hold steady at unhealthy levels. Nerdwallet.com estimates American household debt at $11.4 trillion, and most worryingly, credit card debt has started to climb again.
After the financial crisis, one of the narratives that made its way into the mainstream media was how saving was back in vogue in America as folks cleaned up their household balance sheets. To the extent that this was true, it didn’t last long. Indeed, most of the decline was a result of credit-card company writedowns, or as Nerdwallet summarized:
“In 2010, credit card companies wrote off seriously delinquent debts in earnest, lowering the total amount of revolving credit card debt. The charge-off rate – the percentage of dollars owed that issuers have written off as uncollectable – rose to 10.9% in the second quarter of 2010. This represented an increase of over 300% from the first quarter of 2006, when the charge-off rate was only 3.1%. Charge-offs account for a significant portion of the debt reduction.”
Even as mortgage and credit-card debt were falling, however, the other key variable of household debt – student loans – continued to rise. Currently, American households have $914 billion in student loans, which marks a 7.35% increase from last year according to Nerdwallet. How is it that, as other kinds of household debt fell during The Great Deleveraging, student loans continued to rise?
Administrative Bloat
The Saturday Essay in today’s Wall Street Journal provides an excellent window on the world of today’s higher education industry. In it, Scott Thurm explores the fiscal troubles of public universities, most of which are struggling with declining state funding and soaring costs. The predictable result is that the costs are increasingly being passed on to the students, who in turn must finance rising tuition with debt. Thurm tells the story of a Colorado man who compares his college experience in the mid-1980s with that of his daughter, a current undergraduate. Both generations attended Colorado University in Boulder. The father paid about $4,000 per year; today, the daughter pays about $23,000 for the same education. Meanwhile, faculty-to-student ratios have remained exactly where they were a generation ago and are trending in the wrong direction.
Stories like these abound because this is the unavoidable reality of today’s higher education industry. Although I passed through college a little later than the man in the WSJ story, my experience is not much different. During my final semester of college in the early 1990s, my tuition was a little less than $1,000. That same tuition today is around $5,000.
But why?
One of the most-discussed items that figure into the bulging operational costs of higher education is administration. When I was in school, about 20 years ago, college administration was a sleepy little corner of the world, populated (usually) by academic wash outs and part-timers. But not too long ago, this began to change. Benjamin Ginsberg, a professor at Johns Hopkins University, explored this change in his 2011 book The Fall of the Faculty. Ginsberg explained:
“Every year, hosts of administrators and staffers are added to college and university payrolls, even as schools claim to be battling budget crises that are forcing them to reduce the size of their full-time faculties. As a result, universities are filled with armies of functionaries – the vice presidents, provosts, associate provosts, vice provosts, assistant provosts, deans, deanlets, deanlings, each commanding staffers and assistants – who, more and more, direct the operations of every school.”
This more or less hits the nail on the head.
Often the case is that this newer class of administrators arrives from the business world’s ranks of upper and middle management, and at least one lesson from the business world has made itself at home inside the university – excessive compensation. Corporate executives have long understood that virtually no one is minding the candy store. Even as sales and/or profits decrease inside a business, it is incredibly easy to earn escalating salaries and bonuses (take the recent example of Hostess executives earning bonuses even as the company hurtled toward bankruptcy and eventual liquidation).
This same class of people has realized much the same thing about universities; the board of trustees, with whom ultimate power rests, is composed of folks who are usually out to lunch, not unlike most corporate boards of directors. Corporate boards are famously known for their lack of leadership and accountability and are often easily cowed by the CEOs they are supposed to oversee. University boards of trustees are subject to even fewer regulations to compel them to exercise their fiduciary duties, and college presidents and lesser administrators face little resistance to their sucking in an ever-greater share of university resources.
And, so, the predictable occurs. The administrative class continues to grow at the expense of what is supposed to be the core mission of the university – teaching and research. And this growth is not cheap. While administrators have gone to great pains to limit the growth of faculty salaries (often by hiring on part-timers and leaving full-time positions vacant), there doesn’t seem to be any limits placed on administrative salaries. It has been well-known for some time that college presidents now earn salaries that rival corporate CEOs; what is less known, however, is the steady rise in pay of lesser functionaries on campus, or as Ginsberg wrote, “Somewhat more difficult to explain is the fact that by 2010, even some of the ubiquitous and largely interchangeable deanlets and deanlings earned six-figure salaries.”
Debt & Delusions of Grandeur
To pay for what Dr. Ginsberg has dubbed “the all-administrative university,” students are now beginning their adult lives with a debt load that averages around $30,000 per household. But financing the extravagance of today’s universities is not just a matter of student debt. Increasingly, universities themselves are taking on massive debt to finance the fantasy. Earlier this week, The New York Times examined the finances of U.S. universities and discovered that their balance sheets are coming under stress. Andrew Martin reported:
“Overall debt levels more than doubled from 2000 to 2011 at the more than 500 institutions rated by Moody’s, according to inflation-adjusted data compiled for The New York Times by the credit rating agency. In the same time, the amount of cash, pledged gifts and investments that colleges maintain declined more than 40 percent relative to the amount they owe.”
The escalation in administrative pay and headcount is not the only factor in soaring operational costs. Martin also cites what he calls The Edifice Complex, which he defines as a “spending binge to build academic buildings, dormitories and recreational facilities — some of them inordinately lavish.” Construction starts on campus far outpace the general economy, and after a brief lull following the financial crisis, we are seeing new capital projects climb once again, despite the obvious lack of traditional funding.
Normally, when a sane person encounters a project for which he has no funds, you find a cheaper alternative or learn to do without. University administrators don’t seem bound by this relatively simple fact of life.
The Times article contains numerous quotations from university administrators justifying the spending binge. It is easy to feel sympathy for some of them, like Thomas H. Powell, president of Mount Saint Mary’s University in Maryland. While I’m not familiar with the specific circumstances of the school, its 2008 master plan, which included a variety of construction and renovation measures, comes off as relatively modest compared to some schools, even though the school took on debt that exceeded its total endowment in order to get it done.
However, the typical justifications that administrators use to provide cover for their use of funds are beginning to sound hollow. The pursuit of “better quality students” is a familiar refrain. But if you reduce the problem down to a few basics, you begin to realize how misguided a goal that is and how cynical the response is. For instance, for a state school that receives anywhere from one-third to one-half of its funding from the state, one would expect its primary mission to be oriented around the education of in-state students. Once schools begin pursuing “better quality” out-of-state students to the detriment of in-state students, it erodes the foundation on which the funding is provided in the first place.
Furthermore, administrations have done much to muddy the idea of what, precisely, constitutes better quality in the student body. Administrators are often the loudest proponents of moving away from traditional measures of academic achievement when vetting applicants. While I don’t necessarily support the idea that traditional measures, like standardized testing, should be the exclusive determining factor in college admissions, one needs to understand that, when administrators speak of “better quality” students, they do so in a very self-referential, almost tautological way. In effect, “better quality” is whatever they believe it to be.
Another oft-heard justification for spending beyond our means is the ever-present need to attract “better quality” faculty, but again, in a world where the concept of quality has become devoid of common meaning, it’s hard to sympathize with administrators on this point. The faculty angle is a favorite justification of administrators who want to build fancy new libraries, research labs, and the like. However, compare that desire to construct gleaming new buildings with the average faculty salary, and it’s easy to be cynical about the administrators’ motivations. If “better quality” faculty were truly the goal, I would think simply increasing their base pay would do the trick, but a full professor’s salary at an average state school is about the same as that of any one of the proliferating “deanlings” that Dr. Ginsberg so humorously details in his book.
One final justification typically provided is the omnipresent demands of college rankings, like those of U.S. News & World Report. I never felt these rankings to be particularly helpful; their methodologies are suspect, their data-gathering encourages corruption, and their results often hint at significant differences where, frankly, there are none. But administrators, rather than reveal the rankings for what they are, typically play along. And why wouldn’t they? After all, complying with the massive amount of paper-pushing required by these surveys only aggrandizes their power within the university. This reveals a dynamic that is fairly common throughout all forms of bureaucracy – the need to justify one’s own existence.
If we revisit Mount Saint Mary’s University once again, you begin to see the utter silliness of the “keeping-up-with-the-Joneses” approach that rankings encourage. The Mount, as it’s affectionately called by locals, now has a debt-to-endowment ratio greater than one, and now has the distinction of being ranked the 23rd best university in the North region by U.S. News. And by the way, this distinction can be all yours for the bargain price of just $33,000 per year! I don’t think it’s petulant of me to suggest a problem here with the return on investment.
I don’t mean to pick on Mount Saint Mary’s. It is a fine school. It’s also private, so it’s not exactly an apples-to-apples illustration of the problems facing state schools. My own alma mater, the College of Charleston, might be a better example. Over the past 15 years, the College has embarked on an ambitious spending spree, opening new dormitories, a new library, a new basketball arena, and countless other purchases of real estate on the Charleston peninsula, which for those of you unfamiliar, is not exactly cheap. I recently received an email from the College’s president where he confidently asserted his “mission” of making the College a “national university.” The school is currently ranked 11th by U.S. News for universities in the South. If we were ranked 21st or 31st, would I feel any different? Not really. And the students probably wouldn’t either. It seems the only folks who really care about these rankings are the administrators themselves. And they’re willing to imperil the fiscal condition of their schools to further the delusion.
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