Friday, October 31, 2008

Wall Street Journal: Universities Begin to Feel Crunch

All these stories we post continue a mosaic of higher costs of living for Americans in the long run as median wages falter. In the "richest country on Earth" many kids have been forced to borrow $20,$30,$40K to get higher education - creating a ball and chain around their lives for the first decade post graduation. Or robbing their parents the ability to save for retirement. The house ATM hid this situation for half a decade but now we're seeing reality. Looks like costs are set to even go higher... remember our thesis that state budgets are going to be a complete disaster in 2009 - which means sharp reductions in what states can give to their state universities.

At some point the discounted cash flow model is going to show that it is better to begin work at 18 - at a lower wage - and skip the 4 years of wasted earnings potential plus the massive debt many are now being forced to pay off from their higher education. In fact, I would not be surprised if we've already passed that point for many careers outside law, medicine, and the like. Remember the chart we outlined in September at how far ahead of inflation college tuition is rising. A breaking point must be reached at some point as people cannot borrow against their homes to help their kids go to college.
  • The financial and economic tsunami that has ripped through Wall Street and the housing market is beginning to wash across the college green. Higher education hasn't yet seen anything to compare with foreclosures and bank nationalizations in the private sector. But seized-up credit markets, shrinking endowment funds and a reduction in state subsidies are punishing universities from California to Vermont.
  • A campus construction boom is slowing, administrations are cutting jobs and faculty may be forced to pay more into their pension funds. The demise of a $9.3 billion investment fund used by 900 colleges has some schools scrambling to pay their bills.
  • College construction soared to $15 billion in 2006 from $10 billion in 2001 (50% increase in 5 years? obnoxious)
  • It all brings a gloomy pall to what has been, until recently, a booming industry. Higher education has grown rapidly in the last half-century into a formidable slice of the economy. U.S. colleges and universities spend $334 billion annually, employ 3.4 million people and and enroll 17.5 million students. (aka it's now a "big business" but without the cost cutting of most enterprises)
  • The boom was powered by a growing stream of donations, strong returns on endowments, rising enrollments and tuition prices that climbed well above the rate of inflation -- paid, more and more, by families who borrowed heavily to meet the bills.
  • he cratering stock market has already hit endowments. Falling markets typically take a toll on gifts, many of which are made, for tax reasons, in the form of appreciated stocks and bonds. Analysts and schools are predicting even bigger tuition increases than those seen so far. But this time, families may be in no position to meet the higher bills. Falling house prices have sapped their ability to use home-equity loans for tuition payments, and the credit crunch has forced many lenders to stop making student loans. (bingo)
  • "This is the worst environment for colleges I can remember," says Mark Ruloff, a consultant at Watson Wyatt in Arlington, Va., who advises college endowments. With their ability to raise capital curtailed by the crisis, schools may be forced to sell their most liquid endowment assets at a time when the markets are not offering much, he predicts.
  • Molly Corbett Broad, president of the American Council on Education, which represents 1,600 colleges and universities, says public schools face the greatest challenge in a slumping economy because they get as much as three-quarters of their revenue from state taxpayers.
  • She says students could face double-digit tuition increases next year, up from the typical 4% to 6% level in recent years. Some university presidents privately confided to her that their institutions, which she declined to name, are even considering midyear tuition hikes. (how much blood can you squeeze from a rock?)
  • Ms. Broad adds that small private colleges without hefty endowments may have to consider merging with bigger rivals.
Some examples of the current situation, and again - we haven't seen anything yet...
  • University of Massachusetts system this week said it would have to cut its budget by about $25 million, or 5%. The flagship Amherst campus froze hiring in all but the most critical positions.
  • Boston University's president sent faculty a letter late last month announcing that the school is imposing a freeze on new hires and new construction projects.
  • The state of Colorado has frozen hiring and state construction projects, including about $50 million worth at public universities
  • The Tennessee Board of Regents, which oversees the University of Memphis, five other universities and 13 community colleges, has been forced to cut $58 million since July. Bob Adams, vice chancellor for business and finance, says the system, with 190,000 students, may have to increase tuition "fairly significantly" next year. Including tuition, room and board and other fees, students typically pay $12,500 annually.
  • The University of Memphis recently announced a voluntary employee buyout program. Mr. Adams says schools are also delaying equipment purchases, such as laboratory equipment, and library acquisitions, including books and subscriptions. He says he suspects that classes will get larger because of rising enrollments and shrinking staffs.
  • The University of California, Berkeley, faces $28 million in cuts or unavoidable cost increases for the academic year that began in July. He says that rising health care costs will result in an 11% increase in the cost of providing medical and dental benefits to staff starting in 2009.
Every time I read these type of stories I remember the CNBC pundits in summer 2007 saying "what's the big deal even if housing slumps (not that it will!); it is only 4.5% of GDP" What they forget is housing is the base of so much tax revenue in this country... the dominoes will fall one after the other through the system. And universities are actually going to have to act like private enterprises...

Disclaimer: The opinions listed on this blog are for educational purpose only. You should do your own research before making any decisions.
This blog, its affiliates, partners or authors are not responsible or liable for any misstatements and/or losses you might sustain from the content provided.

Copyright @2012