How the Economic Hard Times Will Affect Colleges

From the issue dated November 14, 2008

By LAWRENCE WHITE

So what next? In rapid succession and over what seems like an impossibly short period of time, our nation's economy has absorbed a series of staggering body blows. In ordinary times, any one of them would have been the biggest business story of the year.

Trillions of dollars of the market value of publicly traded stock have evaporated in the past 12 months, a big proportion of it in September and October. Credit has dried up. Banks are unable or unwilling to engage in short-term lending and are hoarding cash. Credit standards have tightened, and in certain parts of the country it is almost impossible to secure intermediate or long-term loans.

The national unemployment rate was 4.8 percent a year ago. In September it was 6.1 percent. Economists expect jobs to drop by an average of 74,000 a month for the next year and project that the unemployment rate will reach close to 7 percent by June 2009. In some states — hard hit by mortgage foreclosures and corporate retrenchment — the unemployment rate could rise close to or even above 10 percent by the end of the academic year.

That's where we are today. What impact will continued financial turbulence have on higher education in the weeks and months ahead? Colleges will probably have to deal with:

Affordability issues. All of the investment and savings vehicles that parents and independent students traditionally use to pay college expenses — appreciated home values, prudently invested savings, private and government loans, lines of credit — have evaporated, making it considerably more difficult for millions of Americans to finance the cost of higher education. At colleges already struggling to fill seats, the enrollment pinch may become acute as spring-semester tuition bills are mailed to enrolled students in the next few weeks.

Affordability problems will be compounded by the convergence of three other factors related to the deteriorating economy. First, the federal Pell Grant budget will fall billions of dollars short of the needs of eligible students and their families. This year Congress appropriated $14-billion for Pell Grants. But as early as July, the projected number of Pell Grant-eligible students had already risen by 800,000 over the previous year. Today higher-education officials estimate that Congress will need to appropriate an additional $6-billion to meet the needs of eligible students during the current academic year.

Second, institutions are hard pressed to make up the gap in federal aid because their own institutional aid budgets are shrinking as endowments are eroded by the plummeting stock market and more students clamor for assistance.

Finally, just as parents are scrambling to find money for college, institutions are raising tuition to make up for cuts in state aid, fund-raising shortfalls, and reductions in endowment income. Some state higher-education systems are considering taking the almost unprecedented step of imposing midyear or midsemester increases in tuition and fees.

Problems accessing debt and credit markets. Colleges are steady borrowers. They use proceeds from bond issuances to finance capital construction and long-term leases. They even out cyclical revenue flows by tapping lines of credit. In many ways, colleges are better positioned than other enterprises to cope with paralysis in lending markets. Their ability to offer tax-exempt interest payments makes their bonds attractive to lenders, and their predictable cash flows give them access to credit lines other enterprises can't tap.

Yet the cost of borrowing has already spiked. The Wall Street Journal reported in October that seized-up credit markets have forced many colleges and universities to cancel or slow projects for the construction of new buildings. Other institutions fear that voters may not approve bond referenda for campus construction. For institutions that can still tap into lending markets, the cost of borrowing can be expected to go up even further as bond yields jump.

Liquidity fears. Like all good-sized organizations, colleges park uncommitted money in "near cash" accounts — money-market accounts, mutual funds, and Treasury notes. The dollar value of assets held in those accounts dwarfs every other investment medium. Historically those funds have been as safe and liquid as cash, and colleges move money on a daily or even hourly basis among such funds and from those funds into their operating accounts.

But many forms of near-cash accounts do not enjoy the same kind of deposit-insurance protection available to holders of commercial bank accounts. In September and October, nervous investors withdrew unprecedented amounts from near-cash accounts, creating problems of liquidity and redemption for even the largest of those funds. According to The New York Times, in the week after Lehman Brothers filed for bankruptcy, in September, investors withdrew more than $169-billion from the nation's money-market funds. September saw a freeze on redemptions from accounts at Commonfund, which holds endowment and other assets for about 1,800 colleges. Putnam Investments also briefly froze withdrawals from its Prime Money Market Fund, a popular parking place for college operating money. Since then mutual and hedge funds have experienced sporadic illiquidity. The failure of even a small number of near-cash funds could cause snowballing liquidity problems for colleges, making it difficult for some institutions to pay bills and meet payroll for weeks or even months at a time.

Fragility in the insurance sector. Colleges are heavy purchasers of insurance products. They use commercial policies to protect against slip-and-fall claims and motor-vehicle-accident claims, as well as for construction subrogation, medical malpractice, directors' and officers' liability, and environmental exposures, among many other risks. Following the near-failure of the American International Group — a major underwriter of college insurance policies — concerns surfaced over potential problems at the nation's largest insurance companies. In early October, insurance companies lost almost a third of their market capitalization in one five-day period, on fears that capital erosion would affect their liquidity and ultimately their solvency. For colleges, problems in the insurance market have already translated into higher premiums and difficulty in purchasing policies.

Macroeconomic woes. This recession, according to analysts, will be deeper and more prolonged than those that preceded it in the 1980s and 1990s and the early part of this decade. In a disturbing article on the front page of The Wall Street Journal on October 27, economists concurred that job loss, unemployment, and home foreclosures are already deeper and more widespread than at comparable points in the cycles of previous recessions, raising the prospect that this one will be longer and more painful than any recession since the Great Depression of the 1930s.

Colleges will feel the impact in many ways. High unemployment rates will mean that greater numbers of students will have to postpone college. State budgets will suffer, and appropriations to support public institutions will be reduced — and have, in fact, already been reduced in as many as half the states. Some institutions have instituted hiring freezes and layoffs, and we can expect the number of belt-tightening institutions to grow rapidly.

We can foresee that employees will be asked to endure benefit reductions and to pay more for the benefits they already receive. As is always true in periods of financial stringency, labor malaise will affect workplaces. The number of employee grievances and employment-related lawsuits will grow, and collective bargaining will become more contentious. Any executive-compensation arrangement that could be characterized as excessive will be questioned.

Economic bad times will make it more difficult for institutions to conduct fund-raising campaigns. Defaults on pledges and planned gifts will increase. Corporations and foundations will reduce their philanthropic giving, and federal support for research and development will dwindle. Institutions will feel pressure to dip into endowments or increase their spending rates to protect the operating budget against draconian cuts — but at the cost of reducing endowments that are already being hammered by dropping asset values.

So — to return to the question with which we started — what is likely to come next?

First, we will continue to see growing pressure on the Treasury Department, the Federal Reserve Board, and Congress to re-engineer the $700-billion rescue plan enacted in early October. Its principal focus has been to restore liquidity to the financial-service sector. We can see growing indications that other sectors — insurance, automobile manufacturing, and state and local governments — will agitate for rescue plans of their own, financed either through rededicated pieces of the $700-billion or through follow-on rescue plans.

Second, we will see discussion — heatedly partisan, in all likelihood — of a second stimulus bill from Congress. Last February 13 — a date that seems like a lifetime ago in terms of the national economy — President Bush signed into law a stimulus package of more than $150-billion, consisting largely of direct rebates to taxpayers. Congressional leaders are now talking about a differently designed stimulus package — perhaps in the range of $150-billion to $300-billion — with features that might benefit higher education directly. The new plan might include payments to hard-hit states that could be used to support midcycle, supplemental appropriations for public institutions, and additional funds for Pell Grants and other federal student-aid programs.

And third, we will reach something of a moment of truth in early 2009, when colleges get their first glimpse at spring-semester enrollments. At that point we will be able to gauge whether — as many economists have predicted, and as many higher-education officials fear — this recession will cause pain not only immediately and deeply, but for a sustained period.

Lawrence White, formerly chief counsel to the Pennsylvania Department of Education and general counsel at Georgetown University, is an educational consultant in Philadelphia. This article is adapted from remarks at the University of Vermont's 18th Annual Legal Issues in Higher Education Conference, in October.

Section: Commentary
Volume 55, Issue 12, Page A120
http://chronicle.com/weekly/v55/i12/12a12001.htm

Meet our New Deal President - in China!

During the election, Obama got a little play with his little program for infrastructural development. He plans to create a "National Infrastructure Reinvestment Bank," because nothing says efficiency and stability like a title with the word "bank." This entity would then spend $6 million dollars, as Dr. Evil would say - ok, $60 billion dollars in our dollars. The catch - it would do this over 10 years.

Using America's world-renowned math skills, I divide 60 by 10 and get 6, umm, 6 million, whoops, $6 billion dollars a year. Since the US has 300 million or so people, that means that our New Deal president-elect plans to spend, per person per year, for the renewal of American prosperity - 20 bucks!

Meanwhile, China just announced its own stimulus package, focused on public works: the equivalent of $586 billion, in two years. Since China has about 1.4 billion people, it will spend a little more than $200 per person per year, or almost exactly 10 times the Obamanomics amount.

But hey, we can think big like China too: we're spending $200 per person per year - to bail out failed banks. And that's just round 1.

The Bell Tolls

Amazing headlines today for your old m-c pals Freddie Mac and Fannie Mae, the descendants of Bailey's Bank in It's a Wonderful Life that kept the speculative mogul wolf Potter outside the door and built the US middle-class. How about "Big Mortgage Death Watch - Freddie and Fannie in freefall." As we saw yesterday, even airline management has figured out that the US run by finance capital is a chain of Pottersvilles.

The New Dark Ages

The signs are everywhere that we continue to move backwards into the political past. One of the most important is the return to private government.

• A good piece on Gazprom in Russia describes the extent to which the country's monopoly gas and oil company controls the state. Putin's handpicked successor as President was Dimitri A. Medvedev, Gazprom's Chairman. Here he is, thumbs up, posing with his favorite rock group, Deep Purple. Deep Purple was my favorite rock group too - for a few months in 1972. Why do moguls and hedge-fund managers like groups who long ago stopped having anything to say? OK, I answered my own question. Back to Gazprom - their taxes constitute 20% of the Russian state's budget, may soon surpass everyone's favorite oil company Exxon Mobil as the world's largest, will start to raise domestic gas prices 25% per year (Medvedev's brilliant idea), and is about to accept the man Putin is replacing as Prime Minister, Viktor Zubkov, as its new chairman. Musical chairs - or neofeudalism.
  
• The US State Department has renewed Blackwater's contract to provide security for US diplomats, the NY Times reported yesterday. Blackwater had been under investigation for starting a Baghdad firefight that killed at least 17 Iraqis last September. Oh well. Rep. Henry Waxman says he can't understand the renewal. He's right to be upset, but wrong not to understand it. "The chief reason for the company’s survival? State Department officials said Friday that they did not believe they had any alternative to Blackwater, which supplies about 800 guards to the department to provide security for diplomats in Baghdad. 'We cannot operate without private security firms in Iraq,' said Patrick F. Kennedy, the under secretary of state for management. 'If the contractors were removed, we would have to leave Iraq.' The US government is neither large nor independent enough to protect itself. A little harmless outsourcing - or neofeudalism.
  
• Finance historian Peter Bernstein starts his column today with this: "In the darkest days of the Depression, Treasury Secretary Andrew W. Mellon, one of the richest men in the United States, opposed any government action to stem the tide of plunging business activity and soaring unemployment. Instead, he urged a policy of supreme indifference. 'Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,' he said. 'It will purge the rottenness out of the system,' he added, and values 'will be adjusted, and enterprising people will pick up the wrecks from less competent people.'" Vicious, lazy, rich-man pseudo-Darwinism? No - just neofeudalism. Bernstein rejects it, but his piece is so defensive in suggesting it was ok for the Fed to intervene in the credit crisis this year that it's clear that modern government is in his financial circles a beleaguered thing.
• Same goes for Gretchen Morgenson's headline, "Big Rescues Can Work," which summarizes the difficult collaboration among banks, unions, governmental bodies, etc. that refinanced New York City's bad debt in 1976. She notes that President Gerald Ford's attitude really was "New York: Drop Dead" until he went to "an economic summit outside Paris sponsored by President Valéry Giscard d’Estaing of France and Chancellor Helmut Schmidt of West Germany." These leaders told him that if he didn't fix New York he'd have "a global dollar crisis." Ford didn't care about New York, but he did care about the dollar, in part because he cared about himself, and his election campaign.

Politics as usual - or neofeudalism? Ford was the starting point of Pitiful Government as we know it today. I vote for the latter once again.

Pains of Slow Decline

The Pew foundation has released a new poll about middle class decline, and I've pasted in the wire service summary. Papers are cutting back, you know - no one's around to actually read the report live. Dismal.

Decaying infrastructure is a related topic, since public services and the middle-class decay in lockstep. It killed a firefighter in LA two weeks ago. And the amazing airline chaos of the past couple of weeks offers the private version of the same underinvestment, in the air services at prices that allowed the masses to go long distances for the first time. Jeff Bailey at the New York Times has a good overview of the long-term problem that led one carrier - American - to cancel 3000 flights during last week.

***


http://www.latimes.com/business/la-fi-pew10apr10,0,2719008.story
From the Los Angeles Times
Middle-class Americans say they're feeling pinched
From the Associated Press

April 10, 2008

WASHINGTON — More middle-class Americans say they aren't better off than they were five years ago, reflecting economic pressures amid growing personal debt, a study released Wednesday found.

Their short-term assessment of personal progress, according to the study, is the worst it's been in nearly half a century.

The survey by the Pew Research Center, a Washington-based organization, paints a mixed picture for the 53% of adults in the country who define themselves as "middle class," with household incomes ranging from below $40,000 to more than $100,000.

It found that a majority of all Americans said they hadn't progressed in the last five years.

One in four said their economic situation had not improved, while 31% said they had fallen backward. Those numbers together are the highest since the survey question was first asked in 1964. Among the middle class, 54% said they had made no progress (26%) or fallen back (28%).

Asked about their financial experiences in the last year, 53% of middle-class people said they had to cut spending because money was tight. Nearly 18% said they had trouble getting or paying for medical care, while 10% reported they had lost their jobs.

Looking ahead to the coming year, half of the middle class surveyed said they expected to have to further reduce personal spending. Among those employed, one in four, or 25%, expressed worries that they would be laid off, that their job would be outsourced or that their employer would relocate in the coming year, while 26% were concerned that they would see cuts in salary or health benefits.

Middle-class prosperity overall also lagged compared with richer Americans. From 1983 to 2004, the median net worth of upper-income families -- defined as households with annual incomes above 150% of the median -- grew by 123%, while the median net worth of middle-income families rose by just 29%.

At the same time, most middle-class people remained upbeat when asked to measure their progress over a longer time frame, although their level of optimism lagged behind their wealthier counterparts. Two-thirds, or 67%, of middle-class Americans say their standard of living is better than the one their parents enjoyed at the age they are now.

In contrast, 80% of the rich said they exceeded their parents' living standard. Among lower wage earners only 49% reported better conditions.