Is It Time for a Son-of-Restructuring Act for Higher Ed?

Table credit: SCHEV

At its May meeting today, the State Council for Higher Education in Virginia (SCHEV) explored letting Virginia’s elite universities charge higher tuition and/or admit more out-of-state students. Giving Virginia’s powerhouse institutions authority to generate more revenue would allow the state to reallocate state support to institutions that don’t have the pricing power to offset state cuts in support for higher education.

It is official policy for the state to pay for 67% of the cost of education for in-state students, while students pay for the other third. Funding cuts in recent  years have reduced the state percentage to 47%, putting considerable pressure on public colleges and universities to raise tuition in order to maintain their spending plans.

Council members have consistently voiced their preference for the state to increase its financial support for the higher-ed system. But if it fails to do so, members have agreed, SCHEV needs to consider giving colleges alternatives to raise revenue.

Giving universities even more leeway to set policy than they enjoy now, said council member Marge Connelly, “takes on the flavor of the next iteration of restructuring.” By that, she was referring to the 2005 Restructuring Act which created three levels of autonomy regulatory in exchange for meeting state goals for enrollment, affordability, research, and other priorities. Re-writing the relationship between higher ed and the state along the lines of the ideas in the SCHEV list of options would constitute a second-generation restructuring.

The options include:

  • Out-of-state-enrollment. Institutions would be authorized to increase out-of-state undergraduate enrollment. The current appropriation act restricts out-of-state participation to 25%. Because out-of-state students pay considerably higher tuition, increasing the percentage would create an influx of revenue. Highly ranked institutions like the University of Virginia, the College of William & Mary, and Virginia Tech presumably have the cachet to attract far more out-of-state students. (With its niche educational product, so does the Virginia Military Institute, which has 39% out-of-state enrollment.) The flip side is that fewer slots would be available for in-state students.  (See table above.)
  • Different funding ratios. Instead of maintaining a consistent funding ratio for all institutions (currently 47% of tuition), the state could adjust support according to need, “whereby students would receive a greater subsidy at one institution than they would at another.”
  • “Free” community college tuition. Other states are implementing “free” community college tuition policies. In Virginia, community colleges generate about $500 million in tuition revenue — potentially a huge loss of revenue. However, other states impose numerous restrictions on who qualifies for the free tuition. Therefore, states SCHEV, the fiscal impact of such a policy on Virginia’s community colleges would be considerably less than a half billion dollars.
  • More freedom to set tuition. In theory, the Code of Virginia authorizes the governing bodies of public colleges and universities full authority to set their own tuition, although the General Assembly has the power to override its own laws. While the General Assembly has largely respected university tuition-setting autonomy over the past decade, legislators responding to dramatic tuition increases over the past several years may not be willing to continue maintaining a hands-off attitude. SCHEV’s idea is to let some institutions set rates higher and direct limited general fund support to those lacking that capacity.
  • Charge out-of-state-students more. Appropriation Act language requires institutions to charge out-of-state students at least 100% of the cost of education.  The General Assembly could direct them to charge more than 100% of the cost — in effect to increase the profit margin on out-of-staters — and redirect General Fund support to other institutions. (See table below.)
  • As part of the restructuring deal in 2005, colleges and universities gained more control over procurement, human resources, capital spending, IT, and other functions, depending upon their administrative capacity. Perhaps, says the SCHEV list of options, “the Governor and the General Assembly could implement other changes for some or all of the institutions that would result in greater savings.

Council members’ reaction to the idea of having options was positive, although some took issue with particular options.

“My perception is that people don’t want to increase the percentage of out-of-state students,” said Heywood Fralin, a University of Virginia alumnus and SCHEV vice board chair.

Katy Webb, a retired lobbyist, said the discussion was “worthwhile” but urged caution on the grounds that “how one institution would be affected would be very different than another.”

Institutions with the flexibility to raise tuition or enroll more out-of-state students might not appreciate seeing their efforts being undercut fiscally by having the General Assembly reducing their state support, suggested Minnis E. Ridenour, a former Virginia Tech budget director.

SCHEV took no action on any of the ideas.

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6 responses to “Is It Time for a Son-of-Restructuring Act for Higher Ed?

  1. These SCHEV proposals are reasonable.

    But do they address the symptoms of the problems of Higher Education instead of its root causes? If they address only the symptoms, they will mask the underlying problems until those those problems finally overwhelm the system. This delayed reaction will cause far greater damage than would have been the case had the real problems been fixed earlier.

    I am sure that is what is happening today in Higher Education. Here is why.

    In the 1980s the savings and loan industry and Banks (to a degree) were deregulated, taxes were cut, and defense spending soared. The economy took off. With all the new large commercial lenders, commercial lending expanded dramatically, most particularly in the development of real estate.

    Now many more banks (incl. S&Ls) went looking for borrowers instead of the other way around. Lending criteria and standards declined. Loans were pushed out the door. More and more people could get loans and got loans. More and more commercial buildings were built. And the construction loans kept on coming as the standards and qualifications for getting those loans kept on getting lower and lower.

    Soon commercial buildings were being built without signed up tenants in place to occupy them. So there were no leases to secure the loans when monies went out the door into the new construction. These buildings were built on speculation. And as time when on and more and more buildings were built they were because because the construction loan monies had become like addictive drug. Banks would lend the drugs and the landowners would eagerly take the drugs to keep their “habit going”, building ever more new buildings on the hope that tenants would show up from somewhere and sign leases and fill up the new building and start paying rent before the new buildings construction loan money ran out.

    This worked for a while.

    A so more and more buildings were being build and put into the 18 month pipeline that it took to complete the building. And soon there were more buildings being competed that there were tenants of lease and occupy the space. So newly built but vacant buildings began to pile up.

    SO now the landlord builders began to DISCOUNT their asking rent for space in the new buildings. They had to do this to lure potential tenants away from other vacant buildings in the marketplace. Soon more and more people started having to give away FREE RENT at the start of the lease.

    Remarkably, even now, banks kept on making new construction loans anyway. And new buildings kept getting built with owners having to DISCOUNT THEIR RENT, that is give away free rent for longer and longer periods of time to keep tenants moving in.

    So then what happened next is that long term tenants in older buildings began to refuse to renew their old existing leases there with their long term landlords but instead these existing tenants jumped ship out of the older building to lease space in brand new half empty buildings down the road where they could get FREE RENT (DISCOUNTED), and so occupy great new space for free for up to a year then 18 months before paying any rent at all.

    Remarkably even then everyone evolved kept playing the game. Other peoples easy money builds addictive habits only disasters can break.

    The game played on like on the Titanic until disaster struck the new real estate industry and the banking (incl. deregulated S&Ls) in 1990. Whole city market were devastated. That great recession lasted until very late 1993/94.

    This example of what happened in real estate in the early 1990s shows why today’s habits of colleges and universities are so dangerous in so many ways.

    For example:

    When Colleges and universities give out grants and discounts not to help out to poor but instead to buy students to fill up their seats, and to buy rankings by buying kids with extremely High SATs, and better yet out of state kids with high SATs from all over the 50 states so as to claim that you are an Elite NATIONAL University per rating standards, they are building up a market that will invariable collapse causing great harm to all concerned. And all of society too because that harm spreads everywhere.

    And

    when colleges and universities keep building ever more expensive and fancier campus buildings and facilities or do away with real grades to keep luring kids to their schools and away from other schools, whether just to keep the tuition money coming in and/or to keep climbing up the ratings charts by taking the “better” student prospects away from its competitors. Here the damage is left everywhere – kids without educations but with crippling loans for example.

    So we must be careful that we solve problems instead of masking them.

    • The S&L crisis makes an interesting analogy. I’ll keep my eyes peeled for parallels.

    • In this next installment we will discuss why the real estate crash at the start of the 1990s was not avoided but instead could be stopped only a huge crash in the national market. This brief tale will begin to establish parallels between what happened then with what is going on in our system of Higher education today.

      After that, a follow on installment (#3) will show how the recovery from the early 1990s crash paradoxically put in place the system which is now building what I believe will result in a financial crash of our educational system unless immediate remedial action is undertaken, an unlikely event given our history in the 1980s, 1990s, and first decade of 21st century.

      The first modern gold rush real estate market began in earnest in the late 1960s before it cashed around late 1974/75. Here when the overbuilt market demanded more loans than the large traditional commercial real estate lenders – the larger Banks and Life Insurance Companies – were willing to supply, the newly invented Real Estate Investment Trust created by 1960 legislation ballooned up to overheat to market to the point of collapse. This wiped out the Real Estate Investment Trust as commercial lending vehicle along with many developers caught in the market collapse.

      But, by the late 1970s, pent up demand signaled the approach of another grand recovery in the economy and real estate market, one that would change of the face of America forever – creating the suburban satellite cities and large commercial suburban office parks that rule so much of the American landscape today. And brought with it so much opportunity, and ultimate dysfunction that haunts us to this very day.

      So there are very big and timeless lessons here that we ignore at our great peril. And one of those lessons is that:

      Once these feasts of red hot nation and institution building orgies get going they are extremely hard to stop before disaster strikes them down. Here, in this particular tale, there were several primary reasons, namely:

      When the traditional conservative Big Bank and Big Life Company lenders began to slow their lending volume in that overheated 1980s market, the ensuing slack was picked up with a vengeance by the newly emergent Savings and Loans that had been Mom & Pop local lenders before. But only a couple of years earlier had been endowed by the US Congress with the lender powers of big national banks and merchant banks. As a result, too often now in the 1980s small and formerly conservative local S&L charters were bought by very aggressive “Buccaneer” type capitalist tycoons.

      Suddenly a whole lending industry with thousands of outlets and hundreds of charters were playing a game they had never played before. Problem was they lacked the hard earned experience, the expertise, the culture, and infrastructure (including capital reserves) to prudently lend very large sums of money to inherently speculative real estate ventures. And those buccaneer buyers who now controlled the new born S&L made matters worse when they also build collateral and subsidiary businesses that garnered for the principals up front fees and income for finding, processing and selling loans to the S&L, hence making big profits without any liability for any loss that resulted from poorly underwritten loans that ultimately went into default.

      So, as time when on, the principals (individuals) running things were making big money in cash up front while selling off the big liability for any loan default to other entities that had nothing to do the loans origination or its underwriting. Hence when the markets began going south, none of the decision makers wanted to stop the merry go round. They were making to much dough and having too many many good times that they later called the DO DA DAYS.

      So in this way numerous S&Ls, tiny and local before, within a few years became national lending giants armed with an array of partners and affiliates generating big fees up front to those relatively few people in control who had every reason to keep the circus of loans coming down the pike, irrespective of the health of the loans or their market.

      Plus now the Big Banks jumped back in to join the feeding frenzy.

      The big Banks, who were initially conservative before, now saw what looked to them to be a remarkably strong and continuing hot streak market where their conservative underwriting and prudent lending policies were now cutting them out of all the action and costing them big money and their earlier dominant market share. Share holders were angry.

      So many of the big banks jumped back in, joining the party. And once they were hooked on the big up front fees and bonuses it was hard for them to stop the circus too. Plus, with banks so big, those with the power of grand decision were too far above the real action to monitor what was doing on down below at ground level where the loan decisions were made. And so a long as the loan fees kept coming, and the losses were hidden by selling off or pasting over troubled loans, short term liabilities, or interim shortfalls, well then Big Banks back then had trouble with the nuance of local and fast moving markets that were being hyped everywhere by everybody from Congress to the President to the Mayor to borrowers and local bank officer on down on the loan originators, brokers, consultants and appraisers.

      Plus, in addition:

      Many of the real estate development borrowers were ballooning up as rapidly as the S&Ls. A cadre of strong local players suddenly became regional and national players in the space of a very short decade. These were very able and experienced people who quickly spun off prodigy of highly educated and talented younger people who spread out across the country taking the original developer national and/or creating new companies that stayed regional or ultimately nation as well.

      And below them there sprung up a raft of second and third tier local developers of lesser talents and resources who further fueled and fractured the market. And every one was fiercely competing with one another locally, and often regionally, and also nationally among the 15 or so nationally recognized firms that now were rated from 1 to 15 annually in the national magazines. And if you were one the these 15 or so nationally rated developers well then the big lenders came knocking at your door trying to sell you on their services as “world class Lenders.”

      In the last years of the feeding frenzy the big lenders were “selling” to the prime rated national borrowers NON RECOURSE 100% construction permanent loans loaded up with service fees payable to the borrowers, and fully financed two years worth of lease up costs that somehow overlooked all that free (Discounted) rent that was growing everywhere like cancer, undermining whole markets from Boston to DC to LA and San Francisco.

      Given all of this it was extremely hard for borrowers to get off the gravy train. What were they to do? Forgo all those fees? Fire hundreds of loyal employees who depended on them, and go out of business, leaving the build but increasingly vacant shiny new world class buildings to vultures?

      Of course this is typical.

      All of this is how most speculative fast paced business works in all big time markets that fluctuate up, down, and around, as most such markets do these days no matter who may like it or not, or who may get hurt on not. In fact, given today’s modern technologies, these markets are faster, more volatile, more unpredictable, and more treacherous than ever before.

      Next time we’ll discuss the remarkable remaking of the 1990s / 2000s markets that arose out the collapse on the US market, including real estate, in the early 1990s and how these remade markets got us to the place where our imperiled system of higher education system finds itself today.

  2. re: “discounts” ‘… do you mean like when the car companies increase the MSRP and then advertise thousands of dollars in “cash back”?

    😉

    hey – if it works… what can you say..?? More and more goobers are
    procreating as we speak!

    But I was struck by the absence of Bacon’s Bottom Line – which to this point on this subject has focused on finding out what nefarious things are behind the steady increase in tuition costs and then on this post – apparently buys the SCHEV narrative that the costs are justified and mitigation strategies are instead the issue…

    does that mean we’re at the end of the complaints about “transparency”… subsidies to low income .. high-dollar labs and “star” professors as the focus – and without even a whimper?

    so how about it – is SCHEV’s view that the tuition costs are justified and will likely not be reduced.. .. correct?

    • I was struck by the absence of Bacon’s Bottom Line.

      There was no Bacon’s bottom line because (1) it was a straight news story, and I was reporting what occurred, and (2) I was rushing down to Norfolk on personal business and didn’t have time to pontificate.

  3. You make excellent points, Larry.

    We are now getting closer to the central problem that today is driving most all other problems and flaws in our current system of Higher Education. I will elaborate on these central driver issues that have now been raised soon.

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