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Penn State has continued to pay millions of dollars to the
former president who led it during a
sexual abuse scandal that cost the
university nearly a quarter of a billion dollars in settlements,
fines
and legal fees. Credit: L. Reidar Jensen/Penn State/Flickr
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The Hechinger Report
How higher education’s own choices left it vulnerable to the pandemic crisis
Hiring sprees, low endowment returns, generous benefits continued as enrollment fell
By Jon Marcus
August 4, 2020
When Missouri Western State University declared a financial emergency
in the spring, it was widely assumed to have been the fault of the
coronavirus pandemic.
But that was only part of the problem.
In the decade since the last recession, Missouri Western had kept
hiring, increasing the number of full-time faculty by 5 percent as its
undergraduate enrollment was plummeting by nearly 25 percent. Other
spending, too, continued to go up. The university overspent its budget
by millions of dollars in each of the last five years. Cash reserves
sank.
Some members of the institution’s own governing board were surprised
when they were confronted with these facts. By then, the president who
had overseen that spending had retired.
“The problem that we have right now has not happened this year. It
absolutely hasn’t,” his successor, Matthew Wilson, told the board in
April during a contentious meeting to plan deep cuts after the
coronavirus pandemic shut down the campus. “It’s the previous budgets
that weren’t done correctly.”
Left vulnerable when the coronavirus pandemic hit, Missouri Western is
now cutting nearly a third of its faculty and at least 98 majors,
minors and concentrations, including in English, history, chemistry,
biology, philosophy, sociology, political science, computer technology,
music and art.
Like many businesses, universities and colleges are struggling with a
crisis that was not of their own making. But, according to observers
and statistics, many left themselves exposed to it with questionable
management that was.
They added employees and facilities, even as enrollment fell. They gave
out so many discounts to fill seats that their revenues couldn’t keep
pace with costs. They got lackluster returns from their endowments.
They were accused of ignoring or covering up complaints of sexual and
other misconduct that traumatized victims and consumed hundreds of
millions of dollars in settlements and fines. They made huge payouts to
presidents who had led them into deficits at some schools and scandals
at others.
American higher education is composed of thousands of colleges and
universities, with different track records and results. But if it’s
judged as a whole in the way that other industries are, its collective
decisions can be seen as having left it singularly susceptible to
sudden downturns like the health emergency that’s thrown it into chaos
now.
The reasons include incentives that encourage leaders to spend more,
not less, under the watch of governing boards meant to be trustees of a
multibillion-dollar industry who instead consider themselves to be
“boosters, cheerleaders and donors,” as a task force chaired by former
Yale University President Benno Schmidt put it.
Among other problems, one in four higher education institutions had no
financial contingency plan when Covid-19 hit, the consulting firm EAB
found.
Colleges in Crisis
Hundreds of colleges and universities had financial warning signs long
before the coronavirus threatened to make everything worse. Our
Hechinger Report/NBCNews.com collaboration analyzed higher education’s
poor financial health, explored how it got that way and looked at the
ultimate consequences for students.
Faculty and staff are being laid off, and whole departments eliminated.
And while most are avoiding the bad optics of raising tuition this
year, history suggests these costs will eventually fall to students and
their families.
Reforming long-standing practices that have eroded colleges’ and
universities’ finances “are complicated decisions, and not easy to
achieve,” said Kevin McClure, associate professor of higher education
at the University of North Carolina Wilmington. “But had they been done
before there was a crisis, it might have put them on sturdier footing.”
Even after the 2008 recession struck a powerful warning blow, higher
education leaders returned to operating in ways that left their
institutions at financial risk, experts say.
“We didn’t really change anything in a major way,” said Paul
Friga, clinical associate professor at the Kenan-Flagler Business
School at the University of North Carolina at Chapel Hill and
co-founder of ABC Insights, a consulting firm that helps institutions
improve efficiency. Colleges and universities “just kept spending more
every year, adding [employees] and charging more.”
While labor productivity in the broader economy has gone up since the
last recession, measured by the Bureau of Labor Statistics as output
per employee hours worked, higher education has been adding more
employees to serve fewer customers.
Since the last recession, as enrollment declined by about 11 percent,
universities and colleges nationwide increased their number of
employees by 5 percent. That includes a 16 percent jump in the number
of administrators and support staff.
Universities say some of these hires were must-adds, such as mental
health counselors and sustainability officers, while others were needed
to cope with government regulation (though the burden of red tape has
proven much lower than institutions have contended).
“Teaching is the only profession, with the possible exception of
prostitution, that has had no productivity improvement in the 2,400
years since Socrates taught in Athens,” said Richard Vedder, an
emeritus professor of economics at Ohio University and a longtime
critic of the ways universities are managed.
Meanwhile, to contend with that years-long enrollment decline — a trend
due largely to demographic changes that they knew were coming — private
colleges and universities have been offering deeper and deeper
discounts to prospective students; of the revenue they take in from
tuition, half is now handed back in the form of discounts and financial
aid, the National Association of College and University Business
Officers, or NACUBO, reports.
This means that, even as they raise their advertised prices faster than
the rate of inflation, many institutions aren’t bringing in enough
money to keep up with that rate, a destructive cycle few for-profit
businesses would survive.
Higher education endowment funds realized returns of 6.8 percent from
2009 to 2017, a period during which the S&P 500 index gained 11.2
percent.
Yet higher education has also kept building. Colleges and universities
collectively spent an average of $11 billion in each of the last four
years, adding close to 70 million more square feet of classroom and
office space alone, according to the private company Dodge Data &
Analytics. That does not include athletic facilities, dorms, dining
halls, libraries or labs.
This “arms race in facilities has gotten too far in front of reasonable
expectations for revenues to support it,” the facilities consulting
firm Gordian warned in early spring.
University leaders are propelled by incentives such as college rankings
that reward them based on such things as resources made available to
faculty and how much they spend per student. Some presidents get
bonuses if their institutions move up the lists, and few leave office
without boasting about how many new facilities they built. In a system
of shared governance, they’re also served by keeping the faculty
content.
What oversight exists comes from boards of regents and trustees that
are composed in large part of wealthy alumni and political appointees.
While many have private-sector experience that could be helpful to a
college, more than 40 percent acknowledged in a survey by the
Association of Governing Boards that too little time is spent on their
own training and professional development. One in four say too little
time is spent evaluating their institutions’ presidents.
Another thing universities generally haven’t managed particularly
effectively: their endowment wealth, on which they’ve realized
surprisingly poor returns.
Investments they make from their endowments “significantly
underperform” market benchmarks, according to research by business
professors David Yermack and Sandeep Dahiya of New York University and
Georgetown, respectively. A separate study released in May by scholars
at MIT’s Sloan School of Management and the University of Illinois
found that higher education endowment funds realized returns of 6.8
percent from 2009 to 2017, a period during which the S&P 500 index
gained 11.2 percent.
Despite slumping revenues and comparatively poor returns, however,
universities — most of them public or nonprofit — continue to provide
more generous employee benefits than those in other industries.
Sixty-three percent of people who work at colleges and universities get
health care provided for them after they retire, reports the TIAA
Institute, a think-tank spinoff of the academic financial services
provider TIAA. That’s a perk the Kaiser Family Foundation says is
enjoyed by just 25 percent of employees at other types of businesses
with 200 workers or more. At 677 institutions, employees get up to
$37,000 a year toward tuition for their children and domestic partners
at their own and other participating campuses.
Full-time faculty receive contributions to their retirement plans equal
to an average of 10.7 percent of their salaries, the American
Association of University Professors says; that’s more than double the
national average employer contribution to employee 401(k)s, as reported
by Fidelity Investments.
Some administrators get other extras. Two-thirds of presidents, 6
percent of provosts and 3 percent of executive vice presidents have
houses provided or receive housing allowances, according to the College
and University Professional Association for Human Resources, or
CUPA-HR. Seventy percent of presidents and between 9 and 15 percent of
provosts, chief business officers, executive vice presidents and
athletic directors get cars.
These big financial strains have seldom been as visible as now, when
universities are struggling to balance their budgets. Georgetown has
announced that it will suspend contributions to its employee retirement
plans, saying the move will save $47 million over the next year.
The decentralized nature of universities also complicates their
finances. Academic departments and graduate schools often handle their
own information technology, purchasing and other functions, with their
own separate staffs. In a survey about just one of those services, by
Educause, an association of IT leaders, half couldn’t estimate the
total amount their institutions were spending on IT.
This seeming lack of accountability reaches to the highest levels.
University governing boards have given lavish severance packages to
leaders who oversaw their campuses during events that led to scandals,
or who drove them into debt. That’s often because the boards fear being
sued, or their institutions’ reputations being damaged by an ugly
split, said James Finkelstein, professor emeritus of public policy at
George Mason University’s Schar School of Policy and Government, who
studies this.
After sexual abuse by a former Pennsylvania State University assistant
football coach was exposed, for example — about which the university
had been warned repeatedly, and which has cost it nearly a
quarter of a billion dollars in settlements, fines and legal fees — the
president at the time, Graham Spanier, stepped down. But he left with
an agreement to be paid $3.7 million over the subsequent six years as a
member of the faculty, even though he didn’t have an office on the
campus and didn’t teach, The Associated Press reported.
There were also big payouts to the presidents of Michigan State
University, who was indicted for lying to police about a sexual abuse
scandal involving a university physician — the charges, which she
denies, were dropped in May, though prosecutors say they are
considering an appeal — yet was paid $2.5 million by the university,
which is also covering her legal costs and agreed to commission an
official portrait of her; and the University of Southern California,
who tax records show got $7.7 million when he stepped down after a
similar scandal. He was also allowed to continue as a member of the
faculty at an undisclosed salary and given a lifetime appointment to
the board of trustees.
Governing boards have often made these kinds of agreements in secret,
or sought to block public knowledge of them. In a closed-door meeting,
the Northern Illinois University board voted to give President Douglas
Baker $700,787 in severance pay, legal costs and unused vacation time
when he resigned after state investigators found reasonable cause to
conclude he had mismanaged the public institution by evading
competitive bidding rules. When he left, the university had a $35
million funding shortfall and a bond rating that had fallen to junk
status. Baker could not immediately be reached for comment, but said in
his resignation statement that the state report was a distraction and
he left because “I simply couldn’t stand by and let this situation
continue to fester.”Asked why he had received such a large payout, a
university spokeswoman referred to a 2017 statement by then-board chair
Wheeler Coleman, who said Baker had released the university from legal
claims and waived his right to a $225,000-a-year faculty position.
The University of Massachusetts Boston paid its chancellor, J. Keith
Motley, his full $422,000 presidential pay for a year, plus $200,000 in
deferred compensation, and gave him a $240,000-a-year position on the
faculty when he resigned after running up a $30 million deficit. The
university then closed its campus daycare center and began layoffs.
Of presidents who successfully finish their terms, an increasing number
now receive “contract completion bonuses.” Thirteen percent of public
university presidents are entitled to as much as $1 million after they
leave under such provisions, Finkelstein determined in research he
conducted with Schar School colleague Judith Wilde.
Forty percent get deferred compensation, an additional payment on top
of their base salaries, the two scholars say. Many other university and
college administrators receive this, too. Deferring compensation
provides tax benefits for them, but saddles universities with large
future financial liabilities.
Colleges and universities collectively spent $11 billion, on average,
in each of the last four years, adding close to 70 million more square
feet of classroom and office space.
Other decisions of the past 10 years are also having an effect now. The
University of Akron, for example, is cutting 97 full-time professors —
more than 1 in 6 at the university — because of a budget crisis
deepened by the pandemic. Faculty complain the university has steadily
increased spending on athletics, which lose an average of $22 million a
year. A university spokesman said in a statement that spending on
athletics “is certainly not the reason for our financial situation,”
which he said had resulted from enrollment and state funding trends.
But the current president, Gary Miller, has set up an athletics review
task force.
At Missouri Western, cash reserves fell from nearly $50 million to $14
million as its president, Robert Vartabedian, was running up $11
million in deficits — red ink finally revealed by the student newspaper
— but the board of governors gave Vartabedian a contract extension,
raised his salary by 35 percent and renamed a building for him.
Now the bills are piling up, there and on campuses everywhere.
Some university leaders “bristle at the idea that they should have seen
it coming,” McClure, of UNC Wilmington, said of the current crisis.
“Part of me is sympathetic to that view. It’s a lot easier to look
backwards and say what you should have done to prepare for something no
one could have seen coming.”
On the upside, he said, the pandemic and resulting recession could finally force change.
“Sometimes it takes a shock to the system to really see creativity
happen,” McClure said. “And this is likely going to be a shock to the
system.”
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