The following essay was published in the Boston Business Journal on April 13, 2018.
The catastrophic closure of Mount Ida College in Newton [Massachusetts] has everyone, especially Mount Ida’s students, wondering what happened. Parents, faculty, staff, trustees and donors feel betrayed by the abrupt closure. What is going on?
Moody’s recently warned that the number of college closures and mergers would triple between 2017 and 2018.
Private higher education is especially vulnerable to the four horsemen of the higher education apocalypse: galloping debt, spiraling deficits, unfunded deferred maintenance, and out-of-control tuition discounts. Many of our colleges are borrowing and spending more money than they take in.
We applaud Gov. [Charlie] Baker for calling for an inquiry of the decision by Mount Ida’s trustees. We believe that it is time for the Commonwealth of Massachusetts to lead by monitoring institutions that depend so heavily upon federal and state dollars.
Here are some steps to take:
Insure colleges and universities against catastrophic closure. Colleges are businesses with increasingly limited lifespans. By pooling risk among institutions, students and citizens will be protected from the often unforeseen consequences of catastrophic closure. After the College of Saint Catharine in Bardstown, Kentucky, closed in 2016, the bondholders hired a litigation firm. They sued any former student who held a balance, from unpaid tuition to a parking ticket. The judge added a kicker, adding 12 percent interest to those unpaid balances over the course of 10 years. The results of that have been disastrous.
Use a valid stress test to monitor the fiscal health of colleges and universities. The U.S. Department of Education issues a list of colleges and universities that failed to maintain stable financial composite scores annually. Financial Responsibility Composite Scores determine a college or university’s financial health and qualify them to receive federal aid under Title IV. Based upon a now outdated method of ratio analysis once used to predict corporate bankruptcies, these composite scores are unreliable, outdated and prone to manipulation.
In August 2017, the General Accountability Office issued a report entitled “Higher Education: Education Should Address Oversight and Communication Gaps in Its Monitoring of the Financial Condition of Schools.” The GAO warned USDE that composite scores are famously unreliable barometers of stability that are sometimes “gamed” by unscrupulous institutions.
Find ways to address the coming tsunami of unfunded deferred maintenance. The quality of facilities is often ignored when budget decisions are made. Unless an institution is using a “plus 10” (+10 percent of capitalization) formula to fund ongoing maintenance of buildings and grounds, most colleges and universities have unfunded maintenance costs totaling at least $100 per gross square foot of constructed space. Some smaller institutions are carrying deferred maintenance of $50 million or more, causing students at Brooklyn College, for example, to rebel at their condition of their facilities.
Find innovative ways to give tuition-dependent colleges and universities access to capital markets. Public bonds, private bonds, and hybrid financial instruments now make it possible to repurpose crumbling buildings. Real Estate Investment Trusts (REITs) enable colleges and universities to fund building projects. Some colleges and universities, like Marygrove College in Detroit, have turned their buildings and grounds over to land conservancies. Still other institutions have used equity or sale/leaseback agreements, which exchange a deed or title for uncapped portions of a property’s fair market value.
Brian Mitchell is a principal in Academic Innovators and past president of Bucknell University and Washington & Jefferson College. He is co-author, with W. Joseph King, of How to Run a College: A Practical Guide for Trustees, Faculty, Administrators and Policymakers. Gerard O’Sullivan is a former provost and dean, CEO of Corvus Education LLC, and Visiting Professor of Higher Education at Immaculata University.
There is some truth to the saying that those who fail to learn from the past will be doomed to repeat it.
Essentially, this was the message that former Treasury Secretary Larry Summers delivered recently as part of his larger concern that Massachusetts not become complacent despite U.S. unemployment hitting a 10-year low in April.
In an interview with the Boston Globe, Summers compared the problem facing the state — the lure of complacency — to what he found on assuming the Harvard presidency, as Stanford cleaned Harvard’s clock as all things Internet came to dominate the new American economy. The impact locally on Route 128’s hold as “America’s technology highway” was dramatic.
The emergence of biotechnology saved the Boston area from a precipitous decline in economic standing among major innovation regions in a technology-driven global economy.
Mr. Summer’s admits that Massachusetts’ $500 million state deficit might make his call for investment seem a bit odd as Massachusetts’ governor, Charlie Baker, works to close the gap. He argues: “Ironically, sometimes not spending money is taking a much bigger risk than spending money, because it’s gambling with your preeminence.”
Further, Mr. Summers warns that some budget balancing acts, like trying to reign in Medicaid spending (40 percent of the state’s budget) as well as fees on employers and caps on health care might have the opposite effect.
Massachusetts is “Eds and Meds” Capital of the World
Massachusetts stakes a claim as the “eds and meds” capital of the world. Mr. Summers asserts that Medicaid may appear to be a budgetary expense, for example, “but at the margin, it’s coming out of being the place where the smartest scientists want to come and work their miracles.” He suggests that the efforts to end Obamacare and replace it with Trumpcare, moreover, could effectively destabilize the state’s critical health care economy. And Mr. Summers notes that rival technology regions like New York are already making heavy state investments in new life science initiatives.
Mr. Summer’s comments have tremendous implications for the role that American higher education will play in the American economy in the future. When the U.S. House of Representatives passed its version of a new health care bill, it legislated changes that impacted one sixth of the American economy. Separate out how and why this was done. Set aside the timing tied to the first 100 days of the new Trump Administration.
The facts are that the American economy is a little like a three-dimensional chessboard. Any move has a dramatic effect that must be comprehended on multiple levels.
Higher Education Is Foundation of U.S. Economic Competitiveness
There’s much at stake for higher education that reaches beyond the different political philosophy, chronic dysfunction, and incremental governmental bureaucratic practices. From an economic perspective, higher education plays two important roles in the American economy:
- The first is that it trains an educated workforce through programs that adjust this education to evolving economic needs.
- The second is that the “eds and meds” complexes of America largely moved the American economy – and the regions that they support — into a competitive post-industrial global economy. They are the foundation for the future of American competitiveness in a global market.
These centers of innovation and creativity are typically in urban, blue states or in regions where the voters historically vote or are trending blue. They inhabit one side of a cultural divide in an anxious America. They welcome immigrants, many of whom provide the talent and skill sets to keep the “eds and meds” miracle happening. As such, the “eds and meds” community has a great deal at stake as the states and the federal government move the chess pieces around.
Many in the western U.S. repeat a saying that is pertinent to this discussion: “I’m from the government and I’m here to help.” But, in fact, government at all levels does have the perspective and resources that can move the needle.
What government lacks are the courage and consensus to put an investment strategy in place. Government funding is a rationing tool built on an annual funding cycle. This hardly supports imaginative and enlightened government policy and programs.
We can have the debate over whether higher taxes, deficit funding, or better economic growth will ultimately pay the investment bill. But America must get over its deeply partisan divide to support what drives the American economy.
Mr. Summers was right. Having the vision and confidence to invest strategically — despite the competing pressures on government budgets — makes sense. Combining the social and cultural need to invest in better schools with the economic necessity to make infrastructure and life science investments is a sane path forward.