The Dorm Wars have not yet caused the numerous bankruptcies amongst minor and maybe even some more established colleges that seem inevitable. What they have done is change the nature of college education. Whether at Harvard or Ramapo, students want luxury dorms with private bathrooms and glitzy campus centers. And since students—fueled with cheap student debt are the all-powerful consumers—campus administrators have followed the money. Unfortunately, they also too often followed their students into debt. As the NY Times reports today,
A decade-long spending binge to build academic buildings, dormitories and recreational facilities — some of them inordinately lavish to attract students — has left colleges and universities saddled with large amounts of debt. Oftentimes, students are stuck picking up the bill.
I recently visited my alma mater for a reunion and was housed in the building where decades ago I labored long into the night as an editor for my beloved Prism magazine. It is the dorm in which I once put my hand through a glass door in the midst of a late-night editing and layout session. I barely recognized the Pratt Dormitory, which resembled more a Tablet style hotel than a college dormitory.
Such lavish quarters are now seen as necessary to attract the best students—something that is sad if it is true. And this perception, true or false, has unleashed the dorm wars. Some colleges, like the one I attended, don’t need to borrow to build. But many others think that they do.
“If Ramapo College was going to respond to what students wanted, which was larger, more comprehensive programs and residential housing, then we were going to have to go out and borrow,” Peter P. Mercer, President of the public liberal arts college in New Jersey told the Times.
How wrong is that. Borrowing can of course be justified. But if you want to build something, there are other options. You can, for example, go out and raise the money. That requires work, convincing people, many of whom have no personal connection to your college, that what you are doing is important and worthy of support. Excessive borrowing is, too often, the resort of those unwilling to take the longer and yet more responsible path of building an institution that people are willing to invest in and support.
More importantly, the enormous borrowing of colleges reported by the Times is evidence of an educational system that has simply lost its way. The fastest growing costs at colleges across the country are for administrators and for capital projects. Much of the borrowing is financing new luxury buildings and a bloated services staff. The priorities are wrong and real focus on teaching and learning seems to have been largely ignored. As students and parents confront extraordinary costs that go increasingly to pay interest on debt and support lavish undergraduate living, many are increasingly rebelling.
And for the first time in generations, students have other options. The rise of Internet learning is going to disrupt college education in this country as the Internet has transformed nearly every other area of life. And it will do so at the very moment when the finances of colleges and universities around the country are shakier than they have been in generations. The shake out will be painful.
What needs to be thought here is what is it that allowed debt to become so infectious within and amongst our educational institutions. With $1 trillion in student debt and $200 billion in institutional debt, education more and more resembles the housing and financial sectors of our economy.
Education is supposed to be a conservative enterprise, a bastion of learning and teaching the accumulated history and knowledge of the past. Somewhere along the line, education changed from being an experience of teaching and forming young individuals and citizens and became something very different. Higher education is now a progressive launching pad for careers. It is job security for tenured professors. It is the center of research and the producer of valuable sports franchises. Lost in the mix, I fear, is original mission itself. Just as banks and financial institutions abandoned their old job of lending and saving money and sought to become investment banks, so too have colleges changed from being educational institutions to being consumer brands selling luxury and success instead of the life of the mind. Some can do both. But many more will go the way of Pan Am and Hostess.
I have been trying to understand our pension mess for years now, and I will tell you that the numbers and acronyms are at times baffling. But help is here.
Two of the nation's Federal Reserve Banks (the Cleveland and the Atlanta Federal Reserve Banks) have joined together to form a "Financial Monitoring Team to study pension funds and municipal finance with an eye toward implications for the wider economy and financial system." In other words, these two banks are seeking to shine a light on the dark and difficult to understand corners of municipal finance. Chiefly, the banks are interested in learning about Municipal Pensions.
The Cleveland Fed publishes a newsletter, "Forefront", and the latest issue contains a number of incredibly helpful articles about the state of municipal pensions. The main article is: Public Finances: Shining Light on a Dark Corner. This is a clear and helpful article, with a glossary and helpful sidebars. It also comes with a video primer on the pension crisis that is sober, clear, and helpful.
One question the article addresses is just how big the pension shortfall actually is. According to government numbers, the shortfall is $800 billion. The government estimates are based on assumptions of an 8% rate of return, which inflates the assumptions about the present value of pensions. In all likelihood, the return will be somewhere between the 8% historic average and the painfully low return offered by persistently low interest rates. Thus, many private economists estimate the shortfall at around $4 Trillion. Here is what the Cleveland and Atlanta Feds say:
Some economists, however, have come up with a $4 trillion shortfall. They have pointed out that for most state and local plans, promised pension benefits are protected by constitutional, statutory, or common law guarantees. (See related article, “Navigating the Legal Landscape for Public Pension Reform.”) By definition, this ought to make them riskless obligations to the pensioners. Thus, the appropriate valuation methodology should discount promised benefits using the risk-free interest rate, usually calculated as the yield on long-term U.S. Treasuries. This method, argued cogently by Jeffrey Brown and David Wilcox in “Discounting State and Local Pension Liabilities” (2009), has the virtue of being supported by both economic and legal principles. It also produces substantially higher estimates of the present value of pension liabilities. Given the currently low yields on Treasury bonds, this approach implies a present value of accrued obligations as high as $6.7 trillion, leaving an unfunded liability of $4 trillion.
In other words, the actual size of the pension shortfall is probably somewhere between $800 Billion (the size of the 2009 stimulus package) and $4 Trillion. The likely shortfall, as the Fed says in its video on the site, is in the $3-$4 Trillion range.
So what does this mean? The Cleveland and Atlanta Feds offer a few conclusions:
1. At this point, it seems unlikely that any major pension fund will run out of cash in the next few years, barring a general worsening of economic and financial condition.
2. But we are not out of the woods yet. Many funds will require significant reforms to reduce underfunding levels, with painful new contributions from employers and employees.
3. Another concern is that some states’ legal protections may be too strong to give reforms enough time and flexibility to put plans on sustainable paths. In that case, states would ultimately be on the hook for covering pension benefits out of general revenues. This scenario, by creating crisis conditions in those states, could stress economic conditions more generally.
The real problem is the combination of #2 and #3. For if state laws make it too difficult to cut or reduce pensions, the only option is "painful new contributions from employers or employees." It may be that we cut the guaranteed pensions of pensioners, making them less well off in retirement. That would hurt the workers. Or, if legal protections prevent that option, we the taxpayers will have to dig deep to pay their pensions, probably as we at the same time cut other essential services. And that will not be pretty. Either way, the state and local government crisis is shaping up to be one of the most important challenges of our generation.
For more on the pension crisis, you can revisit our other posts on the subject here.