Deferred Maintenance

Peter Wood

            The stimulus bill passed by the House on Thursday includes $7 billion for infrastructure at colleges and universities. This provision is Congress’s answer to the plea put forward December 16—a giant ad in The New York Times, The Washington Post, and The Boston Globe—organized by the Carnegie Corporation and signed by numerous college presidents.   The ad summoned President Obama to throw $40 billion to $45 billion of the stimulus package into “shovel ready” campus projects. I criticized the idea (Asking a Lot), and noted how one bad idea builds on another. A week earlier, the College Board had released a report, Coming to Our Senses: Education and the American Future, which called for a massive expansion in the size of American higher education. The College Board report was likewise signed by a who’s who of American higher education. It was coy about the numbers, but it essentially asked Americans to support a doubling of college enrollments in the next seventeen years. I criticized this idea too (Cold Brine: the College Board Loses Its Senses).

                The Carnegie Corporation ad and the College Board proposal dovetail.   Both express concern that America is falling behind other nations in the percentage of college-educated citizens. (A claim that embarrassingly turned out to be built on flawed statistics from Organization for Economic Co-operation and Development.) Both located the problem in the disparately small proportions of black and Hispanic students who complete college.   The Carnegie Corporation simply added the twist that we need a huge new federal support for higher education infrastructure to accommodate these underserved minority students. 

 

                Incidentally, at the recent NAS national conference, I asked Terry Hartle, who is Senior Vice President of the American Council on Education and one of the signatories to the College Board’s proposal, whether he thought a doubling in the size of enrollments in higher education is remotely feasible. He replied (publicly, on tape) that he thought it was not and had expressed this very concern to his fellow commissioners, who were unmoved by the impracticality of the proposal and regarded their goal as “aspirational.” Mr. Hartle signed anyway.  

                It is not clear what the Senate will do and what will be in the bill that finally reaches President Obama.   But it looks as if the higher education lobby will have to settle for about a sixth of its $40 billion to $45 billion wish list. Still, $7 billion in new funds is a lot of money. Can colleges and universities spend that much on infrastructure within the next year, as the Carnegie Corporation ad suggests? Would it—will it—be a wise use of public funds?

                It seems unlikely. Colleges and universities, once models of frugality, have become extraordinarily profligate institutions. Largely this has to do with the financial model that has grown up around state and federal aid and the federally-guaranteed student loan program. Since the 1960s these factors have worked together to relieve colleges and universities of much of their concern about rising costs.    The subsidies have prompted a huge growth in the number of college campuses, the infrastructure of campuses old and new, and the size of enrollments. Tuitions soared far beyond cumulative inflation because universities realized that federal financial aid (loans and grants) appeared to students like a discount.    Each increase in federal support could be raked off the table by the institutions simply increasing their tuition, with little fear this would dent enrollments. The American middle class became convinced that a college degree was an indispensable “investment” in a child’s future success in the workplace, and further convinced that the pricier colleges and universities would be worth the extra cost.  

                With such inelastic demand and, in effect, a bounty on each extra student enrolled, colleges tended to expand. Many became heavily reliant on those high tuitions—but able to persuade students to borrow the money—essentially gambling on their imaginary future prosperity. In time that became an inexpugnable debt. Congress made sure that even personal bankruptcy doesn’t relieve an individual of having to repay student loans. The reliability of repayment ensured that there would be lenders aplenty, even though the borrowers typically lacked collateral or a reliable credit history.   In this sense too, government intervention insulated colleges and universities from worry about how their financial model could be sustained. No matter how high the prices, it seemed, people would pay because (a) a college degree was deemed indispensable, (b) the students could be persuaded that assuming large debt was basically prudent given their future financial prospects, and (c) lenders would put up the money knowing that their loans were almost entirely secure. 

                The logic of this financial model urged expansion now, maintenance later. The more students a college could capture, the better off it would be in present income. Colleges and universities, of course, worked hard to disguise this reality. They floated—they still float—numbers that suggest that tuition covers only a small fraction of what it costs to educate a student. If that were really true, you can be sure colleges and universities would be working hard to pare enrollments to a minimum. The inflated number for cost-of-education-per-student is always derived by some version of taking the total operating budget and dividing it by the number of students. Voila!   It is a large number—much larger than tuition. But it is misleading in a dozen ways. It bundles into the per student costs the expenses of researchers supported by federal grants, the expenses of special programs underwritten by donors (and that probably wouldn’t exist if the donors weren’t paying for them), and all manner of expenses that are entirely elective on the part of the college and that have little or nothing to do with the actual costs of educating an undergraduate student.

                Those supposed per-student costs also include debt service on the money borrowed to expand the campus itself—typically for facilities that will be complete after the student graduates and that he would never use in any case.   These inter-generational costs can be rationalized by considering that the next cohort of students will likewise be plundered to underwrite still more facilities. 

                The details vary from college to college, and public institutions jigger the game a little differently from private colleges. But the key point is that colleges and universities persistently overstate per-student costs in order to persuade students and their parents that tuition—high as it is, and still increasing—is a bargain.

                The dynamics of this model have consistently favored growth, often in enrollments, always in infrastructure. In the last twenty years in particular competition among colleges has taken the form of adding more and more expensive amenities to campuses and, at many universities, substantially increasing expenditures on intercollegiate sports. When challenged on these optional expenses, college administrators frequently claim that they have no real choice. If they want to stay competitive for the best students (okay, students who come reasonably close to admission standards and can either pay or push up the numbers of preferred minorities), say these administrators, they have no real choice. If the colleges in our “comparison group” offer day spas and free massages, we need to as well. What respectable college doesn’t have an indoor rock climbing wall? Who wants to live in a dorm that requires students to share a bathroom?

                This competitive drive towards luxury and unnecessary expense is not an illusion. Colleges and universities really do feel the pressure as they study their applications, acceptances, enrollments, and retentions. But that competition didn’t just come out of thin air. It came about because of state and federal policies that incentivized expanding enrollments and did so in a way that discouraged colleges and universities from competing on price. Students, in effect, became valuable quarry pursued by ever greater numbers of hunters, each trying to lure the students into their own preserve. 

                One of the oddities of this financial model is that it enabled administrators to pay so little attention to tomorrow. Colleges and universities across the country typically have huge underfunded “deferred maintenance” problems. They have found it much more advantageous to build new buildings than to take care of old ones.   Maintenance doesn’t create the material for flashy new claims, for persuasively explaining tuition increases, or competing with peer institutions. Moreover, well-heeled donors want their names on new buildings, not on the resurrected plumbing of old structures. 

                This financial model for higher education is now in trouble. The trouble began when the student loan system started to slip its gears, and it has accelerated as states have had to retrench their budgets. Other problems are beginning to nibble at the edges, as students have begun to migrate to online universities and graduates in significant numbers have discovered that a college degree doesn’t guarantee much in a recessionary job market. 

               These troubling signs, of course, can be swept away, if the higher education Ponzi scheme can be maintained by doubling the size of enrollments (as the College Board recommends).    By Ponzi scheme I don’t mean an illegal operation such as Bernie Madoff’s where investors were paid imaginary returns by passing on to them other people’s money. I mean a system that is built on the unsustainable supposition that unfunded liabilities can be covered indefinitely by some combination of raising prices, relying on government subsidies, and expanding enrollments.   Such a scheme is build on illusions that are no less illusions if its architects think otherwise. 

                The Chronicle of Higher Education is reporting on the shakiness of public trust in this system. The most telling anecdote concerns the president of the University of Minnesota, Robert Bruininks, urging Minnesotans to support the stimulus bill because it will help to pay for some $680 million in needed repairs to Minnesota State Colleges and Universities (MnSCU). Bruininks vividly scaled the problem: “To understand the pent-up demand for maintenance and renewal,” Mr. Bruininks wrote, “consider that MnSCU maintains more than 292 acres of rooftops over its classrooms and academic buildings, and that the state’s bonding bill last year was only able to meet half of the system’s maintenance and renewal needs.”

                Ah, the deferred maintenance problem. But why was the maintenance deferred? The Chronicle reports several Minnesotans who wonder about that. One cites the $140 million in tax revenues Bruininks devoted to a new football stadium “instead of using it for all of those needed improvements.” Another aptly asks what was wrong with the planning. 

                Let’s make that more explicit. If you buy a house or a car, you pay part of the costs up front either with your own money or borrowed funds. But you also acquire an ongoing cost of maintaining your new property. How is it that colleges and universities across the country have continued to build and build and build while backlogging the maintenance costs? “Deferred maintenance” is another term for fiscal irresponsibility. 

                Now the American public is being asked in the name of “stimulating” the economy to pay for the deferred maintenance in higher education. It may be a bailout we can’t avoid, but it should certainly come with a demand that trustees and administrators be held responsible for their past ineptitude. Perhaps that translates into a set of Financial Accounting Standards that put a spotlight on college and university decisions to build new buildings if they are not currently covering the costs of maintaining existing structures. Surely we should expect good stewardship at the level of proceeding with projects only after careful consideration of long-term upkeep. 

                Rules ensuring this kind of responsibility are the minimum we should expect for our $7 billion.

                “Deferred maintenance” is a practical problem that testifies to the deep flaws in the financial model that drives most of America’s system of higher education. It is time for some serious rethinking of that model. But let’s not leave the term as just a description of leaky roofs in Minnesota and crumbling sidewalks in Massachusetts.   The “deferred maintenance” problem arose because higher education became too deeply enamored with itself as a system that could and would encompass all of America’s social, economic, and political problems. Higher education would be for everyone, and in becoming so, old-fashioned concerns such as prudent financial planning were neglected. Those same impulses of course also played out at the level of the curriculum and the shaping of the faculty. We have deferred maintenance problems there as well, where much the same thing happened. Over the last quarter century we have added a whole lot of glittering new programs and up-to-date faculty members, and…well, it isn’t too hard to fill in the picture.  If $7 billion could ensure that every American freshman had a good unbiased course in American history; that every college graduate could write a coherent essay and competently handle higher mathematics; that every student knew at least one play by Shakespeare; that no one graduated without a least a foundational course in economics—I’d consider the money well spent. 

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