Prospects for Higher Education Sector in a Challenging Economy

The economic health of the higher education sector may become a critical factor in Vermont's economic stability.  I have pointed out that higher education accounts for a large percentage of Vermont's economy and employment (click here to read my prior posting on that subject).   As a lawyer for higher education and a parent of a student heading to college next year, I have been following reports in the Chronicle of Higher Education about the impact of the current banking crisis on colleges and universities, many of which rely heavily on invested endowments and foundation grants.

While the New York metropolitan area has been paralyzed by the banking crisis, with bankers, traders and financial managers immediately affected and, as a result, work drying up overnight in other sectors such as real estate professionals, home contractors, retail, luxuries and the service economy in general, the atmosphere in Vermont has been notably calm.  Vermonters are following the financial news, and while we may be watching the value of our investments go down, our conversations tend to focus on ways to save on heating, food and transportation costs for the coming winter.   The overall sense is that our local economy is stable and that this is a time for prudence, not fear. 

It seems to me that this local sentiment is due largely to the fact that while the population of New York is so directly tied to Wall Street, the population of Vermont is directly tied to higher education, which is not experiencing a direct downturn.  While the banking crisis immediately reduced demand for homes, home improvements and luxury items in the New York area, economic downturns tend to increase demand for higher education.  I graduated from college (1985) and law school (1991) in difficult economic times when the trend was for people to choose education over employment if possible and to remain in school as long as possible, hoping the economy would improve by the time they entered the work force with their degree(s) in hand. 

Healthy endowments are intended to allow colleges and universities to weather economic storms without affecting operations, allowing academic freedom to rise about economic considerations.  But those colleges and universities that rely on invested funds for operating expenses are vulnerable. College and universities tend to invest their endowments in funds together with the endowments of other colleges and universities that share common investment parameters. One of these investment funds, Commonfund,was frozen on September 29 and the impact was potentially severe for many colleges and universities invested in that fund. Commonfund is managed by Wachovia Bank as trustee, and as Wachovia struggled to maintain solvency it restricted and then eliminated withdrawals by fund depositors, which included over 900 colleges and universities. Several Vermont colleges were invested in Commonfund, but they were not invested to an extent that threatened their short-term operations when Commonfund was frozen. In contrast, some colleges outside Vermont reportedly were questioning whether they could make payroll with Commonfund frozen, because many colleges and universities used their Commonfund accounts as checking accounts to withdraw operating funds as needed.

Although most colleges and universities are nonprofits, they are viewed as wealthy institutions in comparison to businesses and community service nonprofits. Of course not all colleges have huge endowments but it is true that many do. In recent years colleges and universities have been subjected to scrutiny for rising tuition rates despite rising endowment incomes, and colleges and universities have countered with very little in the way of a defense.  The trend in the past year has been for colleges and universities to replace loans with grants and reduce or eliminate tuition requirements for students from low income families.

Vermont's Congressman, Peter Welch, takes a keen interest in higher education.  Colleges and universities nationwide are taking a keen interest in Congressman Welch this year because he introduced a bill aimed at reducing rising tuitions by requiring colleges and universities to spend 5% of their endowment income each year, similar to private foundations.  According to an interview published by the Chronicle, Congressman Welch is disappointed that colleges and universities are so hostile to his proposal.  He points to the fact that Congressional increases in student aid are neutralized by tuition increases.  He believes colleges and universities know best that cost of education is a difficult problem and are in the best position to address the problem with practical solutions.  And in a down economy, students and families may become even more interested in lower cost education options.

According to reporting in the Chronicle, studies have shown that foundation giving is not directly affected by investment performance. This assessment was confirmed to me in a recent conversation with Scott McArdle, Senior Philanthropic Advisor with the Vermont Community Foundation.   Private foundations are required to give away 5% of their investment income each year so in theory, market factors could have a direct impact on the amount of money foundations donate to nonprofits including colleges and universities.  But the experience in prior economic downturns has been that foundations continued their giving programs at consistent levels despite reduced income from investments.  Colleges and universities benefit from foundation philanthropy so stable foundation giving supports stability in the higher education sector.  Again, based on reports in the Chronicle, some foundations may be grievously affected by the banking crisis, for example foundations that were heavily invested in one or more of the failed financial institutions, but overall foundations will come through this crisis well.

Research universities depend on government research funding, which can be directly affected by cutbacks in the federal budget.  Federal grant funding has been restricted over the past few years, so this phenomenon is not new, but it may be exacerbated by the nation's new focus on the need to reduce the federal deficit, which has become a campaign issue.

A large part of my law practice involves advising colleges and universities on immigration laws relating to faculty, staff and students.  As a professional serving colleges and universities, I am pleased with the financial stability of the college and university sector in this recent economic crisis, including Vermont institutions.   And as a member of the Vermont business community, I am very pleased to know that one of the pillars of our state's economy, colleges and universities, is sturdy in difficult economic times.