Thursday, December 15, 2022

College Bankruptcies, Revisited

College enrollment has been declining since I started this blog.  Tuition, on the other hand, continues to rise.

Labor shortage, student loan debt, skyrocketing tuition, small colleges going bust - they all have one thing in common - the age pyramid.  The number of young people graduating from high school is smaller than previous generations, and as a result, fewer are applying to college. Xenophobic immigration policies mean than many foreign students (who paid full tuition no less) are saying "no thanks" to a US education.  Some American students are also finding it cheaper to go to college overseas.  It is a perfect storm, driven by demographics.

College enrollment overall has declined every year since 2010
The biggest drop has been in for-profit schools, which is a good thing.

As a result, schools are raising tuition to cover costs, with fewer butts in the seats - or to provide more "amenities" to attract from the smaller pool of recruits.  When I was 18, the only school that "recruited" students was the University of Miami, which sent out a "Congratulations!  You have been accepted!" letter to nearly everyone who took the SAT test - even if you never applied there.  Today, college reps go to high schools during a recruitment week and try to "sell" their college to the Seniors.  "Come to Party U!  We have frat parties and you can roofie your date!  Plenny of fun!  Sign here and pay for it with student loans!  We've got a rock-climbing wall!  You kids like that, right?"

The rise in tuition causes more people to think hard before going to college - at least the astute students.  So that adds to the drop in enrollment. Students also look more critically at a college education in terms of return-on-investment.  When it's so damn expensive, you have to think that way - colleges brought this on themselvesSmall liberal arts colleges are the hardest hit. They traditionally have the highest tuition rates and the degrees are less valued in the marketplace.  Employers look for "name brand" schools with good reputations (often based on athletics, not academics) and students realize this.  They would rather go to a well-known State school with low tuition than some boutique college with staggering rates and a limited curriculum.

Even in the "tech" world - or particularly so - the value of a college education is eroding.  Computer programming or coding can be learned from a number of sources, including online courses taught by many corporations. Companies are so desperate for "coders" that they will hire someone without a Computer Science degree.  And in fact, for a young person, the cost of spending four years out of the job market may outweigh the salary paid working those same years. It is an interesting development.

College has, in recent years, turned into a place for keeping young people out of the job market for a while.  Maybe with the labor shortage, that is no longer needed, at least in some fields.

What got me started on this was a reader sending me an update on the fate of Cazenovia College, which is slated to close at the end of the Spring semester.  Whether this actually happens or not remains to be seen.  My late sister's alma mater, Sweetbriar College, threatened to close, until a judge decided that the terms of the endowment, made many, many years ago, which stipulated that it remain a women's college perpetually, could be overturned even if they went co-ed.  It also rallied the alumni to open their pocketbooks and cough up some dough to keep the place running. For how long, is anyone's guess.

The problem for Cazenovia is a $25 million loan they took out to do infrastructure repair.  The interest is coming due on the note, and since the college is already running at a loss, they cannot afford to make that payment and thus will default on the debt.  Since they are in default, they can't borrow yet more money to cover operating expenses.  Closing or bankruptcy are the only two options.

(One wonders whether they could go through a Chapter-11 reorganization and emerge debt-free.  It appears, however, that such a move would be institutional suicide.  And then again, maybe some on the board have plans for the real estate - that sort of thing has been known to happen!  Like with Mitt Romney and Bain Capital, sometimes there is profit in disassembling things. The remaining endowment and sale of land pays back the bondholders, and maybe a developer kicks-back to someone in-the-know.  It's been known to happen and it does strike me as somewhat odd they are throwing in the towel so quickly).

Or... maybe they are doing this to rally the alumni to open their pocketbooks.  It could be that at the last minute, a wealthy donor, like Pleasant Rowling, coughs up the money for the place to continue.  She saved Wells College - maybe she'd do it again?   $25M is a lot of money, though, and if the college is operating at a $3M deficit already, what is the plan to return to solvency?  They either have to increase revenue (more students, higher tuition) or cut costs.  Colleges don't know what the latter even means.

On Google Maps, I noticed that the school, in addition to the main campus and the remote "athletic center" also has another remote "Jephson" campus and a remote public relations office as well.  I recall a Jephson family having an enormous estate just out of town (now a housing development) and we used to launch model rockets there.  Probably the same folks who donated the land for this art center.  It underwent an extensive renovation in 2015 - it didn't look cheap, either!  Seems like they could sell off some of those ancillary properties for a little quick cash and also to reduce overhead.  I wonder if the ill-advised expansion, circa 2000 wasn't what set the ball rolling for bankruptcy in 2023.

It reminds me of the effort to build a new high school in town in the early 1970's. In that era, a mafia-connected construction company fanned across Central New York, building state-of-the-art schools in communities with declining enrollments.  In nearby Ledyard County, they even had a planetarium in the high school (I went there on a field trip in 8th grade).   A nice feature but really necessary in a rural farm community? When we moved there decades later to buy the lake house, they were closing the elementary school and combining it with the high school, as enrollment had dropped by more than half.

They are still paying off the school bonds on that planetarium, though.  The citizens of Cazenovia voted down the new school proposal - twice.  And it turned out to be the right decision, as my class - 1978 - was the largest they ever had, and we were hardly crowded.  Since then, well, they are even less crowded.

It is a similar story at a lot of other colleges - the infrastructure keeps expanding ahead of the enrollment.  And the cost of buildings outweighs other priorities.  Salaries in academia are meanwhile decreasing, tenure has become a relic of the past, and students are being taught by fellow (grad) students.  The Dean still draws a hefty salary, though!

A lot has changed at Cazenovia College since I hung out there as an underage teen, buying pitchers of beer in the rathskeller and trying to pick up girls (and succeeding, on occasion). For example, in 2002, they opened up a new athletic center with a swimming pool and athletic field.  I don't recall the college even having athletics when I was growing up there. I certainly don't remember the "Wildcats" at all.

It got me to thinking, though, how much that athletic center cost to build and - worse yet - maintain.  One problem I see on many college campuses is that alumni will pay top dollar to build a new building with their name on it, but no one wants to pay for a new roof for the old building.  Mark used to do pottery at Cornell and I would go there with him on occasion.  Most of the buildings were sparsely occupied, even on a weekday, during the school year.  Overcrowding was not an issue.  When I returned to Syracuse University, new buildings crowded the "Quad" like a Terry Gilliam animation.  All that stuff has overhead costs.

It costs us a bare minimum of $1000 a month to live in a house worth a half-million or so.  It doesn't take long for the operating expenses to become a significant part of the overall cost - and that's not including things like major repairs and renovations.  The $25M in debt that Caz College saddled itself with was ostensibly for deferred maintenance on infrastructure.   That shit adds up!  And like I said, no one gets their name put on the new roof - hence alumni don't donate for that.

You laugh, but it is true.  Mark worked at the gift shop in the lighthouse and he had to work many of the parties for donors and members.   They have a wall of names of people who donated and it is a status thing on rich people's island to have your name up there - and on the program and so forth and so on.  And every year, they have to put on a dinner for the donors (a donor dinner) and it damn well better be good, because they paid for it!  It was a tricky job, because you piss off the donors, and the whole place goes bust.

This is nothing new, either.  In ancient times, kings and dukes would be "patrons" of painters, composers, sculptors, musicians and even poets.   It was the ultimate status symbol to support the arts and higher culture.  And part of this was endowing your local college or university.

So none of this is new.  In fact, it quickly is becoming a thing of the past, as college graduates, saddled with debt, cannot afford to donate to their Alma Mater anymore.

Unless enrollment ramps up in the coming years, this trend will continue.  And looking at the 2022 age pyramid, it looks like we are entering an age of behavioral sinkYou think the labor shortage is bad now!

The age pyramid looks downright scary these days - top heavy!  Ready to tip over!

So, what's the answer? Beats meOne pundit claimed that 50% of colleges in America will close in the next 10-15 years or so.  Many think that is a dramatic proclamation, but on the other hand, there are thousands of small-town colleges out there, across America, who are struggling with lower enrollment and higher costs.  In terms of number of colleges extant, the 50% number might not be far off the mark.

Compounding the demographic shift is the staggering cost.  It has taken a while, but many young people are starting to think hard about signing student loan docs.  Many Millennials got their weenie caught in the wringer - their younger siblings in Gen-Z seem to be taking note.

This is an instance where I get no joy about being "right" after predicting college bankruptcies for over a decade now.  Maybe smaller schools can be saved - and many will be saved, if they keep an eye on expenses and don't fall into the perpetual expansion (and increasing debt load) trap.  In a way, it is no different than personal finances.  Sure, it would be nice to have a look-at-me house and a fancy car to go with it, but if you can't afford it, you'll live to regret it.

Of course, I wonder how many of these construction and renovation contracts paid by with that $25M bond were let out to those same mafia-connected builders who wanted to build us a new high school back in 1973.

They'res always corruption to consider.