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General News    H3'ed 3/3/11

Creative Destruction-The demise of the brick and mortar university and the looming college debt bubble

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William Czander

He holds a doctorate in psychology from NYU and has taught in MBA programs for 35 years. In 1970 he graduated from CCNY.   In 1969 when the tuition jumped from $27 a semester to $32 he joined students on a strike. He was 31 years old when he completed his postdoctoral studies at Yale and is happy to say he spent 27 years as a student and paid nothing.

When does one know things are out if control? Consider this, since 1980 the cost of obtaining a degree at most universities and colleges has increased 100 percent every 10 years. In 2010 Sarah Lawrence College was the first to break the $60,000 a year threshold for an undergraduate education. Taylor (2010) suggests that "If recent trends continue, four years at a top-tier school will cost $330,000 in 2020, $525,000 in 2028 and $785,000 in 2035. " Believe it or not Taylor's estimates may be too low. At 100 percent every ten years, by 2020 Sarah Lawrence will cost $480,000 and will easily break the million dollar barrier by 2035. If one follows the Lewin (2008) report, between 1982 and 2008, the costs of higher education increased over 430% which suggests that costs have increased 150 percent every ten years. At that rate Sarah Lawrence will reach the million dollar mark by 2025. This raises a question-Who will be the first to have their grandchild get the million dollar diploma? In 2011 it is expected that Columbia, NYU and Bard will join the $60,000 club with many more to follow. The unthinkable million dollar degree is around the corner. Of course this is only for 4-year private so-called elitist institutions not the public institutions. However, the public universities are quickly catching up. In 1985 public education costs were a bit less than one third that of the private universities and in 2006 they were a bit less than half. In 2011 with states strapped for cash the gap will close at an even faster rate. Also, it's not only the puny undergraduate degree that is skyrocketing -- just consider the cash cow's at most elitist institutions, the MBA programs. In 2010 Stanford had the distinction of offering the highest tuition for an MBA diploma in the country at $106,000 for a full time 2 year MBA, and Harvard right behind increased its MBA tuition from $54,000 in 1999 to over $97,000 in 2010 (this is tuition only and excludes fees, books, instructional supplies, insurance, housing, food, transportation, etc).   So what will happen? In 1997, Peter Drucker predicted that in 30 years the brick and mortar university campuses would be driven out of existence by their inexorable tuition. We are beginning to see evidence that Drucker's prediction may occur earlier than he predicted.

The Absurd Cost of a Diploma: Greed, Mismanagement and the Government

Higher education executives have no incentive to reduce expenses as long admissions stay high and families are willing to absorb the burden of twenty years of college loan debt. In addition they are following a business model that is outmoded and increasingly cost inefficient and certain to bring about the demise of many of these private and public institutions.

Consider the once proud University of California at Berkeley: In 2010 they announced a 32 percent increase in tuition that followed a $150 million loss in state funds. Tuition for in-state residents are now more than $10,000 annually (a three-fold increase in the past ten years).   Berkeley is not unique. Public universities and private college and universities have seen their endowments slip, budgets cut and they have had to follow the same path as Berkeley. Fire some faculty, close some departments, eliminate some degree offerings and hold down salaries but keep on building high tech campuses and above all else keep those games alive. Berkeley announced it will spend $150 million to build a high performance center for athletes and $321 million to renovate its football stadium and in 2009 they paid their football coach Jeff Ted $2.8 million while facing a reduction of $150 million in state funding. While their football team gets more in 2010 they are laying off faculty and staff, cutting enrollment, slashing course offerings, degree programs and raising tuition again. They have their priorities straight. In January 2011 the terminations began, 280 positions were eliminated and the following email went out to all employees:

"We are committed to treating all of our employees with dignity, respect and fairness while recognizing that in the end, we will have fewer administrative positions on campus," the e-mail said. "In addition to crafting a somewhat smaller workforce, our goal is to rationalize policies and procedures such that many staff will find their jobs more rewarding and less frustrating."

UC-Berkeley has undergone a number of major changes in recent months: In addition to increasing tuition and fees 32 percent, in September, 2010 they announced that five sports programs would be eliminated, not football. They eliminated women's lacrosse and gymnastics and men's rugby, baseball and gymnastics about the equivalent of two football squads (Thomas, 2011). In November, 2010 Berkeley had the distinction of becoming the first public institution to charge over $50,000 a year for out-of-state students' tuition, fees, room and board.

So while the State of California deals with a major fiscal crisis and tuition zooms up and jobs are eliminated Chancellor Mark Yudof made $591,000 in 2010 and was given $11,500-a-month for housing rental. That came to almost three quarters of a million dollars. Meanwhile Yudof's university system struggled with $2.1 billion pension liabilities and a $1.4 billion budget cut in state contributions. To control the pension liability and deal with the state's fiscal crisis it was proposed that pensions be capped. This brought an angry response from t hirty-six university executives who sent a letter to UC regents on 12/9/10 threatening to sue the state for violating their "legal, moral and ethical obligation." The state is trying to grapple with an excessively generous pension system that gives university administrators who make $400,000 a year and retire after 30 years an annual pension of $300,000. These top executives throughout the system insist on being well paid despite the fiscal crisis. In January 2011 the vice chancellor for administration and finance at Berkeley will earn a base salary of $375,000 - 9 percent higher than the salary midpoint of $344,000 earned by colleagues at other universities and the chief financial officer of the UCLA hospital system will receive a 10.5 percent raise, bringing his salary to $420,000 from $380,000. The campus called it a "pre-emptive retention salary adjustment." And UCSF is providing 10 percent increase of about $20,000 a year to three executives at their Oakland headquarters (Asimov, 2011). While raises and bonuses are being given to executives Yudof told the regents that University of California system will need to close a $1 billion budget gap and layoffs and course reductions are inevitable, and he expects to turn away 20,000 to 30,000 qualified students over the next decade because the university won't have the money to educate them (Asimov, 2011). It's already happening and Yudof's numbers are way off, in the fall of 2010 Cal State's Long Beach campus received 69,000 applications for 6,250 seats, meaning 62,750 students were turned away.

These types of misplaced priorities and mismanagement will speed up the demise of the brick and mortar institutions.

Again Berkeley is not unique. Consider Nick Saban of Alabama University, he made $3.75 Million in 2008, but after they won the national championship title the next year Saban was given new a contract paying him an average of $5.5 million a year through 2018. Meanwhile Alabama's president Witt, who makes over $600,000 a year, told his faculty the school was in a major financial crisis and forced its professors take a salary reduction in 2009 of 1.5 percent and since 2008 hundreds of jobs have been eliminated. So while Saban makes his millions the faculty average about $80,000 annually.


Auburn University, another example, won the 2010 national title and the win earned their coach Gene Chizik $600,000 in bonuses, giving him $1.1 million in performance- related compensation for the season. Meanwhile Auburn's budget has been sliced by a third since 2008 and faculty had not been given raises for three years.

Consider Duke University one of the $200,000 per diploma institutions with a business model that would make an MBA cringe. Duke, as we discover with most of these expensive universities cannot turn a profit and must continue to increase tuition because management is both dysfunctional and greedy. In the summer of 2010 Duke released financial reports for the academic year that ended on June 30, 2009. They reported that their endowment dropped from $6.1 billion to $4.4 billion, and massive investments for the pension plan and health system reserves did as poorly. A new Trustee reported Duke was in "dire financial strait."   The president threatened job cuts and salary freezes for lower level employees, the usual victims of university cutbacks. Janitorial staff, grounds keepers, clerks, cafeteria workers and of course adjuncts were hit hard by the so-called crisis. But not the Duke Management team, they did "rather well." For example the Duke Management Company, the investment arm that lost billions, awarded huge bonuses and two managers got bonuses that were double their annual salary. Broadhead, Dukes president, is engaged in the type of management that can only fire up the forces of creative destruction. Here is some of what Fact Checker found out: many administrators and executives made over a million dollars or close to it and raises and bonuses for their management team were rampant as employees lost jobs and suffered financial loss. Mike Krzyzewski, was the highest paid Duke employee with salary and bonus totaling $4.1 million, he is the men's basketball coach, their football coach makes a paltry $1.5 million and the President of the university only makes $824,755.

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He has taught in MBA programs for almost 35 years in 2002 he left academe to work for Home Depot where he witnessed the absurdity of corporate life. He is now semiretired and serves on the faculty as an adjunct professor at several institutions. He (more...)
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