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Crisis Hits Ivory Tower

source: wsj

Crisis Shakes the Foundations of the Ivory Tower

The financial and economic tsunami that has ripped through Wall Street and the housing market is beginning to wash across the college green.

Higher education hasn't yet seen anything to compare with foreclosures and bank nationalizations in the private sector. But seized-up credit markets, shrinking endowment funds and a reduction in state subsidies are punishing universities from California to Vermont.

A campus construction boom is slowing, administrations are cutting jobs and faculty may be forced to pay more into their pension funds. The demise of a $9.3 billion investment fund used by 900 colleges has some schools scrambling to pay their bills.

It all brings a gloomy pall to what has been, until recently, a booming industry. Higher education has grown rapidly in the last half-century into a formidable slice of the economy. U.S. colleges and universities spend $334 billion annually, employ 3.4 million people and and enroll 17.5 million students.

The boom was powered by a growing stream of donations, strong returns on endowments, rising enrollments and tuition prices that climbed well above the rate of inflation — paid, more and more, by families who borrowed heavily to meet the bills.

All of these wealth generators for the Ivory Tower are facing threats in the current economic turmoil. The cratering stock market has already hit endowments. Falling markets typically take a toll on gifts, many of which are made, for tax reasons, in the form of appreciated stocks and bonds. Analysts and schools are predicting even bigger tuition increases than those seen so far. But this time, families may be in no position to meet the higher bills. Falling house prices have sapped their ability to use home-equity loans for tuition payments, and the credit crunch has forced many lenders to stop making student loans.

At a time when many political candidates — notably Democratic presidential nominee Barack Obama — are stressing the importance of access to college to the country's economic future, financial exigencies threaten to offset or overcome anything the government can do to promote more college attendance.

"This is the worst environment for colleges I can remember," says Mark Ruloff, a consultant at Watson Wyatt in Arlington, Va., who advises college endowments. With their ability to raise capital curtailed by the crisis, schools may be forced to sell their most liquid endowment assets at a time when the markets are not offering much, he predicts.

Molly Corbett Broad, president of the American Council on Education, which represents 1,600 colleges and universities, says public schools face the greatest challenge in a slumping economy because they get as much as three-quarters of their revenue from state taxpayers.

She says students could face double-digit tuition increases next year, up from the typical 4% to 6% level in recent years. Some university presidents privately confided to her that their institutions, which she declined to name, are even considering midyear tuition hikes. Ms. Broad adds that small private colleges without hefty endowments may have to consider merging with bigger rivals.

Some colleges are already feeling squeezed. As part of steep statewide budget cuts, the University of Massachusetts system this week said it would have to cut its budget by about $25 million, or 5%. The flagship Amherst campus froze hiring in all but the most critical positions. To avoid reductions in financial aid or increases in fees, the University of Massachusetts president, Jack M. Wilson, promised work force cuts and consolidations.

Boston University's president sent faculty a letter late last month announcing that the school is imposing a freeze on new hires and new construction projects. The crisis, Robert A. Brown wrote, has "created unprecedented volatility for our students, their parents and the University."

The debt markets' breakdown comes at an inopportune time for colleges, which have been building gyms and dorms to attract top students. College construction soared to $15 billion in 2006 from $10 billion in 2001, according to College Planning and Management magazine. The figure slipped slightly to $14.5 billion in 2007 amid concerns about a weakening economy.

The state of Colorado has frozen hiring and state construction projects, including about $50 million worth at public universities, such as the renovation of an arts and science center at the University of Colorado at Boulder.

The Tennessee Board of Regents, which oversees the University of Memphis, five other universities and 13 community colleges, has been forced to cut $58 million since July.

Bob Adams, vice chancellor for business and finance, says the system, with 190,000 students, may have to increase tuition "fairly significantly" next year. Including tuition, room and board and other fees, students typically pay $12,500 annually.

The University of Memphis recently announced a voluntary employee buyout program. Mr. Adams says schools are also delaying equipment purchases, such as laboratory equipment, and library acquisitions, including books and subscriptions. He says he suspects that classes will get larger because of rising enrollments and shrinking staffs. "It may get to the point where we don't have the facilities to meet the demand," Mr. Adams says.

The University of California, Berkeley, faces $28 million in cuts or unavoidable cost increases for the academic year that began in July, according to Nathan Brostrom, vice-chancellor of administration. He says that rising health care costs will result in an 11% increase in the cost of providing medical and dental benefits to staff starting in 2009. Starting in July, Berkeley faculty and staff have been told to expect to make contributions to their pension funds for the first time since 1990 because slumping stock markets have eaten away the pension surplus.

Before the meltdown, richer colleges such as Harvard and Yale had responded to pressure from Washington and started to spend more of their endowments to lessen the tuition burden. Endowments have swelled in recent years, with 785 of the wealthiest holding more than $400 billion in assets as of 2007.

Now, Moody's Investors Service, the bond rater, is projecting endowment returns to be negative for the first time since 2002. In a report Thursday, the ratings agency estimates that college endowment losses averaged 5% to 7% in the year ended June 30. Since then, including spending and stock market losses, Moody's figures colleges experienced another 30% decline in cash and investments.

The crisis has even made colleges wary about where they keep their ready cash. Earlier this month, a fund that invests cash for about 900 colleges suddenly froze withdrawals. Schools, which can now withdraw about 40% of their money, may not be able to get all of it back until 2011.

Before Wachovia Corp., the fund's trustee, said it was terminating the fund, it held $9.3 billion in assets. The Commonfund Short-Term Fund, used like a checking account at many schools, invested in some mortgage-backed securities that now can't be sold for their full value.

At the University of Vermont, the finance chief secured a $50 million outside line of credit from a local bank to ensure he meets payroll and other monthly obligations — a move he made after learning the school cannot withdraw a chunk of the $79 million it held from a short-term cash fund until next year at the earliest.

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