Explaining Tuition Hikes at the University of Michigan

This is part of an ongoing series of printable pamphlets designed to explain how money flows through public research universities in general and the University of Michigan in particular. The pamphlets are intended to clarify arguments and push back against pervasive and seemingly “common sense” narratives about the crisis of public higher education that impede, rather than advance, meaningful political action. We hope tactics and strategies will emerge from these counter-narratives—after all, we can’t fight what we don’t understand. Download the printable version of this pamphlet here and see the Resources page for the entire series.

Why has tuition grown so much and so fast at the University of Michigan? According to the administration, it has to do with “the long-term decline in state funding.”[1] We’re going to show you why this story is at best incomplete and at worst manipulative. It’s true that since the 1970s politicians around the country have cut budgets for many social services, including public higher education. Using the chart on the following page, the administration argues that state funding made up 78% of U-M’s general fund budget in the 1960s, but by 2012 this number had fallen to 17%. The chart suggests that tuition has increased to replace it, and the two streams are about equal.

The administration's story

So what’s missing from the administration’s story?

First, it’s important to recognize that the university’s budget is far more complex than the chart suggests. There’s not just two streams of revenue into the university. The general fund only represents a small piece of the university’s operating activities. As the pie chart on the next page indicates, other significant revenue sources include federal research grants (about $1 billion), distributions from the endowment (about $400 million), and gifts (about $150 million).[2] Why is this important? It shows that, even when we take the state’s budget cuts into account, overall revenue at U-M is actually increasing significantly. Over the last decade, for example, total revenue for operating activities (excluding the health system) has jumped from about $2.2 billion to $3.4 billion per year.[3] During that same period, state funding fell by just $41 million, while the revenue generated by student tuition increased by an astronomical $466 million. Even if state funding had remained constant, there would still be a lot more money floating around in the system, and students are more than making up for the difference.

The full story

Second, the administration’s story only tells us about the revenue side of the equation, the money coming into the university. It completely leaves out expenditures, where that money is being spent. The administration’s chart would only make sense if expenditures had remained stable over time. But they haven’t. Two non-instructional areas where expenditures have grown significantly are administrative spending and interest payments (also called debt service). A recent AAUP report shows that since 1975, the number of full-time executives at universities across the country has increased by 141% and full-time non-faculty professionals by an astonishing 369%, while the number of tenure-line faculty has grown by just 23%.[4] This same process is happening at U-M—even during the recent financial crisis. From 2005-2010, administrative salaries at U-M increased by 27% while faculty pay increased just 18%.[5] In May 2014, the Institute for Policy Studies released a report titled “The One Percent at State U” which ranked U-M among the top five most unequal public universities, based on “excessive executive pay, highest student debt, and large increases in low-wage and/or contingent faculty labor.”[6]

Another expenditure that goes unmentioned in the administration’’s story is debt service. Since the University started debt-financing building construction in the 1990s, interest payments have become a growing share of its expenses. U-M doesn’t have tens or hundreds of millions of dollars in cash sitting in a vault under the Fleming Building, so when they want to pay for a new building they borrow money at low interest rates by issuing construction bonds. If you look at the documentation from one of these bond sales, which is called a prospectus, you find the University’s own projections of how much interest it is planning to pay out over the years. According to the most recent bond issuance, U-M will pay over $126 million in interest in 2014 alone, and continue to pay over $100 million a year through 2028.[7] (Of course, if the University borrows any more money between now and then that projection will be extended.) What’s even worse is that, as UC Santa Cruz professor Bob Meister has shown, the University achieves these low interest rates by pledging student tuition as collateral and demonstrating its ability to raise tuition at will.[8] That means U-M is making students take on more debt at higher interest rates so its own debt can be paid off at lower rates.

Third, the University actually has a vested interest in weaning itself from the state. Currently there are four main revenue streams into the University: state funding, federal research grants, the endowment, and tuition. The first three come with heavy restrictions. State funding, for example, generally has to be used for educational expenses only and is always subject to the will of fickle politicians. Federal research grants primarily fund specific research projects (including some overhead) and cannot be spent on anything else. The majority of the endowment is tied to specific targets chosen by the donors (an endowed chair, a special scholarship, a new building). Student tuition is unique in that it comes with no restrictions whatsoever, so it can be used for anything—interest payments, executive bonus pay,[9] even venture capital-like “entrepreneurship” initiatives.[10] Naturally, the administration prefers flexible sources of funding so it can spend the money however it wants, without oversight of any kind. As a result, in some ways the administration actually sees state budget cuts as advantageous, because they justify unrestricted tuition hikes, which leads to further budget cuts and so on, in an unending cycle of privatization.

The administration’s story about state defunding is just that—a story. It serves their interests because it absolves them of any responsibility and directs student and worker activism toward the state government instead of the administration itself. The counter-narrative we have presented here identifies the administration as a central protagonist in the privatization of the University. Even if the state were to increase funding to U-M, we can’t trust the administration to use that money as we would want—to lower tuition or hire back the workers they’ve laid off, for example. Through its own decisions, the administration has come to have a vested interest in the status quo.

Notes
1. University of Michigan Public Affairs, “Understanding Tuition,” June 2013.
2. University of Michigan, “2013 Financial Report,” p. 9.
3. Based on a comparison between the financial reports from 2013 (see above note) and 2004, which is available here.
4. John W. Curtis and Saranna Thornton, “Losing Focus: The Annual Report on the Economic Status of the Profession, 2013-14,” p. 7.
5. David Jesse, “Database: Compare Salary Increases for Administrators at 15 State Universities,” Detroit Free Press, March 26, 2011.
6. Andrew Erwin and Marjorie Wood, “The One Percent at State U,” May 21, 2014, p. 11.
7. Regents of the University of Michigan, issuance for General Revenue Bonds, Series 2014A and 2014B, February 12, 2014, p. 12.
8. Bob Meister, “They Pledged Your Tuition,” October 11, 2009.
9. Kellie Woodhouse, “University of Michigan Faculty Question Administrator Pay in Letter to the Board of Regents,” Ann Arbor News, April 25, 2014.
10. As Meister writes, “although tuition can be used for the same purposes as state educational funds, it can also be used for other purposes including construction, the collateral for construction bonds, and paying interest on those bonds. None of the latter uses is permissible for state funds.”

Download the pamphlet for printing: Explaining Tuition Hikes PDF

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Construction Not Instruction: Bonds and Buildings at the Public University

This is part of an ongoing series of printable pamphlets designed to explain how money flows through public research universities in general and the University of Michigan in particular. The pamphlets are intended to clarify arguments and push back against pervasive and seemingly “common sense” narratives about the crisis of public higher education that impede, rather than advance, meaningful political action. We hope tactics and strategies will emerge from these counter-narratives—after all, we can’t fight what we don’t understand. Download the printable version of this pamphlet here and see the Resources page for the entire series.

Since the 1970s in the United States, there has been a shift from industry to finance as the driving force of the economy. Instead of investment in productive capital, money has been increasingly invested in the financial sector, seeking speculative profits. This money always seeks profitable outlets, namely projects, institutions, or individuals to which it can be lent to generate interest. Before 2007, as the graph on the next page shows, much of this money flowed into the housing and personal credit markets. After the financial crash, however, higher education became an important site of investment for the capital accumulated in finance, primarily in the forms of university construction bonds and student loans. Student debt is now the largest source of personal debt at over $1 trillion.[1] During the same time period, university construction debt has grown exponentially as well.

The transformation of the public university into a site of investment has had devastating consequences. In this pamphlet we will explain how these flows of finance capital affect the university, with a special focus on tuition and the overall demographics of the campus.

debt

While students can take out personal loans via student loans or credit cards, universities get their loans through a different financial device known as a bond. A bond can be thought of as a package of smaller loans. Instead of borrowing money from just one bank to raise money for large construction projects, the university issues a bond as many little pieces of debt that institutional investors (like banks, pension funds, and hedge funds) then buy. The university then redeems these bonds at scheduled times in the future, paying back both the principle (the original cost of the bond) as well as a set rate of interest along the way. The large banks that help the university sell the bonds (think Bank of America or Citibank) then make money on the fees they charge the university for this service. The buyers of the bonds make money on the interest that the university agrees to pay them. For most construction bonds, their repurchase is spread out over 30 to 40 years.

As universities take on more and more institutional debt, tuition also tends to rise since after all they have to pay back what they borrow. Tuition is the only revenue stream that the university administration directly controls. The administration cannot count on increased revenue from the state or the endowment and both of these streams of revenue come with certain restrictions. But administrators can raise and spend tuition however they want. That means that they can give themselves raises, build legacy projects, and invest in luxury facilities that have nothing to do with education or research.[2] And rising tuition, of course, means that students must take on more student loans.

Universities have not always used bonds to debt-finance construction—they only started in the late 1980s and early 1990s. Before that, buildings at state schools were primarily paid for with state funds. With state funding, universities paid no interest and no service fees. So why did public universities switch to a more expensive form of financing their construction? One part of the answer is that state funding came with restrictions, so for example the state had control over the design of buildings, reigning in university administrators’ designs for legacy building projects. The utilitarian, concrete Modern Languages Building was built with state funds—and the state had the final say over the architect—while North Quad, with its LCD monitors and vaulted ceilings, was financed with bonds.[3]

Another part of the answer is that switching to expensive Wall Street-based funding has allowed public universities to build more: not just more buildings, but at a more rapid pace. This rampant construction became necessary as public universities switched to a model that relies on attracting wealthy out-of-state students and charging them exorbitant tuition. Because wealthy out-of-state students have many college options, universities have been sucked into a building arms race, building luxury facilities at a stunning rate. Over the last decade, University of Michigan has spent on average more than $500 million each year on new construction.[4] The majority of this construction (despite headlines about recording breaking “gifts” from wealthy donors) has been financed through bonds—money that must be paid back with interest. U-M will pay over $126 million in interest in 2014 alone, and continue to pay over $100 million a year through 2028.[5] More generally, “from 2002 to 2010 . . . [t]he total debt liabilities of public research universities increased by more than 50% to $26,615 per student—and debt service payments went up by more than 86%.”[6] Making these ever-increasing interest payments generally sparks tuition increases, creating a vicious cycle of vanity construction and tuition hikes.

Has this construction spree been necessary? No. These are luxury buildings built to attract “high end” consumers, out-of-state students willing to pay high tuition. Such construction actually makes the public university less accessible for and accountable to working and middle class students because it contributes to continual tuition hikes. Furthermore, the construction boom and the rising tuition on which it depends partially account for the exclusion of underrepresented minorities, since it privileges the whims of wealthy out-of-state students who tend to be white.[7] (This is not to ignore the university’s poor recruitment strategies, the hostile campus climate, and generalized white supremacy). In short, the debt-based growth exemplified by the University of Michigan is a key part of the evisceration of public higher education in favor of a small economic and racial elite.

Unfortunately, there will be no return to an entirely state-funded university. Even if the political will to fund universities did exist, states no longer have the money. The most direct problem, then, is not the state government but the class that has opened the university to capital: the university’s upper administration. Instead of seeing these executives and managers as necessary for the functioning of the university, we see them as obstacles, as the class responsible for its ruin. They are the ones who have tied the university to Wall Street, who have taken on massive debt loads and built an increasingly exclusionary university on the backs of students and workers. The university’s key function is instruction not construction, and students and workers have a lot of experience in such collective knowledge production. It should be left to us. In our vision, the university is democratically run by those who study and work there—the only way to address the misery and exclusion that the administrative elite so ably reproduces.

Notes
1. Cory Weinberg, “Federal Student-Loan Debt Crosses $1-Trillion Threshold,” Chronicle of Higher Education, July 17, 2013.
2. Bob Meister, “They Pledged Your Tuition,” October 9, 2011.
3. Howard H. Peckham, The Making of the University of Michigan, 1817-1992 (Ann Arbor: Bentley Historical Library, 1994), p. 303.
4. Kellie Woodhouse, “University of Michigan’s Mary Sue Coleman Named the Ann Arbor News’ 2013 Executive of the Year,” Ann Arbor News, November 1, 2013.
5. Regents of the University of Michigan, issuance for General Revenue Bonds, Series 2014A and 2014B, February 12, 2014, p. 12.
6. Charlie Eaton and Jacob Habinek, “Why America’s Public Universities—Not Just Their Students—Have a Debt Problem,” August 2013.
7. Data on the changing economic and racial composition of the U-M student body are available here.

Download the pamphlet for printing: Construction Not Instruction PDF