Two Articles from The American Prospect
Overview
This post is comprised of two articles by PRRC partner Kelly Grotke published by The American Prospect in 2021. They are the points of departure for the Recognitions project.
The first is called “Are Endowments Damaging Colleges and Universities?” It uses Oberlin College’s decision to outsource dining-service and custodial services and fire the existing workforce during the early days of the COVID-19 pandemic as a point of departure for a discussion of financialized higher education nationally. You can read it below or in its published form by clicking this link. (The published versions have an audio option, should you prefer to listen.)
Her second article, “The Failure of Financialized Higher Education” takes a broader view of contemporary financialized higher ed. The article begins with an account of faculty layoffs at the University of Akron and moves from there to consideration of the current, devalued state of intellectual and creative work as well as adjunctification. The article then turns to another aspect of financialization: higher ed’s increasing reliance on debt instruments to finance projects and to make up for decades of cuts in federal and state funding. Kelly outlines two consequences: 1) the power this reliance grants to credit-rating agencies and 2) the potential for exploitation of colleges and universities (along with pension funds, municipalities and school districts) by sophisticated players in finance - a potential made very real and material earlier in this century via interest-rate swaps. As above, you can read the article here or in its published form by clicking this link.
Are Endowments Damaging Colleges and Universities?
Endowments are supposed to help institutions weather periods of financial difficulty. Instead, they’ve become a source of it.
BY KELLY GROTKE
FEBRUARY 12, 2021
Over 500 Oberlin alumni contributed to the 1833 Just Transition Fund, a nonprofit that provides pandemic relief to dining and custodial staff laid off by the college last year.
These are perilous times for private, nonprofit, independent higher education, and not just because of changing demographics, ever-climbing tuitions, and pandemic shutdowns. For years, education researchers have charged that institutions are unable to control costs effectively, especially their operating costs. In public discourse, colleges and universities are often characterized as reckless spenders. So when they slash academic budgets or cut staff, nearly everyone shrugs. Higher education has gradually accommodated itself to austerity thinking. But as any critic of neoliberalism can tell you, austerity is really just another way that money and resources are redistributed upward, and outward.
It is rarely, if ever, discussed how endowment fund management is an integral part of the budget problem. As the tax filings of virtually every private college or university show, enormous investment management fees are pouring out of nearly every substantial endowment and into the pockets of fund managers. Most of these fund managers are not university employees, but rather work for industries such as private equity, hedge funds, and other so-called “alternative” investments. According to its tax filings, Oberlin College (my alma mater) paid out a total of $14,872,522 in investment management fees between 2013 and 2017, averaging around $3 million per year. During that same period, Amherst College paid out $186,601,258. At both colleges, investment management fees actually exceeded reported profits from investments several times. Excluding Harvard (which manages its roughly $41 billion endowment internally and has also faced criticism for immensely high overheads), the remaining Ivy League colleges reported paying out $241,653,279 in fees in 2017 alone. That same year, Stanford University paid out $47,901,005, and Johns Hopkins $28,112,000. The list goes on and on.
Nontraditional asset class investing has become so widely fashionable among university endowments that it has taken the form of ideology.
As enormous as such figures are, it is likely that they do not represent the total costs associated with these investments. Tax filings simply do not reveal enough for the overall financial effects of these investment decisions and practices to be comprehensively assessed. But what is known is that the alternative-investment industry is tremendously profitable: In 2020 alone, for example, the top 15 hedge fund managers collectively made over $23 billion.
But we can say that the pattern reflects a widespread institutional practice with endowments, tax-free investments held by nonprofit institutions that provide education as a public good. Increasingly, endowments are invested in expensive, secretive, unregulated, illiquid, risky, and hard-to-value financial instruments—the strategy laid out by David Swensen in his book Pioneering Portfolio Management and nicknamed the “Yale Model.” While acknowledging the greater risks involved, Swensen credits Yale’s returns to this strategy, noting that “developing partnerships with extraordinary people” is the single most important element for its success. What makes these people extraordinary is not specified, but the enormous amounts of money they are paid does fit that description.
Nontraditional asset class investing has become so widely fashionable among university endowments that it has taken the form of ideology. Very few institutions seem to balk at putting alumni and other donations into risky, illiquid investments, something that would have been regarded as foolish and dangerous only a few decades ago.
Oberlin College is among them. According to its Investment Office, 67.9 percent of its $890 million endowment was invested in “alternatives” in 2019 (hedge funds, private credit, private equity, and real assets), a much higher level than many similarly sized endowments. Oberlin’s boilerplate rationale is that “historically, our relatively higher allocations have both increased investment returns and decreased volatility,” just as Swensen promised.
Despite this boasting about its healthy, profitable endowment, Oberlin announced early last year that it would outsource over 100 unionized dining and custodial jobs, in order to save around $2 million annually. That’s less than Oberlin pays out each year in investment management fees. This extreme measure was pushed through despite opposition from students, faculty, alumni, staff, and the broader community. Depriving some of the college’s most vulnerable employees of health benefits and income is bad enough for a historically progressive college in a town with a poverty rate of over 20 percent, but it represents a particular kind of cruelty in the midst of a deadly pandemic.
Oberlin contracted the dining jobs out to AVI Foodsystems, Inc., which eventually reached an agreement with the union to preserve wages and benefits. But on July 2, late in the day and right before a holiday weekend, Oberlin unilaterally announced that it was outsourcing the custodial services to Scioto, a company privately owned by the Rauenhorst family trusts. Scioto only rehired one of more than 50 custodial workers; the rest, a majority of whom are in their fifties and sixties, with over 600 combined years of service to the college, were fired outright. Scioto’s job listings indicate lower pay, few if any benefits, and often no guarantees of stable, full-time employment.
Those close to the negotiations say that the college made no attempt to bargain in good faith with the union, a local of the United Auto Workers, despite the fact that it was willing to make numerous concessions. The college’s decision over the summer to extend health care benefits until the summer of 2021 to any former employees not otherwise covered only came after considerable union and alumni pressure.
How did Oberlin College, whose progressive history is a national treasure and source of pride for many alums, stray so far from its values that it is now union-busting and contributing to its hometown’s already considerable poverty rate? And why is it that austerity measures such as these are increasingly foisted upon faculty and staff at colleges and universities nationwide, when their endowments should be sufficient to safeguard jobs and benefits during times of extreme financial stress and difficulty? Why have endowments, meant to insulate institutions from difficult times, instead become a source of profound vulnerability and needless pillage?
One College’s Crisis
During the financial crisis of 2008, I was tracking state pension investments, which were comparatively free of the regulations governing other taxpayer-funded state funds. At the time, a number of state pension funds were increasingly investing in derivatives and various other alternative investments, many linked to the housing bubble. When the crisis hit, it became clear that the managers of these funds did not have a remotely adequate sense of the risks involved. When the bottom dropped out, private financial institutions were propped up with public taxpayer money, with practically no assistance for people who ended up losing their homes, and with the general negative economic effects disproportionately affecting people of color.
After the crisis, I began to look into endowments, and noticed that many were also investing substantial percentages of their assets in risky and illiquid financial instruments, making them highly vulnerable to the “unexpected.” As an alum, I followed Oberlin’s endowment more closely than most.
Oberlin was already beset by a number of crises before current president Carmen Twillie Ambar’s arrival: two major lawsuits as well as a 2015 scandal involving the chair of the Endowment Investment Committee, Thomas Kutzen, who was charged by the SEC with fraudulently inflating the value of his hedge fund. Ambar also inherited a structural deficit common to many colleges and universities. Despite its impressive $890 million endowment, the college was in apparent distress, even before the pandemic hit.
When pressed, the administration and trustees just insisted upon the necessity of their plans. There was no accountability at the top, simply imposed austerity. Austerity is always a labor issue, because it affects the circumstances and dignity of work. In America, where health insurance is often tied to work, it is also a social-justice issue.
Given Oberlin’s progressive history, its decision to cut unionized jobs was unsurprisingly met with vigorous opposition. Students, staff, and union members demonstrated. One faculty member went so far as to chart the rate of the endowment’s return over time compared to a standard index fund, finding that the endowment seemed to be doing significantly worse.
A synergy between secretive endowments and the changing character of university and college administrations vibrates at the heart of this episode.
A group of alums, myself included, formed an ad hoc committee called Alumni for a Sustainable Oberlin Endowment. On March 12 last year, we sent a letter to the administration and the trustees, signed by over 60 alumni who were willing to commit to withholding donations in protest. In addition to requesting that the administration halt the firings, we also requested designated contacts who could answer questions about the endowment. Most crucially, we offered to undertake a confidential, independent evaluation of the endowment. Our offer, if accepted, would have helped restore trust and confidence that the administration and the trustees were doing the best they could in a difficult situation.
Our letter briefly opened up a communication channel. The trustees did not respond substantively to our requests, but did inform us of an emergency fund established to help students stranded by the pandemic. To Oberlin’s credit, this was much more than many colleges and universities did, and we exempted that fund from our donation boycott. Our offer of an independent valuation of the endowment, however, was never acknowledged, although it still stands. Again, Oberlin pays out more each year in investment management fees than it hopes to save by the job cuts.
As we waited in vain for a response to our requests, I discovered some politically symptomatic ironies. Chris Canavan, trustee chair and principal advocate of the proposed cuts, also chairs a public foundation called the Fund for Global Human Rights, whose lead slogans are: “Equipping Activists. Mobilizing Movements. Improving Lives.” Among other projects, the fund addresses issues like food security in Honduras. Perhaps resources from this fund might be made available to the workers let go at Oberlin, which already has such a high rate of poverty?
Despite considerable opposition, the college administration and trustees unilaterally went ahead with their original plan and outsourced the jobs. They provided no evidence that cutting jobs and benefits was the only way forward, they allowed no one to look at the books and come to an independent conclusion, and they did not reveal how they calculated the anticipated savings. They simply asserted that their course was the only correct one, something no one else was in an informed position to judge.
In response, over 500 alumni contributed to the 1833 Just Transition Fund, a nonprofit that a group of us established to provide pandemic relief to those who were not rehired by either outsourcer. We were able to provide at least $3,000 to each, surely something but hardly enough to make up for what these people had lost.
A synergy between secretive endowments and the changing character of university and college administrations vibrates at the heart of this episode. In addition to exposing institutions to considerable financial risks and costs, the secrecy of alternative investments has meant that even well-meaning administrators and trustees—people who truly value education, research, and scholarship—are provoked to act in ways that erode a sense of community and shared endeavor. This secrecy has encouraged autocratic behaviors at the expense of the institutions and communities they should serve and safeguard, all while the pandemic has made the urgency of cooperation and acting in good faith ever clearer.
Profits and Values: The Erosion of Higher Education From Within
The situation at Oberlin mirrors the reality of alternative investments and our financial market–dominated economy. As researcher Ludovic Phalippou of the Oxford Saïd Business School has demonstrated with respect to private equity funds, investors habitually pay enormous amounts for financial instruments that did no better in their returns than index funds and were considerably more expensive, just as the faculty researcher at Oberlin concluded. Another recent study found that hedge funds, another alternative investment, typically net investors a mere 36 cents for every dollar earned; most of the money goes to the managers. These investments aren’t protecting the futures of private colleges and universities; they’re just providing seed money for a tragically unequal economic system.
Given the noxious and anti-democratic role of money within our political system, both parties are undeniably caught up within the mechanisms of a heavily financialized economy that has transformed our society from a democracy into an entrenched oligarchy. Institutions of higher education have been helping that process along, though practically nobody involved may even be aware of it.
Surely, the vast majority of alumni who donate to their alma mater’s endowment do so in support of the institution’s fundamental educational mission. But some of that alumni money is enriching fund managers within an already scandalously wealthy industry, in a country already riven by enormous income inequality. Worse, this virtually unregulated and secretive industry contributes to that inequality by depressing wages, disempowering workers, and destroying more jobs than publicly traded companies do.
Endowment management and oversight is usually restricted to specific subcommittees. Faculty, staff, alumni, and students are routinely rebuffed when making inquiries. No one outside of those directly involved with the particular investment vehicles at stake is in any position to evaluate or independently assess any claims about what endowments are invested in, what they are worth, how well or poorly they are performing or being managed, and whether or not there are any conflicts of interest. Although nonprofit colleges and universities are all audited, which would seem to confer at least some legitimacy on the figures provided by trustees, managers, and administration, auditor awareness of valuation complexity and how best to test management’s values can vary considerably. Indeed, it is standard practice for auditors simply to note that values can be profoundly affected if situations change (as they often seem to do).
Private colleges and universities are being used to support and enrich a private investment industry whose sole purpose is extracting extraordinary profits for itself.
So-called “alternative” investments were essentially created to get around regulations and reporting requirements that govern public equities such as stocks and bonds, as well as pooled investment vehicles such as mutual and index funds. If a few leaked examples are any indication, they are governed by confidential, long-term contracts that seem to guarantee profits for fund managers, regardless of the performance of the underlying assets.
Because of the immense secrecy surrounding alternatives, even ostensibly straightforward initiatives such as fossil fuel divestment campaigns can yield incomplete results. Public equities in that industry can be sold off, but the underlying assets within alternatives are completely hidden from view. At a time when the humanities in particular have come under increasing pressure to “prove” their value, when hiring and salary freezes are being widely instituted, and some colleges and universities (including Oberlin) are even halting employee pension contributions, the lack of basic transparency about the financial condition of endowments, along with an increasingly top-down corporate attitude that’s become characteristic of the commodification of education itself, just doesn’t cut it.
François Furstenburg, professor of history at Johns Hopkins, was correct when he called attention to an enormous crisis of university governance emerging in the midst of the fiscal strains brought about by the pandemic. And he was also right to note the dangers of conflicts of interest and self-dealing, observing that “over nine years [Johns Hopkins] paid more than $88 million in fees to an investment firm whose founder formerly served as chair of the university’s board.” Some conflicts can be ferreted out by examining tax filings, but others will surely remain hidden. The wall of confidentiality, obscurity, and privilege that surrounds most endowments today is changing the character and culture of private higher education in this country for the worse.
The inescapable conclusion is that our private colleges and universities are being used to support and enrich a private investment industry whose sole purpose is extracting extraordinary profits for itself, and which has no fundamental interest in either the value or the demanding work of education, research, and scholarship. When institutions with substantial endowments nevertheless plead financial hardship and proclaim the need for cost-cutting measures, clearly something has gone badly, systemically wrong. Endowments, after all, are supposed to help institutions weather periods of financial difficulty. Instead, they have become a principal source of financial difficulty, and this fact endangers the fundamental educational mission of our private colleges and universities.
Changing Course
Our highly financialized economy is advancing a process of deep and abiding social, political, and economic disenfranchisement. Enormous fortunes have been made in the finance industry, all while ever more Americans are merely one paycheck away from poverty, and many already plunged into it by missed ones. As we have seen in recent weeks, seemingly random fluctuations in financial assets, and rampant speculation on asset inflation, have become a central preoccupation of wealth in America. A real economy can barely be seen through the speculative fog of financial engineering surrounding any half-baked proposition with a chance to rise in “value.” Hedge funds and other alternative asset managers have driven this reckless chase for returns, which has become completely disconnected from the value and worth of everyday Americans.
Such extremes indicate a very unhealthy society, which treats people as expendable and of no real account in many ways, for all sorts of reasons related to race, gender, class, and even general health. Oberlin College can afford to put millions in the hands of investment managers, enabling the wild gyrations of our financial markets, but claims incapacity when it comes to protecting the most vulnerable within its workforce.
I hope, and trust, that administrators and trustees across the country see the problems I’ve described here, and will work to address them. But I also suspect that there are those who have benefited in various ways from the current state of affairs, and will not cede ground without a fight. The myriad costs of this state of affairs are very real, and Oberlin’s imposed austerity is hardly unique. For example: Despite its $29 billion endowment, the administration at Stanford threatened to close its famed press if it couldn’t become “self-sustaining.”
Our private institutions of higher education are endangered by a powerful and corrupting combination of money and secrecy, which has led to pillage. But accountability is not a one-way street, and colleges and universities must be made answerable for their management of endowments. Institutions could renounce the Yale Model and invest in standard index funds, which yield similar or better returns and are far less expensive. They could also commit to sustainable endowment policies with clear guidelines about conflicts of interest, in order to reassure alumni and other donors that their contributions are not lining the pockets of investment managers. Faculty and other stakeholders can pressure administration and trustees to become more open and transparent about the financial condition of their endowments and how they are invested. Task forces could be formed to assess and challenge imposed austerity measures, against the trend of top-down managerialism and administrative fiat.
There are any number of paths forward. But the extreme conditions of the pandemic have clearly revealed the need to change course.
The Failure of Financialized Higher Ed
Big endowments and big money have made administrators more accountable to financiers than their own universities.
BY KELLY GROTKE
SEPTEMBER 20, 2021
In July 2020, the University of Akron decided to eliminate dozens of tenured (and unionized) faculty positions, pleading “catastrophic circumstances.”
Despite federal pandemic aid of $69 billion, over 650,000 jobs were lost in higher education last year, amounting to 1 out of every 8 workers. This was the most extreme decline ever witnessed in the 60-plus years that the Labor Department has tracked specific industry numbers.
In typically cruel neoliberal-managerial fashion, most of those cuts were directed at the lower ends of the pay scale, affecting already vulnerable service and support workers and adjunct professors, rather than tenured or tenure-track faculty and administrators. Some cuts were even deeper. In July 2020, the University of Akron decided to eliminate dozens of tenured (and unionized) faculty positions, pleading “catastrophic circumstances.” That October, Ithaca College announced it was “right-sizing” its faculty by eliminating 130 of its 547 teaching positions.
In July, the American Association of University Professors (AAUP) annual report painted a grim picture of the general state of higher education. Between COVID-19 and years of austerity, the report warns of “an existential threat” to shared governance and academic freedom. The persistent growth in number of adjunct faculty, who work for exceedingly low pay, few to no benefits, and no job security, has been particularly alarming. Fully two-thirds of faculty across the country are now contingent, as are 51 percent of faculty at doctorate-granting institutions. The situation is even worse at community colleges, where as much as 79 percent of the faculty may now be contingent. And in the often shady and exploitative for-profit sector, contingent labor makes up as much as 93 percent of the teaching workforce; to the best of my knowledge, there is no such thing as tenure. Despite the pervasive deterioration, tuitions continue to rise.
Leaving for-profits aside, administrations and trustees in nonprofit public and private universities increasingly run their institutions as private, top-down corporations that manufacture “education” and “student experiences” much like the companies in econ textbooks that manufacture the ubiquitous “widget.” At many institutions, faculty and staff were not consulted about mandated in-person fall reopenings, despite the delta variant continuing to ravage the country. Even the vast disparities between lowest- and highest-compensated employees on display at large corporations have been mimicked; top university administrators now can make seven-figure salaries.
Administrations and trustees increasingly run their institutions as private, top-down corporations that manufacture “education” and “student experiences.”
One of the worst examples of COVID-era managerial fiat comes from McGill University in Canada, which is mandating in-person teaching. Its provost threatened retaliatory measures against faculty who refused to teach in person, stating that even concern about putting relatives and spouses at risk of exposure was “not [a] valid reason for granting permission to teach remotely.” In classic agency-theory fashion, faculty were also preemptively suspected of falsifying information and malingering.
There have been a few bright spots amidst all the hardships. When Rutgers University’s administration directed proposed pandemic cuts at low-wage workers and adjuncts (many of whom are women and people of color), several employee and faculty unions banded together to preserve jobs and benefits and institute a work share program to protect their most vulnerable colleagues. Similar coalitions at the University of Pennsylvania, UC Berkeley, and Cornell are pushing back against decades of imposed austerity, seeking a greater measure of faculty governance and control.
But serial job losses and loss of control over working circumstances within higher ed match with a long-term trend of imposed “austerity” and “efficiency” logic from administrators, trustees, and the corporate consultants they rely on for advice. Such logic has a history that is intertwined with what Mike Konczal, Charles Eaton, and many others are now calling the financialization of higher education, which has gradually entangled many institutions with external, private finance interests that end up having much more say in how these institutions are run than faculty and staff.
Exuberant Endowments, Institutional Austerities
In a piece from earlier this year, I wrote about Oberlin College’s decision, despite substantial protest, to fire or outsource union employees. One key question was why, given the college’s substantial endowment (which recently soared over $1 billion), did such a drastic and damaging move need to be made in the midst of a deadly pandemic in order to save just $2.5 million per year? Isn’t this the kind of “rainy day” scenario endowments are there for?
After all, as head trustee Chris Canavan admitted during a March Zoom meeting with faculty, Oberlin routinely pays out more than that in investment management fees, more even than the $3 million per year average reported on its 990s. As he said to a gathering of faculty who’d had their pension contributions frozen for a year, you have to pay for talent.
The financialization at Oberlin and within higher education more broadly pits the abstruse world of finance, with its metrics and measures of shareholder “value,” against the character, needs, and values of workers and their communities. One way this process has taken hold is through the ever-expanding world of alternative investments—private equity, hedge funds, venture capital, REITs, and others. These funds often lock up investor money for years, preventing investors like universities from accessing it during a crisis.
Cover detail of a 2020 Preqin report
Barely regulated and not at all transparent, alternatives are now an enormous global industry, exceeding $10 trillion in 2020 and predicted to increase by another $4 trillion by 2023. So ebullient is the industry these days that the cover of Preqin’s 2020 industry report centered on a rocket ship blasting off into space.
The vast majority of institutional investors—which includes endowments, pension funds, charitable trusts, and sovereign wealth funds—now have at least some investments in alternatives, an industry originated and still led by the U.S. but increasingly taking root abroad as well.
Alternatives are ubiquitous, affecting virtually every aspect of our lives: our jobs and benefits, our infrastructure and public utilities, hospitals, health care and nursing homes, retail and manufacturing, housing and real estate, and even the music we listen to, the news we read, and the food we buy. And they inevitably cause negative and damaging social and economic effects, as profits get prioritized over people and communities.
Alternatives are immensely lucrative for the general partners, not least because of the massive “carried interest” loophole allowing profits to be taxed at lower rates. If college tuitions keep rising the way they have over the last few decades, top managers would still easily be able to afford tuitions of even, say, $150,000 per year, while the rest of us would be forced to take on ever more enormous debts. This is not a recipe for educational equity and social progress, but only deepening inequality.
Lured by the prospect of higher yields, colleges and universities have become complicit in our increasing disparities of wealth, which are now at Gilded Age levels. The industry itself will say, much like Canavan did, that the massive fees and costs it extracts from investors are justified because of the higher yields it brings, although recent research has shown that alternatives do no better or even worse than more regulated and less expensive investments, such as index funds.
With adjunctification proceeding rapidly, and the pandemic revealing that faculty at many institutions are effectively viewed as expendable, it’s easy to reach the conclusion that higher education now values the acquisition of paper profits over the experience of its students and faculty, even when those profits are illusory. That can be seen in Oberlin’s recent action. Despite announcing a tremendous, record-setting gain in its endowment this spring, the college went ahead with its plans, firing and outsourcing union employees in the midst of a deadly pandemic.
And then something else happened too, which brings me to another important avenue of the financialization of higher education: debt. After cutting the union jobs and outsourcing, Moody’s upgraded Oberlin’s bond ratings from a negative to stable outlook on March 21, 2021.
Debt and Bondage: The Destructive Effect of Interest Rate Swaps
Most institutions of higher education, public and private, now carry debt in the form of bonds. Particularly at public colleges and universities, which have in recent decades been starved by state legislatures for both political and fiscal reasons, these instruments provide much-needed funds for building construction and other projects. Before the 2008 financial crisis, a particular type of bond had become very fashionable: the interest rate swap, a derivative instrument used to manage risks like fluctuations in interest rates or to lower financing costs.
Across the country, countless schools, municipalities, state agencies, and pension funds invested in swap arrangements. The largest five or so banks, which dominate the industry, aggressively pushed swaps, and had an interest in doing so, since they got paid only if a swap arrangement took place. This conflict of interest no doubt contributed to downplaying the risks to their clients in order to push more product.
Some, like Bank of America, continued to market swaps to their customers, even as the banks’ own research indicated growing risks. One victim was the Chicago public-school system, which ended up paying over $50 million more for the deal than if the district had stuck with traditional fixed-rate debt. Because swaps contracts usually carry longer terms than traditional municipal debt and are expensive to exit, Chicago and many other places were forced to institute budget cuts just to keep up with the payments, resulting in declining standards of living as city services disappeared, schools and libraries were forced to close, and jobs were lost.
The swaps crisis did not spare higher education, either. As an important 2016 report from the Roosevelt Institute revealed, a sample pool comprising 19 public and private colleges and universities across the country revealed a combined total of $2.7 billion in swap costs for those institutions alone. Many of these deals had significant consequences. In 2014, Rutgers was still hemorrhaging money from four long-term swaps contracts, and was only able to right itself by entering into a so-called “century bond,” a hundred-year term bond that will conclude in 2119 (an optimistic move given the accelerating pace of climate change).
In some cases, swaps contributed to credit ratings downgrades as post-crash institutions struggled to deal with ballooning debt service, making it more costly for them to borrow. By design (and contract), exiting swap arrangements is a very expensive move, generally adding tens of millions in additional costs. According to a 2009 Bloomberg report, Harvard University ended up paying around $1 billion to terminate its swaps arrangements with the banks, many approved by its former president Larry Summers in a context rife with conflicts of interest.
Only this spring did Oberlin, saddled with costly and damaging interest rate swap agreements dating from before the financial crisis, regain a positive outlook on its debt. It is hard to imagine that this upgrade wasn’t related to the various austerity measures imposed over the preceding year, as well as endowment growth (as collateral, chiefly, not a resource supporting the general educational mission).
The Disciplining Factor of Rating Agencies
The rating agency Moody’s “Higher Education Methodology” offers a remarkable case study in the ways financial “logic” has become entrenched. It gives far greater weight to the results of one-size-fits-all, metric-driven calculations of financial viability than to any other factor. “Brand strength” is the instrumentalized stand-in for the qualities and characteristics of particular institutions and communities. Under this rubric, some prospective students will be drawn to “progressive” brands like Oberlin, while others will be drawn to “conservative” brands like Pepperdine, much like some people prefer Crest to Colgate toothpaste.
This branded, commodified view of education has no concern for the processes of learning, debate, and critical reflection that are central to education. But this allegedly ideologically neutral way of looking at higher education is in fact very ideological, something that can be seen from the effects of the ratings agencies on governance. And one major effect is imposed austerity, like at Oberlin, as well as declining faculty control over their circumstances of work. For example, because Oberlin outsourced and cut those union jobs, it cannot require dining and custodial workers to be vaccinated, as it has all other employees.
The ratings agencies occupy a “disciplining” position not unlike the “shareholders” of private investments. Institutions have become answerable to these agencies in a manner that exceeds the ways that they are answerable to other stakeholders, such as students, faculty, workers, and communities.
Adding to this is the lack of transparency. When faculty, students, employees, and alumni are not aware of the extent of the financialization, they cannot effectively oppose it. And when administrations and trustees fail to be forthcoming about what they are doing with the money and instead act autocratically, there can be no basis for trust. To date, as far as I know, not a single institution with an endowment invested in opaque alternatives has revealed how much those investments have actually cost.
Higher education has been captured by a vicious circle of financialization, which is destroying it as an affordable and widely available right of the citizenry, and as an engine of social mobility. Saddling people with enormous debts only accomplishes the opposite. This has been a choice, not an immutable fact of nature. Surely, there must still be good, well-intentioned people within administrations and boards of trustees, people who still value education as a worthy public good and are willing to defend it against predatory, damaging financialization. The current system cannot hold.