MuniLand

While student borrowing for college has expanded to record levels and 12 percent of student loans are delinquent, enrollment in U.S. public and private universities declined in 2012. The number of full-time students stood at 11.5 million last year, a 0.7 percent decline from 2011. Meanwhile, state and federal governments have been reducing funding to public universities. Schools themselves have increased their borrowing for capital improvements to compete for the best students. There are rough seas ahead for education; lower the sail and batten the hatches.

Moody’s Managing Director, John Nelson, explained in a recent report why Moody’s has switched to a negative view of the entire higher education sector. It is mainly a lack of preparation for the economic and institutional changes:

The new sector-wide negative outlook reflects mounting pressure on all key university revenue sources, requiring bolder actions by university leaders to reduce costs and increase operating efficiency. As the economic growth languishes below previous benchmarks and the federal government seeks to reduce spending in key areas, even market leading universities with diversified revenues are facing diminished prospects for revenue growth. Universities have been restraining costs in response to the weak economic conditions since the 2008-09 financial crisis, but they have only recently begun examining the cost structure of their traditional business model.

Here is more from Moody’s report:

In addition to recent tax code changes, the resolution of the federal fiscal deficit will likely involve flat to diminished research funding, cuts to Medicare and Medicaid as well as possible changes to federal student aid programs such as Pell Grants – all of which would impact important revenue streams for higher education.

And it gets worse:

Continued federal budget negotiations may result in further pressure on colleges because a rising share of students are dependent on federal grant and loan programs, both of which may be curtailed to some degree. According to The College Board, the number of Stafford loan recipients has grown by 95 percent over the last 10 years to 10.4 million students in 2011-2012.

Spending for public education in New York is the highest in the nation, at $20,645 per student every year. But recent reductions in state aid and a cap on the amount that a community may increase its property taxes is putting the brakes on school budgets. At the same time, increases in employee pension and health care costs are requiring a greater share of school revenue. Now school superintendents are faced with letting employees go and increasing class sizes. The fiscal vise is causing districts to do more with less.

In a recent survey performed by the Council of Superintendents, school leaders were asked if their districts were near insolvency and unable to meet their financial commitments. A surprising number indicated significant stress, as they had already spent down their reserves.

When superintendents were asked feedback, one wrote:

No matter how much we have in reserves, TRS/ERS, health insurance, and Triborough along with meager NYS aid, makes the financial model unsustainable.

Online higher education 2.0 has arrived. It is open source, open enrollment and often provided by non-profit colleges. It has the potential to greatly expand access to higher education and to rapidly improve the knowledge base of global citizens. It is the antithesis of high-priced, online for-profit schools like University of Phoenix.

The momentum in online education is being captured by schools like University of California Berkeley, which recently joined Harvard and MIT in a not-for-profit online learning collaboration supported by edX, an open source technology platform.

Online collaborative platforms support massive open online courses (MOOC), which are often offered for free (or for small fees) and allow students from around the world to register for coursework from top tier schools. In a recent report, Moody’s described the potential for universities using MOOCs:

Chicago public school teachers went on strike after attempts to reach an agreement with public school negotiators failed on Sunday. There are many issues at stake for Chicago, but the struggle is basically about job security and control of hiring decisions by school principals. As school reform is being further implemented in Chicago, teachers are bearing the brunt of tightening fiscal priorities. Reuters reports:

In Chicago, last-minute contract talks broke down not over pay, but over the reform agenda, both sides said Sunday. The union would not agree to Emanuel’s proposal that teacher evaluations be based in large measure on student test scores.

Nor would the union accept his push to give principals more autonomy over hiring, weakening the seniority system that has long protected veteran teachers. Already, the demographics of the teaching profession in Chicago have notably shifted, as the private managers who run charter schools tend to favor rookie teachers who are younger and far less likely to be minorities, studies have shown.

A special commission of the Australian government has been hard at work for the last two years examining how to improve the nation’s education system. Their baseline findings say that Australian academic performance had declined, and that more resources are needed. Australian Broadcasting Corporation reported on the findings of the Gonski Commission (named after its chairman businessman David Gonski):

The report says the performance of Australian students has declined at all levels over the last 10 years.

It says in 2000, only one country outperformed Australia in reading and scientific literacy, and only two outperformed Australia in mathematical literacy.

Paul Krugman, Nobel Prize-winning economist and New York Times columnist, is once again banging the drum for federal aid for state and local governments. In theory, the federal government has the capacity to prop up states and municipalities by providing stimulus dollars to keep economic activity from stalling. However, this would require Congress to raise the debt limit and the Treasury to borrow from bond markets to get the money. Krugman contends that this would cost little and that the Obama administration is postponing the recovery by not fighting for more money from Congress:

The federal government has been pursuing what amount to contractionary policies as the last vestiges of the Obama stimulus fade out, but the big cuts have come at the state and local level. These state and local cuts have led to a sharp fall in both government employment and government spending on goods and services, exerting a powerful drag on the economy as a whole.

What Krugman’s analysis overlooks is that government at the state and local levels has been ballooning for decades and that a contraction may be necessary to purge the system of bureaucracy and outdated programs. Krugman’s borrowing plan would simply freeze budgets which, on their own, are basically unsustainable for state and local governments. As their costs increase, there is no more “fiscal space” in many state and local budgets to maintain the status quo without large tax increases. So after Krugman’s proposed federal stimulus expired, states and municipalities would likely have to raise revenues to support their expanded size.

The research department of the Federal Reserve Bank of New York released an interesting paper this week entitled “How Colleges and Universities Can Help Their Local Economies” (the video above is a good summary). The work centers on two ideas: 1) graduates can join the region’s educated workforce and contribute to economic growth; and 2) “human capital” is expanded when institutions team up with local business, or attract new businesses, to commercialize technology developed at the school.

I think these are good observations and help justify public support of higher education, but the analysis overlooks some big ways for institutions to drive economic growth more broadly. For example, Stanford University’s Engineering School is offering some of its most popular classes free of charge to students and educators around the world.

Here’s the best thinking from the New York Fed paper (page 2):

Higher levels of human capital in a region can contribute to higher levels of economic activity for several reasons. Human capital increases individual-level productivity and the generation of ideas. By extension, a region having more people with higher levels of human capital should have greater economic activity overall.

Conventional wisdom says that to boost economic growth, the nation needs more workers who are highly educated. A 2011 study from Georgetown University’s Center on Education and the Workforce stated:

Over the past century, economic growth in the United States has been tied to technological change. First, it was the assembly line machines of the manufacturing age, and now it is computers and the Internet that have revolutionized skill needs in the workforce. America’s relentless engine of technological development, fueled by increasingly fierce global competition, has required an ever-growing pool of workers savvy enough to integrate these sophisticated new tools into their work routines. The growing need for technical sophistication has been coupled with a reduced need, often the result of automation, for unskilled labor. As an outcome of these technological changes, there has been a persistent and ongoing demand for more postsecondary education and training.

Many studies have proved that higher levels of education lead to higher incomes for workers. But I wonder if any studies have been done that prove economies grow more rapidly when more government resources are spent on education. As a quick check I mashed up data for the percentage of state budgets that are spent on higher education versus the growth of the state economies. There really doesn’t seem to be a direct correlation.

State and local employees have not been as hard hit as the general economy. At 19 million strong, this workforce comprises about 14.6 percent of total U.S. non-farm employment. It looks as if education workers are particularly being shielded from job cuts.

Chris Mauro, Head of U.S. Municipals Strategy at RBC Capital Markets wrote today in a privately circulated research note (emphasis mine):

[O]n a percentage basis, the state general government (non-education) sector has seen the largest decline in employment since December 2007. As of October 2011, it is down almost 6% from its recent peak.

Paul Krugman at the New York Times has a good graph that shows a substantial withdrawal of government demand from the economy. He attributed this to the decline of federal government stimulus to state and local governments as the American Recovery and Reinvestment Act winds down. There is also another factor that is reducing government demand: state and local governments are issuing less debt, which in turn creates fewer building projects and construction jobs.

Municipal bond issuance is about $108 billion less this year than the same period in 2010. Several stories today highlight how states and cities continue to face fiscal challenges that cause them to lower the amount of municipal bonds that they issue for infrastructure projects.

Does reduced state and local infrastructure spending suggest a rationale for increased national infrastructure spending as hinted at by President Obama? Will his proposal be big enough to make up the shortfall of municipal spending on infrastructure? From Bloomberg: