Welcome to the Third World: State Schools Scale Waaayyy Back - John Rubino (20/3/2017)

March 20, 2017

Readers of a certain age will remember when state universities were a bit spartan but extremely cheap. Middle class families could send their kids to Ohio State or UCLA without taking out a second mortgage, and the kids could focus on classes and fun instead of juggling multiple part-time jobs to cover room and board.

Those days are long gone, due in part to a building boom fueled by easy access to student loans that allowed kids to demand ever-more plush amenities. But mostly it’s because so many states are slouching towards bankruptcy, starving their schools in the process. Let’s use Illinois, the poster child for fiscal dysfunction, to illustrate the point:

Illinois Finances Are Worse Than Suggested

(Wall Street Journal) – The state’s unfunded pension obligations translate into about $10,000 of debt for every man, woman, child and zombie in Illinois; but less than half of the state’s residents are tax filers and well under half of those filers (earning more than $50,000 a year) pay significant income taxes. Those tax filers who actually are stuck with the pension IOU therefore are carrying an unstated pension debt burden of about $50,000 each. The moment that taxpayer heads to Texas or Florida, the $50,000 IOU goes away, as do state income taxes and crushing property tax rates. The pension IOU for moderate- to high-income taxpayers left behind in Illinois goes up about 1% for each 25,000 tax filers escaping to more tax-friendly and warmer climates.

This ongoing fiscal meltdown translates into less money for everything, but especially for public higher ed, which has been systemically starved for years:

Illinois Universities Feel the Brunt of State’s Fiscal Woes

(Wall Street Journal) – With the budget stalemate in Illinois in its 21st month, public universities in the state are going beyond belt-tightening to deal with a funding drought that has no end in sight. Campuses already have pressed pause on new construction and stopped hiring for vacant positions. Now, universities including Northeastern Illinois, Governors State and Southern Illinois are looking to fixes like hiking tuition, cutting academic programs or laying off student workers.

“We are in a crisis situation,” said Beth Purvis, the state’s education secretary. “The next set of cuts will affect outcomes for our postsecondary students.”

In fiscal 2015, the state appropriated $1.2 billion to public universities. Stopgap measures provided about 30% of that funding in fiscal 2016 and about half this year.

The state has also cut down on funding for a separate grant program that helps in-state students afford tuition. Last year, the state belatedly doled out about $320 million under the program, providing an average of $3,000 in aid to 107,000 students. That’s down from nearly $364 million in aid to 128,000 students the previous year. It hasn’t yet given any funds for the current academic year, and some schools have warned they can’t afford to keep fronting the money.

“Parents and students are beginning to lose confidence in public education in Illinois,” said Richard Helldobler, interim president at Northeastern Illinois, which has about 9,500 students. “You try to reassure them as best you can, all the while you’re down in Springfield saying, ‘Please, you’re starving us to death.’”

The Chicago school must cut $8.2 million to meet payroll through June. It will temporarily lay off 300 student workers during spring break and force about 1,100 employees to take a total of eight furlough days in an effort to save $2.8 million.

Amy Sticha, a biology major who works about 20 hours a week in a lab on campus, has been putting in applications at area bars and restaurants, and even at a bike tour company, in case her campus job falls through altogether.

“I have no idea if I will still have a job a month from now, and I’d like to have a backup,” said Ms. Sticha, who earns $10.50 an hour at the lab, which she says covers a big part of her rent and tuition.

Governors State, with about 3,900 students south of Chicago, said earlier this month that it would increase base tuition by 15% for the coming school year, to $9,390. It also is cutting 22 more academic programs, including undergraduate economics and a master’s in education, on top of 13 degree and certificate programs it eliminated in the past two years.

The school received about $18 million from the state in fiscal 2016 and fiscal 2017 combined, compared with $24 million in fiscal 2015 alone.

Citing the recent moves at Northeastern Illinois and Governors State, Moody’s Investors Service earlier this month warned that the budget impasse is harming the state’s public universities and community colleges. The ratings firm already classifies the debt of Governors State, Northeastern Illinois and other Illinois schools as “junk.”

Meanwhile, Eastern Illinois University has shed about a quarter of its employees, while Southern Illinois in recent months nominated for possible funding cuts its public broadcast center, a regional economic development office and counseling services. It also said it would eliminate its men’s and women’s tennis teams and trimmed scholarships for swimmers.

Chicago State University declared financial exigency last year in order to eliminate jobs quickly and remains in a fragile financial state after enrollment in the fall plummeted by 25% from a year earlier to 3,578—with just 86 freshmen. The school, which serves many adult students, has shrunk by more than half since 2010.

This series chronicles the ways in which the global debt binge of the past four decades is changing the nature of life in the US and elsewhere. Things we used to take for granted like fast police response times, clean streets, plentiful jobs and high quality, affordable education are disappearing as debts mount and public services at every level are starved.

The result: For today’s students the college experience is very different from what their Baby Boomer parents remember. Money is tight, part-time jobs dominate student schedules, classes are bigger and are taught by less qualified adjuncts or grad assistants, and student loans are a crushing burden. It’s not yet an impossible situation, but it’s a lot harder than it used to be.

And there’s no end in sight. State and local pensions – set at unrealistically high levels by previous generations of legislators who knew they’d be long gone when the bills came due – are wildly underfunded and can only be paid though 1) massively higher taxes which lower the ability of parents to save for their kids’ college or 2) sweeping cost cuts, some of which will hit higher ed. Either way, the idea of college as every American’s birthright is evaporating.

Zooming out to the macro implication of the coming crisis: The only solution that sitting politicians will find conceivable is aggressive devaluation of the dollar (and euro, yen and pound sterling) to make current debts manageable. Which shouldn’t be a surprise, because that’s how it always goes with banana republics.

John Rubino runs the popular financial website DollarCollapse.com. He is co-author, with GoldMoney’s James Turk, of The Money Bubble (DollarCollapse Press, 2014) and The Collapse of the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street(Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He currently writes for CFA Magazine.

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