Universities and the Urban Growth Machine

Why has the price tag of an American college degree skyrocketed (500 percent in the public sector since 1985) in recent decades?

Why has the price tag of an American college degree skyrocketed (500 percent in the public sector since 1985) in recent decades? Instructional cost is not one of the reasons. Salaries of full-time faculty have been stagnant for a long time, and the massive conversion of tenure track jobs into contingent positions (more than two-thirds of professors are now off the tenure track) has sliced the teaching payroll at almost all institutions. Aside from the obvious factor of shrinking state inputs, there is common agreement that the addition of many new layers of administrators, combined with rapidly rising salaries at the senior ranks, has played a leading role. Throw in the heavy investment in all kinds of extracurricular amenities, sports facilities above all. And then there is the less tangible factor of buoyant demand for places. Colleges raise their fees because they can—there is no shortage of applications—and also because a higher price connotes more prestige. Even if domestic demand falls off, the shortfall will be more than made up from overseas. Indeed, some analysts estimate that the global market for higher education will grow by 80 percent over the next decade, as the rising middle class in rapidly developing countries pursue a brand name degree for their offspring.

Other factors are less well understood. Expansionary growth is foremost among them, and there are few colleges that have not embarked on ambitious new building campaigns in the last two decades (students joke that UCD is the acronym for “Under Construction Daily”). Contrary to the truism so cherished by developers, growth does not pay for itself, and it is even more costly in cities where land is scarce. Yet many of our urban research universities have been expanding their footprints. This is not simply to meet their needs, but also because city managers are relying on them to do so, often permitting them to behave like quasi-sovereign planning entities in the neighborhoods that host them. Universities, in short, have become a vital part of the urban growth machine.

Famously, a Chicago economist once estimated that if the public monies spent on a downtown football stadium were dropped in dollar notes out of a helicopter they would have much more economic benefit.

We tend to speak about urban renewal in the past tense, but the truth is it never really ended—we have just given it different names in the years since its heyday in the 1950s and 1960s. The first phase of urban renewal was accompanied by the building of urban freeways and mega-project construction, which involved the green-lighting of sports stadiums, convention centers, and eventually museums. All of these were super-block complexes, built with vast public subsidies, and often with limited public economic impact. Famously, a Chicago economist once estimated that if the public monies spent on a downtown football stadium were dropped in dollar notes out of a helicopter they would have much more economic benefit.

The “edifice complex” did not fade until the 1990s, and there have been at least two growth paradigms since then, both of them linked to the high-wage knowledge economy. One was the “creative city,” which Richard Florida popularized, and it revolved around recruitment of creative talent. This model was much cheaper than shelling out large subsidies for sports stadiums or to corporate investors—a few bike trails, some fair-trade coffee shops, and the semblance of an art scene (to attract the all-important gay population). But it did open up a new circuit of debt-financing for the urban growth machine–student loans. After all, student debt is what underpins the supply of the educated workforce in a “creative city.”

The other one is called “meds and eds,” and it is based on the premise that urban research universities and associated biomedical complexes can and do function as vital economic drivers. They are often among the largest employers in town; they bring in research monies, they train young creatives who tend to stick around, and most important, unlike corporations or major league franchises, they are not going to leave town any time soon. So urban managers have been reassessing these institutions, which they had hitherto taken for granted, and increasingly the Chambers of Commerce in many cities regard them as key assets for luring new business and retaining established ones. Some cities, like Pittsburgh, credit “meds and eds” with their turnaround economic success, and others are now depending on these complexes to generate jobs, wealth, population, and prestige.

Phoenix, the topic of my most recent book, faithfully adopted each of these successive turnaround strategies, and most recently persuaded Arizona State University to build a brand new campus in the downtown area. In addition, a pile of taxpayer subsidy has gone into a new biomedical complex on the vacant lots adjacent to it. Other cities in the metro area are also planning their future growth around colleges. Mesa put out a nationwide call for a college to relocate, or build a campus for its own downtown.

In a metropolis like New York City, the two large research universities, Columbia and NYU, have both embarked on ambitious expansion plans. Why are these institutions so committed to growth? Surely the business of spreading out and scaling up must run counter to their quest for prestige? Academic cachet, after all, is supposed to be a scarce commodity, available only to the select few, and not, in NYU’s case at least, an expanding student body, ever denser at its downtown Manhattan core and increasingly dispatched to campus locations all over the globe.

One of the answers is that these universities are responding in kind to the open invitation of urban managers to help diversify the economy of city that relies too heavily on its FIRE (finance, insurance, and real estate) industries. Not long after he came into office, John Sexton, NYU’s president, spoke publicly about how the intellectual, cultural, and educational industries now formed an ICE sector, large enough in its own right to stand alongside the city’s anchoring FIRE sector. Statistics were generated to show that ICE may be more resilient and profitable in the long run than FIRE. FIRE + ICE became the promotional banner under which the NYU administration pushed its interests through the city bureaucracy.

Of course, these are not altogether distinct sectors, and least of all in the case of NYU, which has a massive real estate presence in Manhattan (and now Brooklyn) and whose basic revenue depends on the student loan business—one of the most lucrative sectors of the finance industry. For evidence of the interlocking of FIRE and ICE interests, look no further than NYU’s own Board of Trustees (which includes Catherine Reynolds, who owns a company—Educap—that makes high-interest, predatory loans to students who have maxed out of the federal loan market). There you will find some of city’s biggest land developers, Wall Street’s wealthy financiers, and a bevy of corporate tycoons. Collectively speaking, they are members of the city’s “permanent government,” which calls the shots (especially on shaping land use), and no elected politician can afford to alienate a body with that kind of clout. Practically speaking, they are the governors of the city’s growth machine, and, as I have suggested, they now see urban universities as essential drivers of urban growth.

Growth does not pay for itself (taxpayers pick up the tab), though it is a relatively efficient way of transferring public monies to private pockets. Does NYU’s own growth fit the bill? Certainly there are many streams of public funds that flow into this private university. Government grants from multiple federal agencies are a basic source of funding for its research operations ($337 million in grants and contracts from federal, state and city sources). The New York State Dormitory Authority heavily subsidized the dormitory buildings NYU has erected as it made the transition from local commuter college to residential national university. NYU collects tens of million a year from New York State in grants.

A much larger revenue stream comes from federal student loans—$108,641,000 in 2011. In 2010, NYU had $659 million in total student debt, a figure bigger than the gross domestic product of twelve countries, and it is a national leader in the debt carried by its graduates, at 40 percent more than the national average. According a recent Newsweek ranking, NYU is now the fourth “Least Affordable School” in the United States. And in the latest Princeton Review college rankings, its financial aid and administration ranked first—for being the worst. The projected $5 billion expansion plan is certain to increase the student debt burden. Most of current student loans are federal money, so we can add these on to the public inputs received by this private university at a time when public universities are being put to the sword.

But how does this public cash find its way into private pockets? Any analysis of payroll distribution would show a clear skewing of compensation toward two employee classes: senior administrators whose salaries have skyrocketed over the last fifteen years, and key faculty who are conduits for top grant funding or who generate lucrative intellectual property for the university (NYU also tops the list of universities that extract revenue from IP licensing—another way in which public monies in the form of research grants gets propertized as an excludable private good). But the most pervasive community rumor about NYU lies in its ties to real estate interests. Several graduates have described their alma mater to me as “a real estate company which also issues degrees.” As one of the city’s two or three largest landowners, the university has an extensive real estate portfolio, and it is perpetually buying, selling, and leasing buildings, or land-banking properties for future uses and returns. An administrator once remarked to me that he feels as if he is running a hotel and restaurant chain given how many beds and cafeteria seats NYU caters to on a daily basis. It is difficult to operate at that kind of that volume without favoring a tidy list of clients and contractors.

It’s fair to conclude then that NYU is a nonprofit institution that generates profits for others. Because its books are closed—and there is no pretense of fiscal transparency—not much can be said about the private profit structure, though there is little that would surprise long-serving employees. Nor is it a leap to observe that $5 billion worth of construction in the heart of downtown is a huge boost in general to the business climate of downtown development, and that it will enrich builders and contractors, amplify area rents, and add nothing to the city’s affordable housing stock. Yet the result is assumed to be in the public interest. Why? Because it is cloaked in the public goodness that is the stock-in-trade of any educational institution.

Perhaps the most important, and least understood, part of NYU’s expansion rests upon its debt financing. The absence of a business plan on the administration’s part has attracted a good deal of disbelief, and rightfully so. What kind of entity is able to raise $5 billion in the current economic landscape? More telling yet was the response of one administrator to queries about the proposed funding of the plan: “NYU is not afraid of debt,” she assured her audience, in a tone reminiscent of the freewheeling credit culture of 2004. But we miss the point if we don’t see how this kind of comment evokes an intimacy with debt and bond ratings that is essential to the capital funding of modern universities.

The ability of universities to raise tuition fees at will (without any fear of institutional default) is the basic collateral requirement for securing a good credit rating, which makes it much cheaper to borrow money to service existing debts and finance large-scale construction. In turn, this capital-intensive construction generates more space per capita, which is a key metric in the US News and World Report’s college rankings. Indeed, the need for NYU to improve on this metric is the only rationale offered by President Sexton for the 2031 expansion. NYU, according to him, falls too far behind Harvard on this rating. Invariably, however, universities need to increase enrollment, as NYU intends to do (an “overyield” this year alone brought 1,600 additional students) in order to secure the tuition-backed bond issues, and so the rationale behind the enterprise falls apart. But the outcome, for the bond financiers, hedge funds, and institutional investors, not to mention the construction industry in general, is an ongoing bonanza.

It is too crude to conclude that the 2031 plan is designed to generate profits for FIRE interests. There is no servant-master relationship at work here, because the main actors are members of an interlocking elite, serving each other’s executive class interests. Senior administrators revolve between high positions in government, Wall Street, and the academy, and the capacity to draw on executive influence in each of these sectors is key to the new patterns of wealth transfer. Jacob Lew is a notable example. Recruited from the Clinton Administration, where he was director of the Office of Management and Budget, he served as Executive Vice President at NYU during the period of the graduate assistant union strike, moved to Citigroup as COO of the bank’s Alternative Investments unit, and is now back in the White House as President Obama’s Chief of Staff. John Sexton himself served (from 2003 to 2007) as Chairman of the Board of the Federal Reserve Bank of New York, and as chair of the Federal Reserve System’s Council of Chairs.

With mortgage and other credit markets still in the doldrums, universities have become a very attractive option for investors looking for high returns on debt-financed growth. Money capital has poured into construction bonds, student loans, and other financial instruments spun out of the tuition bubble. When universities become the apple of the financier’s eye, they begin to generate debt in every direction, as I have shown here. NYU’s own long-term debt is a hefty $2.6 billion, far outpacing that of other comparable urban universities: Columbia ($1.3 billion), USC ($0.973 billion), and Penn ($1.7 billion).

To conclude, let me argue briefly that the developments I have been describing do not prove that universities are becoming more like corporations. I am not a fan of the label “corporate university,” though it is popular among colleagues around the academic water cooler. It is a lazy kind of shorthand for the changes coursing through higher education, and largely because it neglects how corporate organizations are being restructured at a pace that makes even the most entrepreneurial university look like a monastery by comparison. Modern research universities need to be seen as a new kind of organizational species evolving on their own power track, as they shake off older functions regarding public accountability, inclusion, and access. Their market orientation is not akin to corporations, not even corporations in the military sector who are just as dependent on federal contracts and guarantees.

In the Cold War heyday, C. Wright Mills argued that the exercise of power in the United States was shaped by “interlocking directorates” drawn from the corporations, government, and the military. Now that research universities are becoming independent drivers of the knowledge economy as stimulants of growth and development rather than as mere providers of trained labor and research, they are forging their own path to power, adding to the tripartite model that Mills set forth in The Power Elite in 1956. Universities, far from devolving into mere adjuncts of corporations, will more likely end up as players in their own right, throwing their weight around in their own backyard at the same time as they project their presence overseas in the worldwide establishment of offshore campuses.

Andrew Ross is a professor of social and cultural analysis at New York University. His latest book is Bird on Fire: Lessons from the World’s Least Sustainable City (Oxford University Press, 2011). He is also a member of the OWS Strike Debt Assembly.

Image: digital rendering of NYU 2031 plan