Search the Lounge

Categories

« When Harvard Said No to Eugenics | Main | Statutory Anti-Canon »

May 13, 2015

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

Al Brophy

Hi anon, I think the desires of commenters for law schools to close is affecting their judgment on whether schools will close. Not necessarily impugning motives, but I think wishes affected predictions here. That's a pretty common character trait. I know that affects my judgment on occasion, too.

At some point I'd like to speak to when law schools should close. I think there is a place for what I have taken to calling Micro law schools, which have small student bodies and small or maybe even tiny full-time faculties. At any rate I think that's a direction we're headed before we see outright closures. Maybe that's just a stage schools will pass through on the way to closing. Or maybe that'll be a more permanent state of existence for some schools.

Thanks for participating in this discussion and for encouraging me to think about some issues beyond whether schools *will* close. I hope you have a good remainder of the weekend.

[M][@][c][K]

Orin:

It is more complex than that. There are two ways in which host institutions take money from the law schools. First, the ABA allows the host institution to extract a proportion of tuition revenue from the law school - a straight tax so to speak. It is suggested that this number is about 20% of revenue. Second, the host institution can charge the law school for "shared services," which is obviously more feasible if the law school shares facilities with the host institution - is contiguously located. That can amount to another substantial percentage, but this is justified as a "cost" item. Here as I think you point out there is a lot of room for dubious accounting for costs, overhead, etc. How much the universities were pulling out of law schools is hotly debated - but it was widely said that in 2011 the University of Baltimore was managing to extract 45% of tuition revenue, while the budget cuts at Catholic suggest that it was very dependent on its cut of the law school's revenues.

That was the history - the law schools contributed to the bottom line because they were very profitable - and the hosts were taking is is suggested between 20%-45% of revenue. What is now being said is that revenue has dropped to the point that many law schools are no longer contributing and are seeking subsidy. So when it is being said that law schools are operating in the red, what is being suggested is that their costs - all in are not being met by tuition and they are bordering on, or beginning to seek help from the host institution. In short they are now loss-making.

How many law schools are in this situation - not all, but it is certainly not a non-trivial number. In that respect Charleston School of Law is interesting - because it was able to build up a reserve of $25 million in its early years of operation - that the 5 shareholders raided to pay themselves a dividend, but now is in deficit and seeking rescue (i.e., the profits have vanished.) Thomas Jefferson's recent sale and leaseback of its building was similarly designed to deal with a reality of a law school operating at a loss. The question is how many other law schools are now losing money - real hard cash - to keep the doors open - and how long will their host institutions support such losses.

[M][@][c][K]

Orin:

To the foregoing I'd add that, to the extent that law schools were overcharged for shared services, they were of course subsidising the host institution, while departments charged less were not.

If you take a look at the accounting and granting documents for STEM research grants, both from government and from the private sector (I have) you will notice that they always cap what the host institutions can take out in overhead and charges for shared services, office space, etc. It seems that science foundations are wise to that game.

Just saying...

All: In terms of are law schools in the red on their own or because of the cut given to the parent organization, I can tell you from direct experience on site teams to a number of lower ranked schools in recent years, they are in the red all by themselves and that many universities are not only foregoing any contribution, some are funneling money to the law school to keep it afloat. This will not continue forever; some of these universities are not in great shape, but no one wants to be the first to close what is often the most prestigious school it has.

I am always puzzled by the way in which many faculty members reacted to the fact that the law school have to pay something to the parent institution. Most law schools trade off the name/rep/brand of the parent to succeed, all would not exist without the parent founding them. I would ask them: Why shouldn't they pay a % to the university, since all the resources of that university from the main library to the faculty dining room are available to them?

In terms of wanting to see some law schools close -- well, of course!! As a member of this profession, I have come to see how the over abundance of law schools has almost destroyed it, as well as the lives of many recent and current students. This cannot be disputed.

Anyone who answers "perhaps" to the question of whether there are too many law schools is living in some alternate universe.

Outdated Ideas about Law Schools

Faculty dining room? What is that?

Just saying...

I was not referring to a law school faculty dining room, but the university faculty dining room, which still exists at many, many institutions.

anon

Al

"Thanks for participating in this discussion and for encouraging me to think about some issues beyond whether schools *will* close."

You're welcome. But, I think you would agree that it took too many attempts to simply acknowledge that you were dodging the "should" question. THis was troubling, because you sort of casually acknowledged that your "observation" that law schools would keep cutting and cutting to survive might put in jeopardy the delivery of the program.

Thus, it still is a mystery that you stick to your "it's what you wish" meme. That is beneath you, because it is not usually your style to be patronizing and condescending.

One can only conclude that it is YOUR wish fulfillment that not a single law school close, EVER, lest some dam break and all h... break lose. I would ordinarily refrain from referring to my inference of your motivation, but, because you insist upon button holing every argument by mischaracterizing the motives of the speaker, I'll engage by properly (I believe) characterizing yours.

I suspect you will now close the comments.

[M][@][c][K]

Al, just sayin -

Not a rhetorical question, but one I think you need to answer - what is the mission and purpose of a law school in your opinion?

anon

Orin, A commenter at Conglomerate explained it this way:

All law schools that are part of a larger university (the bulk of those that make up the ABA accredited schools) pay a “tax” to their universities. These range from 20-40% of top line revenue.

Conservatively, over the last 20 years the typical law school likely paid more than $100 mn to their parent institution. Some likely paid a lot more than that. Of course, some of that cash flow went to keep the lights on in the law school buildings but I am willing to bet that a substantial amount was free cash flow to the university.

Now many of those same law schools are running at an operating deficit, meaning that each year their incoming revenues (largely tuition) are not enough to cover costs. Some substantial pruning is underway in the form of faculty buyouts, staff layoffs, hiring freezes, taking away coffee in the break rooms but let’s assume that even with all of that there is a deficit.

But remember that’s an operating deficit. It’s calculated after the tax to the university. So on an actual cash flow basis if one builds back in some portion of the tax off the top line, most of those same law schools are cash flow positive. And this is true at the worst part of the downturn as enrollment has pretty much fallen likely as far as it is going to fall.

Now, it’s conceivable that this downturn will be an exception to the many previous downturns and turn out to be a permanent “new normal”. But if it follows the pattern of the last thirty years enrollment will likely bottom out this year and next and soon begin to turn modestly upward.

So at this point does it make any sense for the trustees or regents or whatever of a university to shut down a business unit that has generated tens of millions of dollars for the university? Frankly, it would not just be shortsighted at this point, it would likely border on a breach of their fiduciary duty. Given past history and the evidence of an improving market and wider economy it would take another two-three years of sitting at the current trough or at least one-two years of significant declines to provide a basis for any claim that a law school should be
shut down.

Of course, this analysis does not apply to stand alone law schools, the for-profits, etc.

anon

"evidence of an improving market and wider economy it would take another two-three years of sitting at the current trough or at least one-two years of significant declines to provide a basis for any claim that a law school should be
shut down."

And the "evidence" is what, exactly? Improving market for what? Law graduates? Improving "wider economy"? Where? "two or three years ... or at least one-two years ..." What is the basis for these bullfeathers? This is FL nonsense posing as a reasoned analysis: but it is based, as usual, on nothing.

And, BTW, one would love to know the source of the speculation about the "red" and "black" issues: we are told the source is a " commenter at Conglomerate." Once again, this passes as "fact" in the FL, but it is really quite specious to so assert based on mainly nothing.

Paul Campos

University-affiliated law schools have three potential types of expenses:

(1) Direct expenses. These are the expenses incurred directly by the school in the course of its operations.

(2) Indirect expenses. These are university-wide expenses that aren't incurred by individual units directly. They include things like the cost of the central administration, university-wide student facilities, the main campus library, the portion of the athletic department expenses that aren't covered by AD-generated revenue etc. These expenses are usually distributed among the university's different colleges and schools on something akin to a per capita student basis. So for example, if the law school's students make up 5% of the students at the university, the law school will be expected to cover 5% of the university's total indirect expenses.

(3) Direct operating costs of other units that are paid out of law school surplus revenue, after (1) and (2) are paid. This is the "cash cow" aspect of traditional law school economics.

When a law school is said to be running a deficit, this could mean that the school is no longer providing as much, or any, of the revenue it provided via (3), or that it's failing to pay some or all of what it owes in indirect expenses (2), or that it is no longer covering even all of its direct expenses.

From what I've gleaned, the most common meaning of current central administrative claims that a law school is running a deficit is the intermediate definition, in which it's no longer covering all of its per capita indirect financial operating costs. However it's clear that presently a significant number of schools aren't covering even all of their direct, self-generated expenses.

As for closing a law school for financial reasons, note that a school's per capita share of indirect expenses is certainly going to be larger than the actual marginal costs that the school's continuing operation imposes on the university, because of efficiencies of scale. So closing a law school probably isn't going to be something on central's radar until it's consistently failing to cover even its direct expenses on a long-term basis. This appears to be what happened at Hamline, which is why the university allowed the school to be shuttered, via a face-saving "merger" with stand-alone William Mitchell.

Of course stand-alones, of which there are currently about 20 that are ABA-accredited, are in a different situation. They don't have central administrations to carry them along through downturns, so their survival comes down to their creditors' judgment as to whether the cash flow generated by the school is more valuable than the school's liquidation value. As long as the federal government keeps providing unlimited GRADPLUS loans, and as long as the ABA refuses to pull the plug on schools that don't meet bar passage standards, almost all stand-alones will be able to survive by cutting costs and admitting essentially everybody who enrolls.

Bottom line: Don't expect more than a small handful of ABA law schools to close, unless the feds tighten up loan standards significantly, and/or the ABA starts enforcing its bar passage requirements as bar passage rates collapse over the next few years, as they likely will, given the huge increase in matrics with sub-145 LSATs.

Orin Kerr

Thanks, Paul, that's very helpful.

Orin Kerr

(And thanks to MacK and anon for their helpful comments, as well.)

anon123

I agree with Paul that it is unlikely, absent changes to federal student loans or ABA rules, that there will be an economic reason for universities to close any law schools. Most of the indirect costs are likely fixed costs, meaning that the university incurs the same amount with or without the law school, the law school just allows the university to amortize the same costs over more students. Really, how often do law students use the general library?

Of course, some trustees at universities may actually have ethical concerns about admitting large numbers of students into a professional school if the student cannot be expected to find a job or pass the licensing exam.

JM

Anon123,

The universities will close the law schools if they start to drain significant money from the central administration (#1 from Campos's post). It sounds like some schools are already getting there. Of course, schools have the option to trim huge amounts of fat from the budget first (i.e. reduction in faculty head count and salary), but this might prove too controversial and difficult to implement.

John Thompson

At least we know what the next front of denial will be.

"No, this is just a temporary downturn in the rate of bar passage, which has fluctuated blah blah over blah blah, and anyway this is limited to only blah blah schools, certainly not the majority. We have expanded our course offerings to include practice-ready blah blah experiential blah blah, so it's puzzling that so many who owe so much money aren't passing the bar exams, which surely no one could have known when they were admitted. LSAT, schmLSAT. Perhaps we should blame the anticompetitive practices of the state bar examination committees instead."

Barry

anon: "And this is true at the worst part of the downturn as enrollment has pretty much fallen likely as far as it is going to fall."

No, it's still falling, but more slowly. Anybody here can run the numbers for 2-3% decreases in the student body + a decline in tuition per student. And the drop for last Fall's class will triple in impact over the next two years, as the cohorts work their way through.

"Now, it’s conceivable that this downturn will be an exception to the many previous downturns and turn out to be a permanent “new normal”. "

I have not seen a single dean nor a single professor post *any* evidence that the past few years are part of a normal cycle.

Note that two big changes are (a) the tuition:salary ratio is sky-high in comparison, and (b) the information is more widely available in recent years.


"But if it follows the pattern of the last thirty years enrollment will likely bottom out this year and next and soon begin to turn modestly upward."

If you can show that, please do.

Derek Tokaz

Barry,

I'll echo what you've said. How does one look at slowing declines and declare we've hit bottom and the market has stabilized? The trend points to another year of declines, but at a slower rate than this year. Yet, there are several professors and other commentators who have declared the bleeding over.

It could be that the declines stop next year, or even that there's a slight increase in enrollment. It's possible, and we can come up with stories about why it could happen. There could also be another 5-10 years of 1-2% decreases, and we can likely come up with stories about that. Enrollment may also be passing a tipping point, and next year the declines will begin to accelerate, and we can come up with an explanation for that too (the field's reputation finally hits the low point needed to trigger a death spiral).

Like you said, I'd really like someone claiming the market has hit bottom or stabilized to show their work.

I also want to add to your two structural changes, as I think you are possibly missing the big picture. Law school has generally appealed to people for three reasons (1) prestige, (2) money, and (3) lack of better alternatives with a humanities undergrad. Now compare that to current undergrads considering law school. Much of the prestige is gone. Even if we buy the arguments about increased income, millennials care less about their paycheck; and, for those looking to strike it rich, law doesn't come close to what they're looking for. As for people lacking alternatives? There are more specialized degrees (health care management comes to mind, as well as specialized MBAs). There's also been a big shift in technology that makes striking out on your own more feasible.

Nathan A

*If* current trends persist, its possible we hit bottom soon. The bottoming out has been softened with a huge increase in sub-150 applicants. If these kids start finding options in a growing economy, look out.

Barry

Thanks, Derek. And Paul Campos had another theory - if the economy ever returns to a good labor market, the number of liberal arts grads with no employment prospects will drop like a rock. They won't need law school.

The comments to this entry are closed.

StatCounter

  • StatCounter
Blog powered by Typepad