CHAMPAIGN, Ill. – No sector of the economy was left unscathed in the aftermath of the Great Recession, which officially lasted from December 2007 to June 2009 but whose aftereffects continue to linger today.
Higher education was no exception, and a new book co-edited by a University of Illinois expert in economic policy delves into the profound effect the financial crisis had on both public and private universities, which continue to grapple with shrinking endowments, declining charitable contributions and reductions in government support.
The book, titled “How the Financial Crisis and Great Recession Affected Higher Education,” is a collection of nine studies that presents new evidence on the nature of universities’ responses to the financial shocks of the last decade, and on how the incentives and constraints facing different institutions affected their behavior, said Jeffrey R. Brown, the William G. Karnes Professor of Finance in the U. of I. College of Business.
“It examines universities as economic organizations that operate in a complex institutional and financial environment,” said Brown, who also is the director of the Center for Business and Public Policy at the U. of I.
The studies, which were written by prominent academics and based on discussions and conferences organized by the National Bureau of Economic Research, explore how various practices at institutions of higher education – such as the drawdown of endowment resources, the awarding of financial aid and spending on research – responded to the most severe economic contraction since the Great Depression.
“The key takeaway from the book is the importance of looking at the finances of an institution of higher education holistically and through a risk management lens,” said Brown, also a research associate for NBER.
The studies also examine asset allocation strategies and investment opportunities, and demonstrate that universities’ behavior can be modeled using economic principles, Brown said.
“It appears that some of the decisions about endowment management and payout policy at some universities are made in a manner that is not sufficiently integrated with the strategic priorities and spending needs of the institution the endowment serves,” he said.
According to Brown, university leaders must first define their long-term vision and strategic priorities. Once that is accomplished, they should ensure that all financial policies of the university are consistent with that vision.
“If different institutions have different strategic goals and spending needs, or if different institutions face different risks, then they should probably have different financial policies,” Brown said. “For example, a public institution that is suffering from sharp declines in public funding would have a very different risk profile than a private institution with a large endowment. As a result, it would be very surprising if the optimal financial management plans for these institutions were similar.”
The book also is relevant to the current higher-education landscape, where state legislatures across the country – most notably in Illinois and Wisconsin – are proposing sharp cuts in public funding.
One of the papers shows that when universities face cutbacks, they not only reduce faculty hiring but also are unable to maintain the purchasing power of faculty and staff compensation, Brown said.
“What makes the current situation even worse than the financial crisis is that public universities are being stressed at a time when private institutions are experiencing growth in their endowments,” he said. “Thus, public universities risk having their faculty lured away by private institutions that are not dealing with the same budget shocks.”
Brown, a former member of the bipartisan Social Security Advisory Board and a senior economist with the President’s Council of Economic Advisers in 2001-02, co-wrote with U. of I. finance professor Scott Weisbenner and Stephen G. Dimmock of Nanyang Technological University an essay in the volume on the supply of, and demand for, charitable donations to universities.
The book was co-edited by Caroline M. Hoxby of Stanford University and published by the University of Chicago Press.
Editor’s note: To contact Jeffrey R. Brown, call 217-333-3322; email brownjr@illinois.edu. The book, “How the Financial Crisis and Great Recession Affected Higher Education,” is available online.
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