In December, the University of California abandoned its sleek new logo in response to widespread outcry from students and alumni. Some said the logo looked like a fruit label. Others saw a kickboard. But the general consensus among the nearly 55,000 signatories of a petition demanding a restoration of the old logo—which features an open book and the university’s motto, “Let There Be Light”—was that the new one appeared overly corporate, more befitting of an Internet startup than an esteemed center of learning and discovery.
The logo debacle is not an anomaly. It is simply the most visible manifestation of a drastic change in the way public education across the United States is being marketed, financed and administered. It is well known that public universities are facing an identity crisis. States are drastically scaling back support for higher learning, forcing public universities to find new revenue sources. Tuition increases, out-of-state enrollment drives, increased class sizes, online instruction and investment in profitable medical and sports facilities have become the signature strategies of “privatization.” University administrators have maintained that privatization is now the sine qua non of public university survival.
While the fiscal woes of public universities are indeed dire, the quality and extent of institutions’ swift and deep embrace of corporate strategy is not simply a matter of necessity. Public universities are corporatizing because they are increasingly led by administrators with business backgrounds and ongoing ties to Wall Street. These leaders see the problems facing public universities, and the best solutions to them, in business terms. Consequently, as public universities struggle to rebrand and refinance, they often lose sight of their core missions.
A recent report published by researchers at UC Berkeley highlights the corporate origins of this ongoing transformation in public university administration and its dire consequences for students. The report documents how in the last decade, the University of California has engaged in an ambitious effort to debt-finance medical center development. Such borrowing has had two troubling characteristics. First, UC’s borrowing is indirectly collateralized on administrators’ ability to raise student tuition. Despite this, profits from university medical centers have been siphoned and reinvested, instead of being devoted to mitigating skyrocketing undergraduate tuition, which has risen 300 percent in the last decade.
Second, financial managers at UC have used new, more aggressive types of loans to finance development. In attempts to insure against these greater risks, UC has also purchased financial derivative products called interest rate swaps. While these swaps would have protected UC from market interest rate increases, current near-zero interest rates mean that UC is paying drastically inflated borrowing costs to Wall Street banks. University financial managers’ bad bets on interest rates have cost the university $57 million to date in excess interest rate payments. Meanwhile, the university is laying off critical staff, class sizes are increasing, and the student body is becoming more affluent and less diverse.
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Just as UC administrators were baffled by student and alumni scorn for the new logo, they have failed to see how their new financial strategy is bad for students and workers. They have defended their aggressive and inequitable borrowing agenda, despite mounting criticism from faculty, students and public officials. UC’s financial leadership has scoffed at the idea of seeking to renegotiate its interest rate swap agreements, as many other public organizations nationwide have done. UC’s inflated interest rate payments are also a direct consequence of criminal interest rate manipulation by Wall Street banks, but administrators have spurned demands that the University litigate to recoup its losses.
Taking these steps would save valuable resources for UC, not squander them. So why have administrators been eager to borrow aggressively, but reluctant to demand fair play from big banks? The reason—at least in part—is that those at the helm of UC’s financial leadership are recent transplants from the other side of the table.
In 2006, the UC Office of the President created two new senior positions—chief financial officer and senior vice president for business operations. The first post was filled in 2009 by Peter Taylor, who for sixteen years prior had worked at Lehman Brothers/Barclay Capital, most recently as managing director for public finance. In that position, Taylor had authority over Lehman’s role as bond broker and interest rate swap counterparty for $175 million to finance a medical center at UCLA—an agreement that has cost UC $23 million to date in excess interest payments. The second position was filled by Nathan Brostrom, who as managing director of Western region public finance at JPMorgan worked on financing medical center development at UC Davis. Interest rate swaps on that borrowing were so unfavorable to UC that it paid $6.8 million in termination fees to refinance its bonds.
Taylor and Brostrom’s appointments are part of a broader shift in the composition of UC’s leadership. In 1990, none of UC’s top management or members of its governing board had direct ties to major Wall Street banks. Today, former and current banking executives play a central role in UC financial management, administration and governance. Some of these ties raise difficult questions about conflicts of interest—the very same bankers who sold UC risky debt deals now enjoy broad discretion and minimal oversight in managing those deals and contracting new ones. They point more clearly to a changing mindset among university leadership, a mindset that is manifest in concrete new policies. UC’s new financial agenda—which saw its debt burden increase from $6.9 billion to $14.3 billion between 2007 and 2011—began when its governing board, the UC Regents, was chaired by investment banker Richard C. Blum. Blum’s namesake firm is the dominant stakeholder in two of the nation’s largest for-profit universities, in which UC itself has also invested tens of millions of dollars.
What will be the fate of public universities if they are allowed to be run like businesses, by businesspeople? Students are disinclined to find out, and are organizing to combat this trend on campuses nationwide. When UC administrators decided to scrap their corporate logo, students were pleasantly surprised. “It’s good that UC is listening to us,” UC Berkeley student body president Connor Landgraf told the San Francisco Chronicle. “Hopefully they’ll start listening to students on other issues, as well, such as tuition increases.”
More details are likely to unfold about the ways in which public universities’ relationship to Wall Street is exposing students to greater financial risks. As they do, public university leaders will need to revise their claims about the desirability and inevitability of privatization—at least on these terms—and enhance the transparency and accountability of financial decision-making to ensure safer and more equitable solutions to their fiscal challenges. Otherwise, the new campus bankers run the risk of achieving short-term financial gains for public universities at the expense of eviscerating their core asset—affordable, world-class instruction.
