Thursday, October 30, 2008

The Departure of the Cranes

“Today, the solitary inventor, tinkering in his shop, has been overshadowed by task forces of scientists in laboratories and testing fields. In the same fashion, the free university, historically the fountainhead of free ideas and scientific discovery, has experienced a revolution in the conduct of research. Partly because of the huge costs involved, a government contract becomes virtually a substitute for intellectual curiosity. For every old blackboard there are now hundreds of new electronic computers. The prospect of domination of the nation’s scholars by Federal employment, project allocations, and the power of money is ever present — and is gravely to be regarded.” President Dwight D. Eisenhower in his 1961 farewell address (added 01/17/2011).
Grus grus.
I used to live near a region that was once known for its cranes (Grus grus). They were so abundant that the region took its name from them, and the lords who ruled this land adopted them as central theme in their coat of arms which today adorns the local pottery. The landscape is bucolic. Small villages and towns dot green rolling foothills rising toward distant altitude above the timberline. Modernity and history are interwoven here in natural growth. Below the picturesque castle of the ancient lords and attached medival town, the visitor may be surprised to find the facilities of a contemporary college with American accreditation.

The cranes have become a rare sight today and the region is better known for its cheese. Only the patient may notice a lonesome bird early in the morning standing tall and motionless in the shallow water near the reedy banks of a quiet pond. Over time, the observant develops a keen eye for these graceful creatures and may be able to spot them on occasion in passing from the window of a commuter train carrying people off to work. I have not been on that train in two decades. But according to the most recent check list, the cranes are still about.

The pottery.
Ever since I left that land, I have become familiar with a different kind of crane on my visits to academic institutions in this country. You can spot them easily from afar. These cranes are usually clustered around tall stately buildings under construction. In the past eight years, endowment portfolios at private research universities and medical schools accrued with solid gains. Intense fund raising swelled donations. Credit for new construction was cheap. The institutions embarked on a building spree.

A number of these edifices with facades of blue glass, white columns and brown stone tile are going to house academic medical centers. With the aging of the baby boomers, the demand on health care will amplify profoundly. According to the Health Work Force Institute, 2.5 million registered nurses will be needed in 2020. At present, new degree programs in affiliated health sciences are being created in great numbers across the U.S. In my area, nursing schools have doubled in two years. Local universities as Belmont University are expanding their health science programs. Doubtlessly, new health care facilities are necessary.

On the other end of the spectrum, I saw many construction projects that were slated for biomedical research laboratories. Despite the current funding crunch that I discussed in my post dated Oct. 1, universities and medical schools look fondly upon biomedical research because of its prestige and the money that it attracts. Research grants from federal agencies do not only cover laboratory supplies and equipment, but also a significant portion of faculty and staff salaries. That is why, medical schools can afford to maintain large faculties in excess of the demand of clinical service. For example, I counted 81 faculty members in Neurology at the University of Pennsylvania.

In addition to the direct cost for research, the federal agencies provide host institutions with a percentage of direct cost to help defray overhead expenses for infrastructure, administration and basic services like utilities and plant operations. The indirect cost recovery rate is negotiated with each institution. For example, the rate of the University of Pennsylvania was 59.5 percent in 1999, but could be 100 percent and more in other cases. Some institutions charged overhead excessively, were audited, and eventually fined (Federation of American Scientists Report #91095). The system was revised. Administrative cost was capped at 11 percent.

Overhead recovery rates that are representative for the country at present are hard to find. The University of Michigan currently recovers 54.5 percent. At a presumed rate of 60 percent, a medical school that attracts about 200 million dollars in direct cost for specific research from federal agencies annually (not an unheard-of amount), will receive another 120 million unspecified dollars for indirect cost recovery. This sum would approximately cover the investment for a new five-story research building. The more square feet of laboratory space a university adds, the more investigators can pursue federally funded research, the greater the returns for the institution, inviting yet another clone of a research building. I believe that this chain reaction fueled the current construction boom, boding ill for the future. The cranes may disappear soon.

First, federal funding for biomedical research has been eroding over the past 10 years in the face of a steadily rising number of applications. According to the National Institutes of Health Office of Extramural Research, the grand total average success rate of grant applications fell from 34.2 percent in 1997 to 24.4 percent in 2007 (see success rate table at NIH funding).

In addition, the investment portfolios of endowed research institutions shrank catastrophically in recent weeks and credit has all but dried up. American private universities are commercial enterprises. In his congressional hearing, the former CEO of Lehman Brothers, Richard Fuld, named the exposure to commercial mortgages as the prime cause of his bank's downfall. National Public Radio's All Things Considered broadcast this snippet of his testimony entitled "Lehman CEO Testies On Capitol Hill" on Oct. 6.

On top, private universities are linked into astronomical increases in college tuition and fees. According to Tamar Lewin's in The New York Times on Oct. 29 with the title "Downturn Expected to Drive Tuition up", tuition and fees are about to exceed $50,000.- per academic year for some institutions, forcing them to offer substantial financial aid to attract academically qualified students. If the portfolios of these universities do not recover soon, some may find themselves unable to service their debt.

When you are looking for a college these days, you may wish to read my post dated Jan. 24, 2008, and re-assure yourself that there are not too many cranes on campus.

  • Tamar Lewin filed a second report report on this issue with the title "Tough Times Strain Colleges Rich and Poor" in The New York Times today. It is quite consistent with the observations above (11/08/08).
  • Charles Bagli aptly describes in his report with the title " As Vacant Office Space Grows, So Does Lenders' Crisis" in The New York Times today, the problems afflicting commercial mortgages that Mr. Fuld regretfully recognized in retrospect as lethal to his bank (01/04/09).
  • Reuters Health and Science Editor Maggie Fox reported in her post with the title "U.S. hospital profits fall to zero: Thompson Reuters" today that, according to a recent Thomson Reuters Healthcare survey of more than 400 profit and non-profit U.S. hospitals, the examined institutions were not able to generate surplus revenue for new infrastructure expenditures already in the third quarter of 2008. Because of losses in investment portfolio and slowed medical insurance reimbursements, half of the hospitals were operating at loss. The study was discussed in Janet Babin's segment on National Public Radio's Marketplace with the title "Hospitals ailing with financial stress" on the same day (03/02/09).
  • I just finished my walk around the campus of Vanderbilt University and counted among the university-owned real estate projects completed since my arrival in 1994: four complexes housing offices, hotels and/or retail, four apartment complexes, eight large multi-storied parking garages,  four large dormitories on a commons, three student centers, a baseball stadium, a totally refurbished football stadium, six large and three small research buildings, a new wing for the School of Engineering, a new School of Music, a new School of Law, a new School of Business, a new School of Nursing, two large and one small hospital buildings, plus one large outpatient clinic just completed. I neither counted major renovation projects, nor may my list be complete. The total of the investment may roughly amount to as much as 2.4 billion dollars. That is, the university spent the equivalent of its entire current endowment on the expansion of infrastructure (03/29/2009).
  • National Public Radio's Market Place broadcast an interview of Kai Ryssdal with Chronicle of Higher Education reporter Paul Basken entitled "Stimulus creates application avalanche" today on the implications of this year's 10.4 billion dollar stimulus for the National Institutes of Health (NIH) to fund scientific research at academic institutions. About 115,000 grant applications were filed with the NIH so far this year, constituting a 1.5-fold increase over last year's 77,000. About 21,000 grant applications directly targeted the stimulus funds (06/09/09).
  • Today Gina Kolata reports in her article for The New York Times entitled "Playing it Safe in Cancer Research" that the NIH may be able to fund roughly one percent of the applications for economic stimulus-financed grants known as challenge grants (06/27/09).
  • As an example in support of my own impressions, Richmond Times Dispatch writer Karin Kapsidelis reports in her article with the title "Rising cost at Virginia’s universities mostly unrelated to instruction, study says" published online Jun 10, 2013, by the Daily Progress that Virginia public research universities have increased infrastructure spending over the past two decade, while investment in instruction declined (06/15/2013).
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  1. Well, there was certainly a real-estate bubble that burst around the time you published this, wasn't there?

    Hindsight can be sobering...but it's amazing how infrequently people learn from it!

    1. Yes, the lure of easily available money for construction financed through collateralized debt obligations and interest rate swaps lured plenty institutions of higher education into a building boom at the same time and in as much as easy loans and mortgages led real estate investors and home owners into overexposure and foreclosure.

      The difference may be that it has taken longer for the consequences of this frivolous borrowing to come to bear. Sweet Briar College near Lynchburg, VA, is facing closure and Cooper Union in New York City had to introduce tuition for the first time in its history in good part because of untenable financing schemes undertaken in the past decade for ambitious new construction projects.