80% to 85% of ABA law schools are currently losing money

Over the past few months I’ve studied the current operating budgets of a representative sample of the nation’s 202 ABA-accredited law schools (there are several dozen non-ABA law schools in America, mostly in California, whose operations I know nothing about).

I acquired these budgets via various routes, including asking schools for them, open records requests, tax filings, and private communications with individuals. Law school budgets are somewhat arcane documents, both because each school has its own accounting , and because most schools are located within universities. The latter fact creates various complexities in regard to measuring what are known in the business as “indirect expenses” — that is, university-wide operating expenses that must be distributed among the institution’s various schools and colleges.

Nevertheless, it’s possible to get a tolerably accurate picture of a law school’s true financial situation via budget documents, since most schools get almost all their operating revenue from two sources: tuition and gift income (the latter comes in the form of endowment income and annual giving). Indeed at most law schools tuition revenue accounts for the vast majority of operating resources — only a few schools get even 20% of their revenue from gifts. The exception to this generalization is provided by the increasingly small number of public law schools that still get some sort of significant subsidy from tax dollars. I address this complication below.

As for expenses, these tend to be both homogenous and fixed, consisting largely of personnel compensation, in a context in which serious downsizing of labor costs can’t be undertaken without declaring a fiscal emergency — a move which has serious reputational costs — and physical plant operation. Costs that can as a matter of institutional politics be treated as variable — for example, library subscriptions, adjunct faculty, and low-status staff — are by comparison relatively small.

Furthermore, law schools tend, even in the best of times, to budget on the assumption that they will spend almost all the revenue they expect to generate. This is a natural consequence of the obsession with law school rankings. It’s important to realize that this obsession provides the key ideological justification for law school budgetary practices. Law schools “must” spend more money in real terms every year because other law schools are spending more money every year. This is the all-purpose justification for hiking nominal tuition in real terms every year: we have to raise tuition because we have to spend more money, because otherwise we’ll fall behind in the competition for a crucial positional good.

Thus tuition goes up because costs go up, although, as Brian Tamanaha argues in Failing Law Schools, it would be more accurate to characterize this pattern from the other direction: law schools spend more every year because they raise tuition every year, and they raise tuition every year because they can, courtesy of the federal government’s impecunious educational loan policies. (Law schools can charge literally whatever they want to whoever they choose to admit, and, subject to trivial exceptions, the federal government will loan that entire amount, including living expenses, to the admitted students).

This system is a sure-fire recipe for creating fiscally reckless institutions, that charge prices for their outputs that bear no relation to the actual economic value of those outputs, which is of course exactly what has happened.

However, this sort of system also invariably contains the seeds of its own destruction: the pyramid collapses, the bubble pops, the extraordinary delusions that fuel the madness of crowds dissipates. And, in American legal education, this is what appears to be happening now.

Over the past couple of year, the disjunction between the cost of law school and the marginal economic benefit provided by a law degree has become sufficiently self-evident that the market for places at ABA law schools has begun to collapse. Schools have slashed both enrollment qualifications and real tuition (via semi-invisible discounts), yet first-year enrollment is down nearly 25% since 2010, and real tuition revenue is down by nearly that much (because over the past three years increases in nominal tuition have, it appears, only slightly outstripped increases in off-sticker discounting).

My survey of law school budgets suggests that, on average, law school revenues will be down this fiscal year by about 15% in real terms from where they were three years ago. Costs, meanwhile, have not decreased by the same amount — if anything, they are slightly higher (as of now the rankings struggle continues unabated). Very few law schools were running 15% operating surpluses three years ago, which means that the large majority of law schools — I estimate between 80% and 85% — are incurring significant operating deficits in the present fiscal year.

Note that this estimate is conservative, in that it treats state tax subsidization at public schools as operating revenue rather than an operating subsidy. It is also conservative in that it assumes that no universities maintain long-term budgetary policies that require their law schools to provide subsidies to the rest of the campus, in the form of significant revenue over expenses (aka, the infamous “cash cow” model of legal education).

The likely consequences of this situation will be the subject of another post.