Debt and Growth, FIRE and ICE
								Andrew Ross

      Why are universities like NYU so committed to growth?  Surely the business of spreading out and scaling up must run counter to their quest for prestige?  Academic cachet, after all, is supposed to be a scarce commodity, available only to the select few, not an expanding student body, ever denser at its downtown Manhattan core and increasingly dispatched to campus locations all over the globe. In this respect, NYU’s upward mobility over the last two decades has been unconventional, to say the least. Its plans to build a globally operational university have been drawn from the corporate playbook of offshore outsourcing. And in New York itself, the NYU administration has been responding in kind to the open invitation of urban managers to help diversify the economy of city that relies too heavily on its FIRE (finance, insurance, and real estate) industries. 
          Not long after he came into office, John Sexton spoke publicly about how the intellectual, cultural, and educational industries now formed an ICE sector, large enough in its own right to stand alongside the city’s anchoring FIRE sector. Statistics were generated to show that ICE may be more resilient and profitable in the long run than FIRE. Of course, these are not altogether distinct sectors, and least of all in the case of NYU, which has a massive real estate presence in Manhattan (and now Brooklyn) and whose basic revenue depends on the student loan business--one of the most lucrative parts of the finance industry. For evidence of the interlocking of FIRE and ICE interests, look no further than NYU’s own Board of Trustees (which includes Catherine Reynolds, who owns a company--Educap--that makes high-interest, predatory loans to students who have maxed out of the federal loan market.) There you will find some of city’s biggest land developers, Wall Street’s wealthy financiers, and a bevy of corporate tycoons. Collectively speaking, they are members of the city’s “permanent government,” which calls the shots (especially on shaping land-use), and no elected politician can afford to alienate a body with that kind of clout. Practically speaking, they are the governors of the city’s growth machine, and urban universities are central to the “meds and eds” paradigm for turnaround urban growth.
        Critics of the growth machine have long challenged the truism that growth pays for itself. It does not (taxpayers pick up the tab), though it is a relatively efficient way of transferring public monies to private pockets. Does NYU’s growth fit the bill?  Certainly there are many streams of public funds that flow into this private university. Government grants from multiple federal agencies are a basic source of funding for its research operations. The New York State Dormitory Authority heavily subsidized the dormitory buildings NYU has erected as it made the transition from local commuter college to residential national university. NYU collects more than $50 million a year from New York State in grants. An even larger revenue stream comes from federal student loans. In 2010, NYU had $659 million in total student debt, a figure bigger than the gross domestic product of 12 countries, and it is a national leader in the debt carried by its graduates, at 40% more than the national average. The projected expansion plan is certain to increase student debt burden. Most of current students loans are federal money, so we can add these on to the public inputs received by this private university at a time when public universities are being put to the sword.  
       But how do this public cash find its way into private pockets? Any analysis of payroll distribution would show a clear skewing of compensation towards two employee classes: senior administrators whose salaries have skyrocketed over the last 15 years, and key faculty who are conduits for top grant funding or who generate lucrative intellectual property for the university (NYU also tops the list of universities that extract revenue from IP licensing–another way in which public monies in the forms of research grants gets propertized as an excludable private good). But the most pervasive community rumor about NYU lies in its ties to real estate interests. Several graduates have described their alma mater to me as “a real estate company which also issues degrees.” As one of the city’s two or three largest landowners, the university has an extensive real estate portfolio, and it is perpetually buying, selling, and leasing buildings, or landbanking properties for future uses and returns. An administrator once remarked to me that he feels as if he is running a hotel and restaurant chain—given how many beds and cafeteria seats NYU caters to on a daily basis. It is difficult to operate at that kind of that volume without favoring a tidy list of clients and contractors.
          It’s fair to conclude then that NYU is a non-profit institution which generates profits for others. Because its books are closed--and there is no pretense of fiscal transparency–not much can be said about the private profit structure, though there is little that would surprise long-serving employees. Nor is it a leap to observe that $6 billion worth of construction in the heart of downtown is a huge boost in general to the business climate of downtown development, and that it will enrich builders and contractors, amplify area rents, and add nothing to the city’s affordable housing stock. Yet the result is assumed to be in the public interest. Why? Because it is cloaked in the public goodness which is the stock-in-trade of any educational institution.
          Perhaps the most important, and least understood, part of NYU’s expansion rests upon its debt-financing. The absence of a business plan on the administration’s part has attracted a good deal of disbelief, and rightfully so. What kind of entity is able to raise $6 billion in the current economic landscape?  More telling yet was the response of one administrator to queries about the proposed funding of the plan: “NYU is not afraid of debt,” she assured her audience, in a tone more reminiscent of the freewheeling credit culture of 2004.  But we miss the point if we don’t see how this kind of comment evokes an intimacy with debt and bond ratings that is essential to the capital funding of modern universities. The ability of universities to raise tuition fees at will (without any fear of institutional default) is the basic collateral requirement for securing a good credit rating, which makes it much cheaper to borrow money to service existing debts and finance large-scale construction. In turn, this capital-intensive construction generates more space per capita, which is a key metric in the US News and World Report’s college rankings. Indeed, the need for NYU to improve on this metric is the only rationale offered by President Sexton for the 2031 expansion. Invariably, however, universities need to increase enrollment, as NYU intends to do (an “overyield” this year alone brought 1600 additional students) in order to secure the tuition-backed bond issues, and so the rationale behind the enterprise falls apart. But the outcome, for the bond financiers, hedge funds, and institutional investors, not to mention the construction industry in general, is an ongoing bonanza.   
      It is too crude to conclude that the 2031 plan is designed to generate profits for FIRE interests. There is no servant-master relationship at work here, because the main actors are members of an interlocking elite, serving each other’s executive class interests. Senior administrators revolve between high positions in government, Wall Street, and the academy, and the capacity to draw on executive influence in each of these sectors is key to the new patterns of wealth transfer. Jacob Lew is a notable example. Recruited from the Clinton Administration, where he was director of the Office of Management and Budget, he served as Executive Vice President at NYU during the period of the graduate assistant union strike, moved to Citigroup as COO of the bank’s Alternative Investments unit, and is now back in the White House as President Obama’s Chief of Staff. John Sexton himself served (from 2003 to 2007) as Chairman of the Board of the Federal Reserve Bank of New York, and as chair of the Federal Reserve System's Council of Chairs. 
	With mortgage and other credit markets still in the doldrums, universities have become a very attractive option for investors looking for high returns on debt-financed growth. Money capital has poured into construction bonds, student loans, and other financial instruments spun out of the tuition bubble. When FIRE gets hooked on ICE, the result (which writer could resist?) is a vast pool of melted water, in which the indebted are already half-drowning.