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Pepperdine University School of Law

Saturday, February 11, 2012

Moody's May Downgrade Law Schools' Credit Rating

Reuters, Fraud Suits Against Law Schools 'Credit Negative': Moody's:

Class-action lawsuits recently filed against fifteen law schools for fraud are "credit negative" because they could cause reputational damage and a decline in tuition revenue, according to a report released this week by the ratings agency Moody's Investors Service. ...

Law-school graduates sued three schools in 2011, and twelve more on Feb. 1, alleging they committed fraud by publishing misleading job-placement statistics. The wave of litigation comes at a bad time for law schools -- especially those that are lower ranked, the report said.

"The outlook in general is that law schools are looking at fewer applications," said Emily Schwarz, who authored the report. "Students are starting to question the value of the degree because of high tuition rates and more limited job prospects. They're concerned they won't get their money's worth." ...

The report noted that standalone law schools -- including New York Law School and Southwestern Law School in Los Angeles -- are more likely to suffer the negative effects of the lawsuits than those that are part of a larger university. Standalone schools have less operating revenue and smaller balance sheets than those attached to universities, the report said.

Brian Tamanaha, a professor at Washington University School of Law in St. Louis, agreed on this point. "Standalone law schools are especially vulnerable because there is no institutional support behind them to help out in difficult financial times," said Tamanaha. "At lower-ranked law schools ... the situation can quickly deteriorate if they experience year-after-year double digit declines in the numbers of applicants."

There are already troubling signs for some standalone law schools. In January, Moody's revised its outlook on New York Law School from "stable" to "negative," reflecting "recent enrollment volatility" -- a 25-percent decrease in the size of the 2011 entering class -- and uncertainty about the outcome of the pending lawsuit. (The agency affirmed an underlying "A3" rating on New York Law School's bonds, the lowest grade of "A" bonds with above-average creditworthiness.)

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Moodys doesn't fully understsand law school finances. Standalone or university connected are no guarantee of financial instability or stability. Until sued, the ABA for many years FORCED law schools to find a college or university to tie on to as an unwritten requirement for accredation. They forced my law school to merge with a financially weak private college, now a weak university. The central organization's "cut" is always determined by their needs, not the law school's cost to them.

The central organization has been in various degrees of financial distress for 30 years or more. IIRC, the non-law school faculty have had 3 salary "freezes." This year the university didn't (couldn't) announce salary increases in August, but waited, waited, waited, until January. The incentive fund is well below $1000 per faculty member. Then they announced that the payroll year would be annual instead of academic. The faculty is the lowest priority in the budgeting process. If the Moody's analysts dig deeper they'll find more trouble.

Posted by: Law Prof | Feb 11, 2012 12:06:28 PM

If Moody's had actually read the generic complaints they woukd not have dowmgraded anyone. The allegations are not school- specifc and many of the plaintiffs have legal jobs; in some cases within 9 months of graduation.

Posted by: Griggs | Feb 12, 2012 7:26:03 PM