Paul L. Caron

Wednesday, November 5, 2014

NY Times: 'A Troubled Law School Is Like Dracula: Hard to Kill'

NY Times Dealbook (2013)New York Times DealBook:  Worth Nothing, Failing Law Schools Are Kept on Life Support, by Steven Davidoff Solomon (UC-Berkeley):

A recent debt restructuring at Thomas Jefferson School of Law shows that a law school may be worth absolutely nothing. ...

It doesn’t take an economist to know that lower demand has hurt almost all law schools outside the top 10 terribly. Hardest hit are law schools in the lower tier, where law school applications have fallen even more rapidly. In this vein, the latest issues at Thomas Jefferson School of Law could be an object lesson in what happens once the boom times inevitably end. ... This sent shivers of delight through the law school critics, creating immediate speculation that the law school might be the first to “keel over.” ...

Thomas Jefferson got a sweetheart deal, but its creditors had no choice. If they shut down the law school, the only value left would be a law school building that would need to be repurposed and redesigned. Big lecture halls would need to be turned into offices at a significant expense.

There are lessons here for the entire law school system.

First, a closed law school is worth little, or most likely nothing, to creditors. The value is only in the revenue stream it produces and perhaps its building (you could say the books also, but these are increasingly fewer). And these days, that revenue stream is down 20 to 40 percent, meaning that if law schools were a for-profit business, most would be failures.

A troubled law school is like Dracula: hard to kill. Creditors will not do so because even keeping a struggling school alive means there is some possibility of repayment.

Most law schools, however, don’t have huge bonds to service, or at least, the debt they have is borne by the university. For these schools, the calculus is even easier. If a closed law school is worth nothing and a nice big building without students is useless, then keeping it open remains the only option.

Shutting down a law school at a larger university also puts the administrators and others out of work, with few options for employment. They have every incentive to keep the school alive.

This explains why, despite forecasts that up to a third of law schools could close, even the most financially dire have not. Instead, law schools are doing everything they can to push down costs hard and fast. Reports of layoffs of professors, buyouts and jobs cuts abound even for those with tenure. For years, central campuses sucked money out of law schools. Now, they are keeping them alive. ...

The failure of law schools to close may also simply be a recognition that the market is adjusting to today’s realities. The struggle is pushing down the costs of operating a law school, and law schools are still valuable to universities. It may be tempting to shut them in these difficult times, but it can cost tens of millions to open a new one. Better to invest and cut back on expenses for a while and see what happens.

The status quo is likely to remain as some are forecasting that the bottom is almost here for law schools. This is how economics works: Markets tend to overshoot on the way up, and down.

Thus, the decline in enrollment could lead to a shortage of lawyers five years from now. Of course, this assumes that the change is not driven by technological developments and due to become permanent. And let’s face it, Dodd-Frank and other regulations are also creating more need for lawyers.

But the events at Thomas Jefferson show that the realities of operating law schools are still working for them. It all means that there will still be many law schools, just fewer newly minted lawyers.

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Debt service is not the only consideration. Schools need revenue to operate. Unless the creditors want to double down on their investment, schools will shut down even with sweetheart restructuring deals.

Posted by: JM | Nov 5, 2014 7:49:00 AM