More evidence that lawyers hate economics – the myth of “financial exigency” at Albany Law School

I teach corporate finance, business law and securities regulation – in a law school. And that means I have as students each year many folks who would rather, I suppose understandably, be debating Roe v. Wade and Brown v. Board of Education instead of listening to me explain, as I did briefly last week, how synthetic collateralized debt obligations work. Of course, those synthetic CDO’s are far more important to what is going on in legal education and the legal job market today than almost any major Supreme Court case of the last 50 years.

Why? Because it was the creation of ever more complex and, as it turns out, fictitious forms of capital that led, in part, to the credit bubble we experienced in the wake of the dot com bubble. Now we are experiencing in law schools and the legal job market the impact of the collapse of that bubble. The downturn in jobs and the consequential downturn in applications to law schools will eventually bottom out, and it may be doing so already. And, slowly it will turn upward again. This will happen, unfortunately, too slowly for many recent JD’s who got caught in the updraft and applied to law school thinking the credit bubble was a permanent expansion of the economy and now have been caught in the downdraft.

But the big risk now is that many law schools will be tempted to make the same mistake some made during the bubble phase – rapid expansion of spending on staff and clinics then (as opposed to tenure track hiring, which has slowed overall in higher education dramatically in recent years) – but now in reverse, unwinding that over-spending by over-cutting including threatening layoffs of tenure track faculty.

The most recent example is occurring at Albany Law School, a very old (by US standards) independent law school, with a long tradition of serving upstate New York (and not far from where New York State’s very first law school was established in the Hudson Valley.)

From reports on the web it appears Albany Law School, facing the same decline in applications and enrollment that almost every other law school in the country outside of the world of Harvard and Yale and Stanford and Chicago are facing, is threatening its tenure track faculty with layoffs. Yet Albany is committed to academic freedom and derives its definition from the AAUP’s 1940 Statement on Academic Freedom which more than 200 colleges and universities support.

The AAUP has developed a set of derivative procedural standards that help guide universities in protecting academic freedom. Among these is a commitment that faculty not be threatened with dismissal absent cause or what is known as “financial exigency.” This has led the law school critics, in their typically opportunistic manner, to declare that indeed ALS is facing such a financial exigency.

Apparently, these critics are no more familiar with the basics of accounting than they are with those of finance.

The AAUP’s guidelines define a “financial exigency” as “imminent financial crisis which threatens the survival of the institution as a whole.”

(See AAUP letter to Albany Law School here. The AAUP National President has also issued a strong defense of tenure’s place in the accreditation of the American law school to the ABA here.)

Yet a cursory review of just the publicly available information suffices to demonstrate that this situation is nowhere near reaching that standard.

In 2010-2011 its revenues exceeded expenses by $10 million and while this declined to a $3 million positive margin in 2011-12 it is hardly a suggestion the School is no longer a “going concern.”  And Albany has an endowment of $47 million, far larger than most law schools (granted it does not have a parent institution it might turn to so it has, prudently it would appear, built up an endowment for precisely the situation it now faces.) Some $43 million of its assets on hand are unrestricted and it has most of the endowment in liquid securities.

(See financial data here and here.)

Of course, turning to the seed corn in a crisis is a challenge but one has to call into question any conclusion that suggests the institution is threatened with closing its doors unless it starts laying off faculty. This suggests the Dean and Board of Trustees of the School may be attempting to engineer a reform agenda while using the temporary financial problems of all law schools as an excuse.