The San Francisco Art Institute (Zee Jenks/Flickr)

OAKLAND, Calif. — In March, leadership of the San Francisco Art Institute (SFAI) announced the oldest art school of the western United States would not enroll a new fall class. The alma mater of Kehinde Wiley, Karen Finley, Annie Leibowitz, and Barry McGee told students to transfer. The small institution with an outsize role in art history proceeded to lay off 69 adjuncts. The president stepped down. An interim head arrived from the charter system. The board chair entertained selling the school’s 1931 Diego Rivera mural — as it turned out, “The Making of a Fresco, Showing the Building of a City” wasn’t permanently embedded in the wall after all. 

Diego Rivera, “Making a Fresco” (1931) at SFAI’s Diego Rivera Gallery (via Joaquín Martínez/Flickr)

In July, the school entered technical default on a loan, jeopardizing the landmark 1926 campus pledged as collateral. SFAI was drowning in debt, owing more than $19 million to the one creditor alone. That same month, when school leadership announced it would be resuming online classes in the fall, students were understandably skeptical. (After raising more than $4 million, SFAI is retaining a small group of tenured faculty and offering classes to students within one year of completing their degrees at a discounted tuition.) The 149-year-old institution went from possibly merging with another school to possibility liquidating in fewer than five months.  

Observers blamed declining enrollment and a misguided expansion, with some pointing fingers at trustees and former administrators. Most assumed exceptionally bad decisions were made. But what if the decisions were actually commonplace among college administrations nationwide, only the consequences were accelerated? What if, instead of an extreme outlier, SFAI shows the risks of widespread institutional borrowing practices encouraged by Wall Street investors?

The labor union representing adjunct faculty at SFAI as well as teachers and staff at several other small, nonprofit private colleges in the San Francisco Bay Area have related concerns. Union officials and members at the California College of the Arts (CCA) — SFAI’s design-inclusive competitor — believe CCA’s debt is also shifting institutional priorities away from students and employees towards investment banks. What if the same thing could happen at CCA that it did at SFAI?  

“We’re calling for more accountability and transparency surrounding the college’s financial planning and how that will affect our jobs and the future of the school,” said Matt Kennedy, a print services manager at CCA, who helped organize staff with Service Employees International Union (SEIU) Local 1021, which also represents SFAI workers. 

In light of what is happening at SFAI, our concern is that CCA is not being honest about how dire its circumstances may be and that this could be the beginning of a financial free fall.”

When asked about the power that lenders can gain over small, private colleges through loan agreements, the board chair at SFAI, Pam Rorke Levy, said, “Well, you really have to put the creditor first or they can foreclose on you — you can lose your campus. It’s a catch 22: You don’t want to lose the faculty, you don’t want to lose the students. On the other hand, you need your building.”

Montgomery Building, California College of the Arts (image via Wikimedia Commons)

While student debt has come to define a generation, the size and effects of institutional debt — two sides of what economists call the “financialization of higher education” — are less widely discussed. Yet many scholars, labor organizers, and groups such as the Roosevelt Institute argue the financial sector is using institutional debt to enrich itself on the backs of students and communities. 

Small, private nonprofit colleges such as SFAI and CCA, which derive most of their revenue from tuition, have turned to lenders to finance amenities such as student housing and studio space. (Public universities and private schools with large endowments tend to borrow with related but different motivations and risks, as the Roosevelt Institute highlighted in its 2018 case study of Michigan State University.) Colleges are competing to attract high tuition-paying students. Generally, the loan agreements bet on continued enrollment growth. 

At SFAI, enrollment shrank by more than half in the last five years, plummeting as soon as the college borrowed millions to create an attractive waterfront campus. Many other colleges borrowed when enrollment was going up, and now that it’s going down, they’re struggling to make payments. They just haven’t reached default, like SFAI. So, they fundraise to appease creditors while at the same time cutting operations costs, resulting in overburdened faculty. It’s not sustainable, Levy at SFAI said. “Colleges need to find revenue besides tuition to survive.”

In an interview, Nato Green, an SEIU Local 1021 negotiator, said administrators and trustees should be held responsible for the consequences of often-opaque deals they make with banks. At the same time, banks are taking advantage of schools. He compared the dynamic to the parallel financialization trend driving privatization of the public sector. “After the 2008 recession we saw Wall Street targeting municipalities as an asset class for plunder,” he said. “Now these schools are vulnerable. Enter Wall Street again. It’s the same thing with nonprofit colleges.” 

“There was an element of the bank seeing us as a weak sister,” Levy said of the SFAI lender that sought to seize the campus. “They can come in and make a loan at stiffer terms than a private commercial business would accept, because we just didn’t have a lot of choices.”

According to The Financialization of US Higher Education, a 2016 paper by UC Berkeley researchers, interest costs on institutional debt have grown most markedly among private nonprofit colleges such as CCA, increasing even as interest rates fell. From 2003 to 2012, the paper states, annual interest costs per student increased 23%, from $1,047 to $1,289. Overall, these colleges are directing larger budget proportions towards servicing their debt. 

Charlie Eaton, a lead author on the study and sociology professor at UC Merced, said in an interview with Hyperallergic that students end up experiencing this rising institutional expense in the form of higher tuition. “For students, it’s a cost driver,” he said. And he’s not surprised financialization is drawing scrutiny from college unions after SFAI: “You have to be concerned with your school’s borrowing because the administration is effectively betting your future as a faculty member.”

CCA, the four-year art and design school founded in 1907, previously known as the California College of Arts and Crafts, has borrowed extensively to finance the construction of new residence and instruction facilities in San Francisco as it leaves its historic Oakland campus. 

Treadwell Mansion (Oakland, CA) (image via Wikimedia Commons)

The college, with 90% of its revenue coming from tuition, has $39.4 million in long-term debt, outstripping its $34.8 million endowment, according to its 2018 audit. In the coming years, its annual repayment and interest schedule will steadily ramp up, more than doubling from $1.3 million in 2018 to $2.7 million 2023, the same document shows. The figures don’t include CCA’s obligations in a complex $100,000,000 million construction bond agreement from 2018.  

Like SFAI, CCA has pledged buildings and land as collateral for its loans, and agreed not only to a payment schedule but terms dictating certain financial reserves and minimum enrollment. Enrollment has declined from 1,998 in 2014 to 1,860 in 2019, federal data shows, jeopardizing CCA’s assets by not only threatening its repayment ability but also by breaching its loan terms. 

Through a spokesperson, CCA declined to make school officials available for interviews. In a statement, the spokesperson said enrollment figures for 2020 have not been finalized but that they’re expected to drop. CCA has entered a period of “unprecedented risk” from a “position of long-term financial stability” and consecutive years of balanced budgets, the statement reads. 

CCA’s obligations in the $100,000,000 bond financing for student housing at 188 Hooper Street are not publicly known. The bond is underwritten by investment banking firm George K. Baum & Company and the developer is National Campus and Community Development Corporation (NCCD). CCA press releases have said the school has “no recourse,” or assets pledged as collateral, in the deal, yet the spokesperson said the school is “sharing financial risk with the private sector.” The spokesperson declined to detail the agreement between CCA and NCCD. 

The spokesperson did state, however, that CCA has raised 90% of its goal in a multiyear capital campaign related to construction (the spokesperson declined to name the total goal amount). The school spokesperson said campaign donations are restricted for use in three major areas: campus construction and unification; support for student scholarships and faculty; and support for programs that benefit matriculating students and the general public.

In recent months, according to union representatives, CCA has furloughed dozens of staff and laid off 10 people. Adjuncts, awaiting details of class cuts, are struggling to adapt coursework for remote instruction without additional compensation.  

“We wonder about their financial priorities,” Noga Wizansky, a CCA professor in the diversity studies program, said. “Why are fundraising efforts directed primarily towards the new building and not protecting the people who work in the building?” 

Wizansky said the lack of information about fundraising connects to concerns about transparency and adjunct working conditions during the pandemic. “At faculty meetings, the president will present quote-unquote transparency information about the budget, but I’ve never once heard mention of all the college’s leveraged debt,” Wizansky said. “They’ve been trotting out the same budget pie chart since 2018.”

Wizansky says the administration’s reluctance to invest in the workforce (“there will always be more adjuncts,” she said, lamenting the depressed wages) is having especially acute effects on adjuncts during the pandemic. Preparing for remote teaching in the fall requires a “top-to-bottom class redesign” with no additional pay, and the administration has delayed contract talks, aggravating workers and union negotiators. “What does this say about the excellent quality of education CCA purports to deliver?” Wizansky added. 

Patricia Maloney, an adjunct professor in the CCA critical studies department, who has been advising a group of students raising money for BIPOC peers to meet living expenses, pointed out most financial aid goes directly to tuition. She worries the new bond-financed student housing facilities, as much as they’re framed as solutions to high San Francisco rent, actually increase the debt-saddled institution’s reliance on students for revenue through meal and lodging fees. (The CCA spokesperson said the housing construction costs are not a part of the school’s operating budgets and were not funded by student tuition.) 

Kennedy, the print services manager, echoed those concerns. CCA is moving forward with inviting students to move into the new housing at the end of the month, he pointed out, despite remote classes and safety concerns. “It seems like a lot of money went into this project so they don’t want any delays,” he said. (CCA vowed to enforce social-distancing measures on move-in day.)

Researchers exploring the question of why colleges turn to financial markets, despite evidence of harmful effects on students and teachers, tend to turn to boards of directors. According to one study, the number of board members from the financial sector at liberal arts colleges grew from 28 to 44% between 1989 and 2014, highlighting the unambiguous beneficiaries of all of this borrowing: Wall Street. 

Securities and Exchange Commission (SEC) filings show George Baum, the investment bank underwriting the $100,000,000 bond for CCA’s Hooper Street construction, has offloaded pieces of the debt to firms such as Goldman Sachs, Franklin Templeton, Invesco, and Wells Fargo. Institutional investors such as Morgan Stanley, Invesco, and Nuveen also hold CCA debt from earlier deals in vast portfolios of municipal bonds, according to SEC data. In this secondary market, the debt trades among investors angling to earn from interest payments that, from this vantage, look a lot like funds siphoned from teachers and students. 

“I do think it takes away resources — it jeopardizes students’ education and our livelihoods,” Kennedy said. He worries more precariously financed colleges will unravel in the style of the San Francisco Art Institute, especially without a federal economic intervention, and that the former SFAI students transferring to CCA might be rushing towards the same sort of instability. 

Sam Lefebvre (@Lefebvre_Sam) is a freelance writer in Oakland whose journalism and criticism have appeared in publications including the Guardian, the New York Times, the Wire, Pitchfork, the Believer,...

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