Ed. note: Frank H. Wu is the Chancellor and Dean of the University of California Hastings College of the Law. He’s currently sharing some of his thoughts about legal education and other topics here on Above the Law.
Everyone is urging law schools to make radical modifications to how they do business, if not demanding that they do so. Indeed law schools are obligated to rethink the basics of everything from the curriculum to the financing of the degree.
As we discuss much-needed reform of legal education, it might be useful for everyone to have information on where the money comes from to operate law schools. There are basically five sources of revenue for the 200 or so ABA-accredited institutions. Academic quality can be sustained only if the business model is viable.
First, law schools are what is called “tuition dependent.” With a handful of exceptions, the primary funding derives from students in the form of tuition that is paid. Almost all schools then return significant proportions of what they receive to financial aid.
But that’s just the first piece of the pie…
Second, for some schools, an endowment also offers support. The original gifts are not spent. A designated portion of the total return from the investments is available on an annual basis. The rate is typically in the range of five percent.
All schools continue trying to generate further contributions. Donors may wish to set up endowments, or they may give amounts to be spent on a discretionary basis. Philanthropy enables schools to progress from good to great, but it is unlikely to be sufficient to cover recurring deficits — and people typically do not feel the desire to offer their largess for that purpose.
Third, for public schools, state subsidies, which once were significant. As an example, the direct legislative appropriation for UC Hastings, which was once well over 80% of its budget, now accounts for approximately 13%. If you display tuition and the state subsidy on a chart, one line heads up as the other line heads down. Tuition must increase as the state subsidy decreases, assuming all other things remain equal.
Fourth, many campuses have auxiliary operations such as student housing and parking garages. These may produce a modest financial benefit. Programs such as non-J.D. degrees might be deemed auxiliary operations as well. They are useful at the margins.
Fifth, for the 90% or so of schools that are embedded within a structure such as a university, the law school may receive resources from the central administration. It might be in the form of services. In the past, there has been lively discussion on some campuses over whether the law school is receiving enough for the overhead it is taxed. But in a time of crisis the money could flow directly in the opposite direction; other units might provide a subsidy to the law school to offset temporary shortfalls.
The relative importance of these sources of revenue should be emphasized. Imagine a school with 1000 students paying $50,000 in tuition. Then suppose a benefactor gave $100 million. These numbers make the math simple. A gift of that scale, by the way, would be transformative and precedent-setting.
Now an endowment of $100 million throws off $5 million per year — optimistically. Say that was all given out in the form of scholarships. The result is a 10% discount. $5 million divided by 1000 is $5000, which is 10%. In other words, even the greatest gift will make legal education only slightly more affordable.
I have embraced change. It is my responsibility to determine how to bring it about.
I note only these facts. Reducing the number of J.D. students who are enrolled, reducing the tuition charged to each of them, or both, will result in significant loss of revenue. Reducing tuition revenue necessitates increasing other revenue or reducing expenditures. People may not have contemplated all of the consequences.
More to come.