Law School Economics 101: Part 2: A “Case” Study

 The popular press has accused law schools essentially of cheating their students for their university’s enrichments. In my last posting, I explained why this is largely untrue and, from an economic standpoint, both irrational and improbable. Today I’d like further to set the record straight by discussing the way law schools are financed and how tuition is established. I use as my model the law school I know best, my own Case Western Reserve University School of Law and, in so doing, also provide some of the transparency that the press complains we lack. While I don’t know the specifics of budgets at more than half a dozen other law schools, my strong impression is that we are unremarkable, except in one respect which I will point out.

Running a law school is like running a railroad or an airline. Like them, we have very high fixed costs that have to be met year after year, regardless of our revenues in any given year. We exist in a market in which competition is fierce and price sensitivity is very high, at the same time that the relatively small bandwidth of tuition differences at most private law schools means that, in order to be successful (fill our class with good students), we cannot adjust pricing much even in a bad year. Yet the fixed costs still need to be paid.

The most significant fixed costs are faculty and staff salaries and fringe benefits. At our law school, they comprise just over 42% of our operating budget, excluding the salaries of our first-rate library staff. Without top faculty, no law school can provide an excellent education. Without a competent staff, absolutely nothing gets done, not admissions, registration functions, career services and student services, fundraising, internal management, secretarial help, nor anything else. While all of us in academia – faculty and staff alike – have made the choice to work in an academic institution for the personal fulfillment it gives us, pay in all of these positions is significantly lower than in the private sector. Our average faculty member, for example, likely easily could earn between four and ten times more in the private sector. Of course we make our own choices. But becoming a law professor does not require a vow of poverty. Faculty are paid at a level that allows for comfortable living, but no more. Staff members (including many staff members with law degrees) are paid even more considerably less than their private sector market value. Yet at a school like ours, I’m proud to say, our staff works very long hours, often under pressure, and probably without enough help. They do so because they enjoy the work, are devoted to our students, faculty, and alumni, and have deep affection for and pride in the institution. But from a purely material standpoint, they are hardly enriched.

What are the other fixed costs of running a law school? Well, the library is pretty critical to both legal education and legal scholarship. In our case, the law library takes about 10% of our revenues to operate. And another roughly 20% goes to student financial aid (taken mostly from endowment income and annual giving, as well as some smaller portion from our operating budget). We’re getting close to full revenue at this point without any evidence of anything resembling a surplus! The balance of our revenues go directly into programming, supporting student travel for moot court events, subsidies for student organizations and activities, faculty research support and travel to speak at conferences and the like, student publications like the law review and various other journals, and various administrative expenses (we have a lot of reporting to do, produce events like commencement, register students for classes and keep track of grades, and all of the other kinds of operations necessary to keep us functioning on a day to day basis). That about eats it up.

These costs cannot be paid by tuition alone, at least at our law school, which I believe puts us in a relatively small and distinct minority. Twenty percent of our operating budget comes from endowment income – the revenues produced by the generosity of generations of alumni who have invested their money in us. The remaining 80% is covered, for the most part, by tuition. Thus, far from being a “cash cow,” we would be operating at a net loss without our endowment. What this means for prospective students is that, at least indirectly, every student at our law school receives financial aid, whether or not they are given an outright scholarship, in the form of a 20% subsidy from the endowment.

But, you might ask, doesn’t the university take some of that money away from you? This again is part of the allegation that we are cash cows. No, the university doesn’t “take” money from us. As part of a major research university, we consume services that the university provides in a more cost-effective way than we could do for ourselves. This portion of our budget is commonly referred to as “indirect expenses.” Services like the university library, information technology, building maintenance, and an array of student services, are all consumed by our faculty, students, and staff. Having paid careful attention to the line items in our indirect expense budget, I am comfortable that we pay for what we use, and I suspect this to be true at all responsibly managed law schools. While the American Bar Association has a rough guideline that 20% of gross revenue is an appropriate amount of indirect expense, our own university charges us considerably less. The central administration provides excellent service for what we pay.

Cash cow? I think not. Overpriced? Not at all. We’re market driven in our pricing and, as I noted, can only keep the lights on thanks to our endowment. Responsible law school finance is hard. But I’m confident that we don’t spend a penny that isn’t directly to the benefit of our students.

I hope that helps readers evaluate the truth about law school financing. But I can’t deny that law school remains expensive. In my next couple of entries, I’ll talk about why one should go to law school, and ways of evaluating competing admissions offers from law schools.