After many years of decline, law school applications are on the rise again. The most recent figures from the Law School Admissions Council show that applicants to ABA-approved law schools have increased by 14.4% from this time last year. First-year law school enrollment did rise last year, but it was only by 0.1%. So next year, we probably will see the first meaningful increase in law school enrollment in the United States in close to a decade.
A lot has changed in American legal education in the last ten years, particularly when it comes to budgets. Major declines in enrollments have meant substantial—and often painful—budget adjustments, and in the worst cases, schools have been forced to close. At law schools that are a part of universities, a declining applicant pool has often redefined the financial relationship between the law school and the university administration. At the last annual meeting of the Association of American Law Schools, this past January in San Diego, I had the privilege of moderating an interesting conversation among a number of law school deans and the CFO of a major campus of a prominent state university. What we learned from one another was very illuminating.
Until recently, many universities created budgets for law schools based on an all-funds, centralized model. All the revenue that was collected by the academic units was sent back to the university and then returned to the units based on a percentage allocation formula across the campus. These percentages could be adjusted up or down based on the needs of a particular school. The university could use highly profitable schools to subsidize less profitable ones, or offer temporary support to schools with special needs. The big problem with this model was that it tended to dampen the entrepreneurial spirit of individual units since they do not reap the full benefits of any profits that they made. On the other hand, the model provided a financial cushion in difficult times. Indeed, in the past when law schools were flush, they often subsidized other units. In recent years, however, many law schools have needed university support to balance their books.
Since the Great Recession, a growing number of universities have abandoned the traditional budgeting model I just described and moved to an activity-based budget or responsibility-based management (RCM). Although there are some differences between the two, the idea at the heart of both models is to keep resources with those units that generate them. In good times, the advantages of these models are obvious. But when money is tight, the university is only of limited help, if it can help at all. For many law schools, activity-based budgeting and RCM have led to layoffs and accelerated retirements, as well as the loss of some programs.
To be honest, much of the cost saving measures and restructuring that often have been a product of RCM and activity-based budget models is long overdue, bringing some much-needed fiscal discipline to higher education. But it is a fair question whether budgeting principles designed for private sector, profit-making enterprises are appropriate for universities, which are, essentially, charitable organizations. At least some of the purposes universities are organized to serve cannot be accomplished effectively if they are expected to generate a profit.
Some law school deans have attempted to make this very argument to the CFOs of their universities by emphasizing the “specialness” or “uniqueness” of legal education. From time to time, this is a sensible approach. Some of the benefits a law school brings to the intellectual life of a university community are very distinctive indeed—it’s hard to imagine a great university without a law school. But in most cases, the specialness argument is a loser. CFOs hear it from all the units, and it is not a particularly compelling way to forge a successful relationship with this important institutional leader.
A more effective course links the law school’s goals to the university’s strategic vision, followed by a compelling plan on how the law school will steward resources as a key partner in that vision. When the law school meets a set of reasonable financial goals it has worked with the CFO to set, the CFO will often become an important ally when new university resources become available and choices need to be made on where to allocate them. As law deans look ahead to rising applications and a renewed interest in legal education, now would be a good time to craft a financial strategy that not only offers a viable future for the law school, but also opportunities for the university to forge a strategy for institutional success in which the law school is an integral part.