Guns vs. Butter: Did the Villanova Board of Trustees Get It Right?

I remember my first Macroeconomics class in September of my freshman year.  Harvard-trained Dr. Thomas Cleaver delivered a stirring lecture on the Production Possibility Curve using the classic economics case study of ‘guns vs. butter.'  As Dr. Cleaver patiently explained to 30 squirming freshmen, in a theoretical economy operating at full capacity that produces only two goods - guns and butter, a choice must be made regarding how much of each good should be produced. We learned that if the economy produces more guns, it must reduce its production of butter, and vice versa.  While my reaction back then could be aptly characterized as "WTF," that lecture took on newfound meaning for me recently as I read Mike's post on July 14, "Villanova Lancaster Avenue Project:  Radnor Board of Commissioners Grants Final Approval."

Mike reported that the project will provide on-campus housing for 85% of the undergraduate population, along with a parking structure for 1,200 cars and a new Performing Arts Center.   In the comments section I questioned whether there was demand from 85% of undergraduates for on-campus housing.  C.M. Jankowski replied that "Housing for 85% of undergraduates today means housing for 65% of undergraduates in 20 years."  That comment likely reflects the thinking of the Board of Trustees in approving the Hamlet of Villanova, as Mike refers to the project.  However, it got me thinking about guns vs. butter for the first time in 42 years.

The Butter

Capital decisions are the unquestionably the toughest a board must make.  They commit the institution to a fixed cost structure with the potential for catastrophic consequences should the assumptions underlying the decision ultimately prove incorrect.  The Board of Trustees may have reasoned that expanding on-campus housing stock to accommodate 85% of the undergraduate students on campus today will translate to housing for only 65% of the undergraduates in 20 years as the student population grows (and presumably while on-campus housing supply remains fixed).  If this indeed was the Board's thinking, it implies an assumption of growth in the undergraduate population at an annual rate of 1.4%.

On its face, that seems reasonable enough.  The college population in the U.S. grew 45% (2.7% per year) over the 14-year period 1997-2011, while the number of college-age Americans grew only 21%.  The combination of a greater percentage of American kids deferring employment to attend college together with growth in the foreign student population caused the growth of undergraduate populations to outpace the growth of the college-age demographic.

The U.S. Department of Education projects that the number of students enrolled at degree-granting institutions in the United States will grow by 13.9 percent from 2012 to 2022.  However, over that same period the 18-24 year old population in the U.S. will decline by 4%.  The latter is not the prediction of some ill-informed glass-half-empty economist, but rather is an immutable certainty.  That certainty takes the form of the number of kids sitting in third grade through eighth grade classrooms in the U.S. today.  Only a profound change in immigration patterns or mortality rates will alter that projection.

Universities are taking notice and planning accordingly.  The University of Maine, the state with the oldest population in the country, is looking to bolster revenues with "distance education."  Others are increasing programs for adults, who would commute to school rather an board.  Both developments suggest slackening demand for on-campus housing.  Absent a massive influx of foreign students, one can reasonably infer that the decline of the college age population over the next decade, distance learning other trends will translate into fewer students boarding on college campuses.

Against the backdrop of near-certain ‘shrinkage' in the nation's college student population (deferring for another time an exploration of George Costanza's probing question, "Do women know about shrinkage?"), the Board of Trustees has gambled that Villanova can sidestep this profound demographic sea change.  Their confidence notwithstanding, we have already seen troubling signs at the fringes of the college landscape.  In March 2015, 114-year old Sweet Briar College, a women's college in Virginia, abruptly announced its closure in May due to "insurmountable financial challenges."  A month later, the 70-year old Tennessee Temple University was forced to merge with Piedmont International University.  Both schools cited declining enrollment as the fundamental source of their financial challenges.

It has been argued by some that admission to the nation's elite schools will remain highly competitive, even as the undergraduate student population shrinks. Who are the elite universities?   Forbes ranks Villanova the 71^st best university overall, #60 among private colleges and #39 in the northeast.  Best Colleges ranks Villanova the 5^th best Catholic university behind Notre Dame, Georgetown, Holy Cross, and Boston College.  It is unclear whether those rankings position Villanova among the elite universities that will be spared from the ravages of declining admissions.

The Guns

In December 2014, NovaDava wrote a compelling Fanpost, "A Comprehensive Plan for the New Wawa Arena at Villanova and the Future of Villanova Athletics."  The facility would be fitting home for the Villanova men's basketball team, which would play 20 games per season in the proposed facility.  The investment in athletics would be complimentary to the University's aspirations of becoming an elite national university, following the model so successfully employed by the University of Notre Dame.  NovaDave estimates that Villanova would need to commit $150 million to build his proposed 13,680 seat arena near campus.  Construction would be financed with debt that would be repaid from season ticket sales and other revenues generated from the new venue.

Against a backdrop of Top 15 expectations for the team next season and a 20+ year wait for season tickets, Board of Trustees has chartered a far more conservative course.  Rather than replacing the Pavilion, they intend to modernize the facility.  Fund raising has already begun for a $50 million renovation, a plan that will result in fewer seats and no incremental revenues to the University.

Guns vs. Butter

Of course, it is possible that the Board of Trustees assumed no growth in the student population and had sound basis for believing that there will be sustained demand for on-campus housing from 85% of the undergraduate students.  It may also be true that Villanova will command a larger slice of the admissions pie, and will manage to grow as the undergraduate population across the United States shrinks.  However, given the uncertainty with regard to both scenarios, was it the right call to grow the on-campus housing inventory to the exclusion of constructing a new basketball arena on or near campus?