Law School Economics: Ka-Ching!

The basic rules of a market economy — even golden oldies, like a link between supply and demand — just don’t apply.

Legal diplomas have such allure that law schools have been able to jack up tuition four times faster than the soaring cost of college. And many law schools have added students to their incoming classes — a step that, for them, means almost pure profits — even during the worst recession in the legal profession’s history.

It is one of the academy’s open secrets: law schools toss off so much cash they are sometimes required to hand over as much as 30 percent of their revenue to universities, to subsidize less profitable fields.

In short, law schools have the power to raise prices and expand in ways that would make any company drool. And when a business has that power, it is apparently difficult to resist.

How difficult? For a sense, take a look at the strange case of New York Law School and its dean, Richard A. Matasar. For more than a decade, Mr. Matasar has been one of the legal academy’s most dogged and scolding critics, and he has repeatedly urged professors and fellow deans to rethink the basics of the law school business model and put the interests of students first.

“What I’ve said to people in giving talks like this in the past is, we should be ashamed of ourselves,” Mr. Matasar said at a 2009 meeting of the Association of American Law Schools. He ended with a challenge: If a law school can’t help its students achieve their goals, “we should shut the damn place down.”

Given his scathing critiques, you might expect that during Mr. Matasar’s 11 years as dean, he has reshaped New York Law School to conform with his reformist agenda. But he hasn’t. Instead, the school seems to be benefitting from many of legal education’s assorted perversities.

N.Y.L.S. is ranked in the bottom third of all law schools in the country, but with tuition and fees now set at $47,800 a year, it charges more than Harvard. It increased the size of the class that arrived in the fall of 2009 by an astounding 30 percent, even as hiring in the legal profession imploded. It reported in the most recent US News & World Report rankings that the median starting salary of its graduates was the same as for those of the best schools in the nation — even though most of its graduates, in fact, find work at less than half that amount.

Mr. Matasar declined to be interviewed for this article, though he agreed to answer questions e-mailed through a public relations representative.

Asked if there was a contradiction between his stand against expanding class sizes and the growth of the student population at N.Y.L.S., Mr. Matasar wrote: “The answer is that we exist in a market. When there is demand for education, we, like other law schools, respond.”

This is a story about the law school market, a singular creature of American capitalism, one that is so durable it seems utterly impervious to change. Why? The career of Richard Matasar offers some answers. His long-time and seemingly sincere ambition is to “radically disrupt our traditional approach to legal education,” as it says on his N.Y.L.S. Web page. But even he, it seems, is engaged in the same competition for dollars and students that consumes just about everyone with a financial and reputational stake in this business.

“The broken economic model Matasar describes appears to be his own template,” wrote Brian Z. Tamanaha, a professor at Washington University Law School in St. Louis, in a blog posting about Mr. Matasar last year. “Are his increasingly vocal criticisms of legal academia an unspoken mea culpa?”

A PRIVATE, stand-alone institution located in the TriBeCa neighborhood of downtown Manhattan, New York Law School was founded in 1891 and counts Justice John Marshall Harlan among its most famous graduates. The school — which is not to be confused with New York University School of Law — is housed in a gleaming new 235,000-square-foot building at the corner of West Broadway and Leonard Street.

That building puts N.Y.L.S. in the middle of a nationwide trend: the law school construction boom. As other industries close offices and downsize plants, the manufacturing base behind the doctor of jurisprudence keeps growing. Fordham Law School in New York recently broke ground on a $250 million, 22-story building. The University of Baltimore School of Law and the University of Michigan Law School are both working on buildings that cost more that $100 million. Marquette University Law School in Wisconsin has just finished its own $85 million project. A bunch of other schools have built multimillion dollar additions.

N.Y.L.S. has participated in another national law school trend: the growth in the number of enrollees. Last year, law schools across the country matriculated 49,700 students, according to the Law School Admission Council, the largest number in history, and 7,000 more students than in 2001. N.Y.L.S. grew at an even faster clip. In 2000, the year Mr. Matasar took over, the school had a total of 1,326 full- and-part-time students. By 2009, the figure had risen to 1,596.

The jump seems to contradict one of Mr. Matasar’s core tenets.

“Can class size be increased without damaging quality?” he asked in a 1996 Florida Law Review article. “Can class size be increased without assurances that jobs will be available for the increased number of graduates? Can class size be increased without also providing more staff, faculty, books and service? Increase class size? No!”

Did Mr. Matasar change his mind? In an e-mail, he cited the unpredictability of yield rates, which is the percent of students who accept an offer of admission. There was more than one year of yield surprises under Mr. Matasar, the largest of which came in 2009, when the incoming class leapt by 171 students.

It was a very profitable surprise, worth about $6.7 million in gross revenue. Mr. Matasar would not discuss the added costs of teaching what became known at the school as “the bulge class.” But faculty members, some of whom were offered the chance to take on additional courses, estimate that, at most, the school had to spend about $500,000 more that year on teaching.

This windfall, it turns out, was perfectly timed. Because as all those students were signing up for their first year at N.Y.L.S., a little-noticed drama was unfolding that involved the financing for that brand-new building.

THREE years earlier, in 2006, the school had floated $135 million worth of bonds to finance construction of the new building, at 185 West Broadway. At the time, Moody’s rated the bonds A3, placing them squarely in the “come and get ’em” category for investors. The rating reflected N.Y.L.S.’s strong balance sheet and the quality of its management, Moody’s said.

Equally important, N.Y.L.S. was — and is — in a very lucrative business. Like business schools and some high-profile athletic programs, law schools subsidize other fields in universities that can’t pay their own way.

“If my president were to say ‘We’ll never take more than 10 percent of your revenue,’ I’d say ‘God bless you,’ and we’d never have to talk again,” says Lawrence E. Mitchell, the incoming dean of the Case Western Reserve University School of Law in Cleveland. “But having just come from a two-day meeting of new and current deans organized by the American Bar Association, I can tell you that some law schools pay 25 or even 30 percent.”

Among deans, the money surrendered to the administration is known informally as “the tax.” Even in the midst of a merciless legal downturn, the tax still pumps huge sums into universities, in part because the price of a law degree continues to climb.

From 1989 to 2009, when college tuition rose by 71 percent, law school tuition shot up 317 percent.

There are many reasons for this ever-climbing sticker price, but the most bizarre comes courtesy of the highly influential US News rankings. Part of the US News algorithm is a figure called expenditures per student, which is essentially the sum that a school spends on teacher salaries, libraries and other education expenses, divided by the number of students.

Though it accounts for just 9.75 percent of the algorithm, it gives law schools a strong incentive to keep prices high. Forget about looking for cost efficiencies. The more that law schools charge their students, and the more they spend to educate them, the better they fare in the US News rankings.

“I once joked with my dean that there is a certain amount of money that we could drag into the middle of the school’s quadrangle and burn,” said John F. Duffy, a George Washington School of Law professor, “and when the flames died down, we’d be a Top 10 school. As long as the point of the bonfire was to teach our students. Perhaps what we could teach them is the idiocy in the US News rankings.”

For years, it made economic sense for smart, ambitious 22-year-olds to pay the escalating price for a legal diploma. Law schools have had a monopolist’s hold on the keys to corporate lawyerdom, which pays graduates six-figure salaries.

But borrowing $150,000 or more is now a vastly riskier proposition given the scarcity of Big Law jobs. Of course, that scarcity hasn’t been priced into the cost of law school. How come? In part, it’s because schools have managed to convey the impression that those jobs aren’t very scarce.

For instance, although N.Y.L.S. is ranked No. 135 out of the roughly 200 schools in the US News survey, it asserts in figures provided to the publisher that nine months after graduation, the median private-sector salary of alums who graduated in 2009 — which is the class featured in the most recent US News annual law school issue — was $160,000. That is exactly the same figure cited by Yale and Harvard, the top law schools in the country.

Mr. Matasar stood by that number, but acknowledged that it did not give a complete picture of the prospects for N.Y.L.S. grads. He noted that the school takes the over-and-above step of posting more granular salary data on its Web site.

“In these materials and in our conversations with students and applicants,” he wrote, “we explicitly tell them that most graduates find work in small to medium firms at salaries between $35,000 and $75,000.”

Determining exactly how many graduates make even those relatively modest salaries isn’t easy. The information posted online by N.Y.L.S. about the class of 2010 says that only 26 percent of those employed reported their salaries. The nearly 300 students who reported being employed but said nothing about their salaries — who knows?

Like all other law schools, N.Y.L.S. collects this job information without anyone else looking at the raw data or double checking the math. Which gets to another dimension of the law school business that other companies might envy: a lack of independent auditing, at least when it comes to these crucial employment stats. It’s kind of like makers of breakfast cereal reporting the nutrition levels of their products, without worrying that anyone will actually count the calories.

THOUGH astoundingly resilient as businesses, law schools have always had a glaring liability: they generally sell just one product, legal diplomas. This lack of diversification means that if enrollment drops, a school’s balance sheet will suffer.

Like all stand-alone institutions, N.Y.L.S. is even more dependent on student tuition than those attached to universities, and Moody’s highlighted this fact in its 2006 appraisal of the school’s bonds. Under a section about potential “challenges” that could lead to a downgrade, Moody’s cited “significant and sustained deterioration of student market position.”

A downgrade would be expensive for the school because it would mark the bonds as riskier, which would force the school to pay higher interest rates in the future.

In May of 2009, a month before the official end of the recession, Moody’s issued a new report and suddenly, a downgrade seemed like a real possibility. One problem was that applications to the school for the upcoming class of 2009, Moody’s reported, were down 28 percent compared with the volume the year before. The rating agency changed its outlook on the bonds from “stable” to “negative,” which is bond-speak for “If current trends continue, a downgrade is coming.”

But just three months later, the enrollment scare was over. In the fall of 2009, the incoming class was N.Y.L.S.’s largest ever — 736 students. (Only one law school in the country, Thomas M. Cooley in Michigan, matriculated a greater number.)

Some faculty members were happy to enhance their salaries by teaching another course. Others were appalled at what the super-sized class would mean for students.

“At a school like New York Law, which is toward the bottom of the pecking order, it’s long been difficult for our students to find high-paying jobs,” said Randolph N. Jonakait, a professor at N.Y.L.S. and a frequent critic of Mr. Matasar’s. “Adding more than 100 students to an incoming class harms their employments prospects. It’s always been tough for our graduates. Now it’s tougher.”

Was Mr. Matasar more worried about bond ratings than the fortunes of his new students? Several faculty members said, and he confirmed, that the bonds were part of discussions about the financial health of the school in 2009.

“However,” Mr. Matasar wrote, “N.Y.L.S. never promised (nor needed to promise) anyone that it would increase enrollment to meet debt service obligations.” The size of the 2009 class, he went on, was “unplanned,” again referring to a surprise in yield.

But given that interest in graduate school typically spikes during economic slumps, wasn’t a sharp rise in yield foreseeable? It was to N.Y.L.S.’s rivals. There are about 40 other schools in what US News has long categorized as its third tier, and the average increase in class size at those schools in 2009 was just 6 percent. (At 10 of those schools, enrollment declined.) That is dwarfed by the 30 percent uptick at N.Y.L.S.

Whether Mr. Matasar had bond ratings in mind at the time, Moody’s liked what it saw. In August of 2010, the company issued a new report that included news of the 736-student class, which was described, in the classic understated style of bond reporting, as “particularly large.” The Moody’s outlook for the N.Y.L.S. bonds changed once again — this time from negative to stable.

THE incoming class of 2009 won’t hit the job market until next year, but if the experience of recent N.Y.L.S. graduates is an indication, many of them are in for a lengthy hunt. Mr. Matasar offered an inventory of N.Y.L.S.’s career services office, which he says includes 15 employees and provides development and mentoring programs and oversees a series of networking events.

There are those, he wrote, “who rave about the career services office.” But he added that a recent poll of law schools found that a little more than half of third-year students were unsatisfied with the job search help. “We have a similar experience,” he wrote.

Among the unsatisfied is Katherine Greenier, of N.Y.L.S.’s class of 2010. As she neared graduation, she organized an informational meeting for students interested in public-interest law, the kind of get-together she thought the career services office should have offered. To her amazement, a rep from that office showed up, took a seat and asked questions.

“She was asking about the process, like how you go about applying for public-interest fellowships,” Ms. Greenier says. “Things that you would have hoped she already knew.”

Ms. Greenier, who wound up with a job at the American Civil Liberties Union in Richmond, Va., ultimately decided that the school had what she called a “factory feel.”

The size of the incoming class of 2009 only sharpened that conclusion.

“There were people wondering, why did the school take on this many people in a job market this terrible?” she asked. “How many of these folks are going to find jobs? And what does it say about the school?”

IN April, Mr. Matasar stood in a lecture hall on the third floor at N.Y.L.S. and delivered the keynote at Future Ed, the third of three conferences about legal education that he’d helped organize, in partnership with Harvard Law School. A few dozen professors and deans were in attendance as he argued for a more student-centric approach to education.

“The focus shifts from us — we the faculty, we the administration, we the permanent employees of the school — to those we serve, our students,” he said. “Things are seen through a lens that says ‘What will this do for the students?’ ”

Nearly all the people who have worked with Mr. Matasar say he means what he says about reforming legal education. N.Y.L.S. professors recall meetings where he urged the faculty to be more responsive to students — to return calls faster, meet more often, whatever would help.

“He put a huge, beautiful student dining area in the top floor of that new building,” says Tanina Rostain, a former N.Y.L.S. professor, now at Georgetown University Law Center. “But it doesn’t have a faculty lounge. We were a little nonplussed, but it was clear that the students were Rick’s priority.”

How does one square that priority with the inexorable rise of N.Y.L.S.’s tuition, its population growth, its eyebrow-arching job data?

The question has puzzled more than a few academics and has produced a variety of theories. Perhaps the most compelling is that as both a crusader and a dean, Mr. Matasar has conflicting, even incompatible missions. The crusader thinks that law school costs too much. The dean has to raise the price of tuition or get murdered in the US News rankings. The crusader worries about the future of all those unemployed graduates. The dean has interest payments to make on a gorgeous new building.

“I’m 100 percent convinced that Matasar believes in his reformist agenda,” says Paul F. Campos, a professor at the University of Colorado at Boulder School of Law and a Future Ed attendee. “But all reformers discover that they can’t change a system by themselves. And by trying to survive in the current structure, he has ended up participating in the perpetuation of its most indefensible elements.”

The tale of Mr. Matasar’s career is not primarily about a gap between words and actions. Rather, it is a measure of how all-consuming competition in the legal academy has become, and how unlikely it is that the system will be reformed from within.

To be clear, there is little about the way N.Y.L.S. operates that is drastically different from other American law schools. What’s happened there is, for the most part, standard operating procedure. What sets N.Y.L.S. apart is that it is managed by a man who has criticized many of the standards and much of the procedure.

In fact, Mr. Matasar has been quoted about wanting to upend legal education for so long it is impossible to believe he is doesn’t mean it. But he can’t act unilaterally. And what industry has ever decided that for the good of its customers, it ought to charge less money, or shrink?

“My salary,” Mr. Campos said, “is paid by the current structure, which is in many ways deceptive and unjust to a point that verges on fraud. But as a law professor, I understand that what is good for me is that the structure stay the way it is.”

DECRYING a business and benefitting from it at the same time — it puts you in a tough spot, Mr. Campos said, and one he speculated is even tougher for a dean. But it is not a spot that Mr. Matasar will be in for much longer.

Several weeks ago, Mr. Matasar sent an e-mail to his faculty stating that he would step down in the next academic year. He was considering a few different job options, he explained, all of them “outside of legal education.”