Investors are pushing back into municipal bonds, which remain an effective way to generate relatively safe tax-free income

Business Week
By Ben Levisohn

After months of being shunned by investors, municipal bonds are back. AAA-rated municipal bonds now yield just over 3%, well below October's rates of well over 4%. For a 10-year bond with a 4% coupon, that translates to a rise in price to $105.83 from a low of $94.39. The iShares S&P National Municipal Bond exchange-traded fund (MUB), which holds primarily AAA- and AA-rated bonds, has rallied from a low of $88.76 on Oct. 15 to over $100 on Feb. 11, a gain of 13%.

One of the biggest reasons for the rally was the rise—and fall—of Treasury bonds. Historically, munis and Treasuries traded at a fairly constant ratio, with tax-free munis yielding about 85% of taxable Treasuries, with the price of the munis reflecting the tax benefit. But that all changed in 2008. By the year's fourth quarter, terrified investors had scooped up all the U.S. government debt in sight, pushing Treasury yields down near historic lows. At the same time, the municipal bond market froze up, pushing up the yields of munis. By November, a top-rated muni bond yielded almost double a Treasury bond. "You won't see another opportunity in municipals like that for decades," says Matt McCall, an investment adviser at Penn Financial Group.

Now, investors have pushed back into munis, and their yields are roughly equal with Treasuries of comparable maturities. Why the rally? For the first time, investors looking for a safe haven—and wanting to earn something beyond the negligible interest rate offered by Treasuries—looked to AAA-rated munis as an alternative. Investors also speculated that the Federal government's stimulus package would provide aid to states and municipalities, making it less likely they would default on their debt. Crossover bond funds, those not limited in the categories of debt they can purchase, saw an opportunity in bonds as well, rushing in to buy when munis were at their low-point, possibly because government intervention seemed in the offing. And individual investors, witnessing a rise in net-asset values of muni mutual funds rushed in, pushing prices even higher.

Room to Rise Further?

And that has left munis too rich for some investors. "High-grade munis are drastically overbought," says Matt Fabian of Municipal Market Advisors, a municipal bond adviser.

Not everyone agrees. Some proponents of munis point to the ratio between Treasuries and municipals—now at 100%—and say munis still have upside as they should soon trade once again near the traditional yield ratio of around 85% of Treasury bonds. But others say that the link between the two is broken. They point to the fact that historically, all fixed income securities tend to move in lock-step. Rising rates pushed all yields higher and drove prices down; falling rates drove yields down and prices up. But no longer. With Treasury yields falling to negligible levels, almost everything looks cheap, including munis. "When Treasuries are yielding two-and-change [slightly above 2%], other forms of debt look overvalued," says Rollance Verkennis, a partner with the Resource Group, a financial advisory firm in Glendale, Calif.

Municipal bonds face other, fundamental pressures as well. The Senate stimulus bill passed on Feb. 10 cut $40 billion of state aid from the House version—not a good sign for those hoping the Federal government would step in, bolster state and local finances, and thereby rescue the muni market. And some experts claim that some buyers are purchasing AAA-rated bonds in order to sell them to high-grade muni mutual funds, which will continue to buy the bonds as long as investors keep putting money into the funds. As soon as that buying stops, prices of high-grade funds could fall—and send investors fleeing once again.

Low Yields

Finally, the yields on munis are at an all-time low, making it hard to argue that they are "cheap." With credit markets unfreezing—$120 billion of municipal debt was issued in January alone—and municipalities looking to sell even more, it remains to be seen whether investors will still clamor for munis, or whether prices will drop, sending yields higher. "The biggest concern for munis is supply, says Samson Capital Advisors' Benjamin Thompson, who manages municipal-bond portfolios for high-net-worth clients. "The amount of pent-up issuance is likely to be substantial."

But that doesn't mean investors should avoid munis. The bonds remain an effective way to generate relatively safe tax-free income, and with taxes possibly on the rise, that could make munis more attractive. There's also value to be found once investors go a bit lower on the credit-quality ladder—a bit below the AAA- and AA- rated categories, though not into speculative-grade issues. Ron Schwartz, manager of the Ridgeworth High Grade Municipal Bond Fund, has been selling his AAA-rated bonds in favor of lower rated, but still investment grade, munis, which have experienced a much more subdued rally.

"We're seeing greater volatility than we're used to," Samson Capital's Thompson says. "But municipal bonds are still attractive."

Levisohn is a staff editor at BusinessWeek covering finance and personal finance.

Swap liabilities make downgrades possible for some not-for-profits

PRESS RELEASE
New York, February 11, 2009 -- Growth in mark-to-market liabilities for interest rate swaps poses credit risks that could result in credit stress and downgrades for some not-for-profit hospitals, higher education institutions, and other non-profit borrowers, says Moody's Investors Service in a new report.

"Some borrowers have seen the fair value of their swap agreements decline significantly over the last few months, in certain cases resulting in large collateral posting requirements," said Moody's Associate Analyst Daniel Steingart, author of the report.

He said large mark-to-market swap liabilities and swap collateral posting requirements mean that "rating downgrades are possible, especially for lower-rated borrowers, who have additional balance sheet or operating stress at the time that they are required to post collateral under their swap agreements."

Additionally, he said, swap liabilities or collateral posting may cause a borrower to violate financial covenants under related documents, and expose the borrower to the risk of bond acceleration and a liquidity crunch. He said current conditions are a marked contrast from the relatively narrow band of fluctuations in the fair value of most swap agreements over the past decade when the vast majority of borrowers met collateral calls with little difficulty.

"Combined with poor investment returns over the past year and deteriorated operating results for some rated borrowers, many not-for-profit organizations find themselves ill prepared for the sudden drain on liquidity that swap liabilities can cause," Steingart said.

In addition to assessing the rating implications of large mark-to-market swap liabilities and swap collateral posting requirements, the report provides examples of rating actions taken over the last several months.

"The report does not address the impact of this risk on governmental, housing and public infrastructure issuers as collateral posting is either uncommon or structured with different terms than for not-for-profit hospitals, colleges and universities, and other not-for-profit borrowers," said Steingart.

The report, "Interest Rate Swaps Cause New Liquidity Stress for Some Healthcare, Higher Education and other Not-for-Profit Borrowers Rating Implications Will Depend on Borrowers' Other Credit Attributes," is available at moodys.com.

Surveys: Hospitals Face Capital Budget Woes

Bloomberg
CHICAGO - A pair of recent surveys show that nearly half of nonprofit hospitals have postponed or significantly cut back on their capital budgets in light of economic woes, including increased difficulty in accessing the bond market.

Nine of 10 hospitals surveyed by the American Hospital Association said they were finding it harder "or even impossible" to access tax-exempt bonds and "other important sources of debt, such as banks and other financial institutions" in recent months, according to the AHA's recent survey entitled "Report on the Capital Crisis: Impact on Hospitals."

The survey also reported that 45% of hospitals had put capital projects on hold and 13% had halted projects that were already in process. The AHA surveyed 639 hospitals from December 2008 through Jan. 6, 2009.

Similar results were reported in a recent survey conducted by the Healthcare Financial Management Association, which showed that 53% of hospitals are holding off or substantially cutting back on new construction spending.

The reports' results are reflected in the relatively low number of tax-exempt health care bond transactions completed so far this year at a time when other issuers have largely returned to the market after last year's credit crunch. While a handful of higher-rated health care credits have started to enter the market recently, issuers rated lower than A have largely been nonexistent so far in the debt markets.

"The vast majority of hospitals report that borrowing funds through tax-exempt bonds - the main source of borrowing for most hospitals - is difficult or impossible," the AHA said in a release accompanying its survey. "The vast majority of hospitals that have postponed projects have delayed updating their facilities, while more than six out of 10 hospitals have put clinical and information technology projects on hold."

One of the difficulties facing health care issuers is securing bank enhancement for bonds, according to the HFMA. The report said 18% of financially strong, or "have," hospitals reported difficulty securing a liquidity facility, and 31% of "have-not" hospitals reported difficulty. The HFMA also noted that 30% of "have" hospitals reported a substantial increase in the cost of debt compared to 43% of "have-not" hospitals.

The decision to postpone capital projects stems from the difficulty in accessing capital as well as other fiscal pressures facing hospitals. Nearly half of the hospitals surveyed by AHA said they had postponed or cut back on capital projects, and 13% said they had halted projects already in progress.

For those hospitals, 53% said a "very important" factor in the decision to cut back on capital budgets was that the "usual sources of capital were unavailable." Another 27% said interest rates were too high, and 18% said their bond ratings were downgraded. Fifty-nine percent said a decline in value of reserves, including investment portfolios, played a role in the decision.

"The broader effects of the economic slowdown play into hospital capital decisions as uncertainty mounts, operating performance declines and the value of reserves falls due to stock market and other investment woes," the AHA said in its report. Of the hospitals that have postponed capital plans, 82% have put facilities projects in particular on hold.

The postponed capital projects represent the majority of the capital budgets for those hospitals, according to the survey.

Of those hospitals that delayed projects, 39% said they would need up to $10 million to complete the plans, while 23% said they would need up to $24 million, and 17% said they would need $50 million or more to complete the projects.

Tough Times, Silver Lining: Builders Lower Their Bids

Chronicle of Higher Education

By SCOTT CARLSON

Now is a great time for colleges to get bids on construction projects — if they have the money to pay for them.

Over the past several years, colleges have endured eye-popping escalation in the cost of campus construction, with the budgets swelling by more than 40 percent in some cases. The increases resulted from similarly rising costs for energy and petroleum-based building materials, and from growing demand for staples like steel and cement amid a booming construction market, both overseas and in the United States. Construction firms consistently bid high because of the demand for their work and to cover the risk of escalating costs on materials.

But times have changed. As the financial, housing, and major-construction markets have headed toward meltdowns, those same construction firms are looking for jobs, even while the prices of energy and materials have fallen. The prices of essential construction materials like structural steel, cement, and lumber are all expected to decline through 2009, according to Engineering News-Record, a trade magazine for the construction industry, published by McGraw-Hill. Because of those declines, building costs are likely to go down slightly this year.

Commercial, nonresidential construction markets fell 17 percent in 2008, including a 28-percent drop in shopping-center and warehouse construction, a recent McGraw-Hill report said. Among the top five construction markets, only New York City showed an expansion in 2008, largely because of projects started at the former World Trade Center site. Atlanta, Chicago, Miami, and Washington were all in decline: as much as 56 percent in the Windy City.

'Firms Are Getting Hungrier'

Those numbers may mean that firms are turning to higher education for business — and that may translate into bargains for colleges.

"We are getting bids that are significantly under budget — and by significantly, I mean a $40-million job that comes in at $35-million" or even lower, says Larry H. Eisenberg, executive director of facilities planning and development at the Los Angeles Community College District. The district is pushing forward with $400-million in scores of construction projects as part of a $5.7-billion expansion plan.

"The firms are getting hungrier," he says, noting that almost 40 construction firms bid on one recent project. "That is completely unprecedented. Early last year, if we got seven or eight bids I would be really happy. The year before that, we were challenged to even get a few bidders."

Some of the most aggressive bidders are high-end companies that had never bothered to bid on community-college projects before, he adds.

Richard Stockton College of New Jersey saw a similar trend in bids on a new campus center. Michael C. Shatken, a partner at KSS Architects, which designed the center, says his firm had worked to keep the building under budget. In an effort to shave the price tag, they had even pushed some costs — like millions of dollars for kitchen equipment — off the building budget and onto the plate of the college's food-service provider.

But when bids finally came in, they were about 25 percent below a figure predicted by two cost-estimate firms. (The budget for the project has not been made public, and a contract on the bid has not yet been signed.)

"What was impressive about the bidders was that they were from a wide range of contractors," Mr. Shatken says. Companies that normally bid only on private-sector work were part of the mix, he says.

Donald E. Moore, associate vice president for operations at Richard Stockton, says that having monitored school-construction prices, he anticipated in August that they would drop for the college's projects. "That is when I put the pedal to the metal to push the project out faster, to take advantage of the market," he says.

Hands Tied

Of course, the economic downturn has brought benefits for relatively few colleges — mainly those that had money reserved for projects. The Los Angeles district, for example, is paying for construction from bonds backed by property taxes.

But many institutions just are not able to build right now. In recent months, states including Colorado, Indiana, and Missouri have either frozen public construction projects or have proposed doing so. More than 130 building projects on California State University campuses, worth about $850-million in all, have ground to a halt amid California's cash-flow problems.

And while construction costs might be coming down, other colleges are experiencing rising costs in debt service and other financial costs. Molloy College, in Rockville Center, N.Y., is planning a $53-million residence hall and student union. On the basis of a $50-million bond issue, "we are looking at a substantial increase in our annual debt service — a minimum of $700,000," says Michael McGovern, vice president for finance. "We are looking at numbers in the 7-percent range, which is unheard of in tax-exempt financing."

Estimated construction costs for Molloy's project rose almost 30 percent over the past three years. Recently the residence-hall portion went out for bid, and early bids are coming back 5 percent lower than expected, Mr. McGovern says. Molloy, which is not far from New York City, may not see the bargains that other institutions are getting because it is subject to the city's relatively steady construction market.

At institutions like the Los Angeles Community Colleges and Richard Stockton, administrators plan to push projects out to bid as fast as possible to take advantage of the market. Mr. Moore says he would like to get bids on a science center and a couple of renovation projects at Richard Stockton, in addition to the new campus center, by the end of the year.

The Los Angeles Community College District recently put out a call for bids on five projects, each worth around $40-million. The district will try to put 20 to 30 projects out for bid in the next six months, Mr. Eisenberg says. "We're spending about $80-million a month. I am expecting that will ramp up to $100-million a month."

There are uncertainties about what will happen to prices in the near future. The federal government's multibillion-dollar stimulus bill, being debated in Congress, includes many billions for school construction, higher-education maintenance, and infrastructure. But experts say those amounts, even if they remain in the legislation's final version, are not likely to reinvigorate the construction market and drive up prices.

Mr. Eisenberg sees the economic turmoil leading to a shakeout in the construction industry. On the upside, the best firms will be left standing; on the downside, fewer firms will be around to bid on jobs and help keep costs down.

Mr. Shatken, the architect, says the current market is fundamentally unsustainable. "I think this is a short-lived opportunity," he says. "The trend on costs can only go one way."

With Independent Colleges Facing Hardship, Their Association Economizes

Chronicle of Higher Education

February 5, 2009

Washington — In yet another sign of the tough times facing colleges, the National Association of Independent Colleges and Universities has frozen staff salaries and reduced its dues increase for 2009-10.

The changes, approved by members at Naicu’s annual meeting yesterday, hold the average dues increase to 1.9 percent, two percentage points lower than the average annual increase. Dues range from $600 to $11,500, depending, in part, on the size of the institution.

In a letter to private-college presidents last month, David L. Warren, the association’s president, said the cuts would be made “in light of the continuing and increasingly negative economic impact on Naicu members.”

Tony Pals, a spokesman for the group, said it had reached the decision on the basis of a survey it conducted in December, and not by any decline in the rolls. Membership, he said, was at a record level, and meeting attendance was up over previous years.

“We are quite aware of the tough choices our members are having to make, and are doing what we can to assist them in difficult financial times,” Mr. Pals wrote in an e-mail message to The Chronicle.

Other higher-education associations may follow suit. On Saturday the American Council on Education will consider a dues freeze, among other belt-tightening measures, at its annual meeting. —Kelly Field

WSJ - Families Appeal to Colleges for Extra Aid

FEBRUARY 5, 2009

Ivy League and State Schools Are Seeing Midyear Distress; Getting a 'Judgment Review'

By ANNE MARIE CHAKER

As the country slides further into recession, colleges' financial-aid offices are seeing a steep increase in requests from families for more aid -- just as their own finances are coming under increased pressure.

The University of Washington has had 3,663 requests for additional aid so far this academic year, already surpassing the 3,121 requests for all of last year. Chapman University in Orange, Calif., increased aid for 2,200 families by January, compared with 1,200 for the same period a year ago. And Syracuse University reports a 30% increase in financial-aid appeals that it has granted over the same period.

Reversal of Fortune

Colleges will often take another look at your financial-aid package if you discover that you need more aid.

• Write a letter to the financial-aid office, attaching any documentation to strengthen your case.
• Sudden changes in a family's financial circumstances -- such as a job loss, pay cut, high medical bills or death -- may weigh in your favor during a review of your aid package.

Schools are paying for the increase in requests through fund-raising appeals and by digging deeper into their endowments and budgets. Some schools say they noticed requests for aid pile in after they sent out letters assuring families of their support for aid programs. Hamilton College in Clinton, N.Y., for example, sent out a letter with the second-semester bills in December promising that despite "this time of economic turmoil ... we will continue to meet the full demonstrated financial need of every enrolled student."

After that, "the phone started ringing off the hook in the financial-aid office," says Monica Inzer, dean of admissions and financial aid.

Other colleges are sending kids to the government. For the most part, says Kay Lewis, the University of Washington's director of financial aid, that has meant helping students apply for increased state or federal grants and loans, since most of the public institution's $36 million in undergraduate aid has already been allotted.

The formula for financial aid, set by the federal government, requires colleges to look at a family's tax return from the previous year. But with rising unemployment and a sinking stock market, many families' fortunes have changed considerably since they last filed taxes. At the same time, the value of 529 college-savings plans deteriorated by as much as 40% in 2008, according to Pittsburgh-based financial-aid expert Mark Kantrowitz.

Though certain assets, such as retirement plans and home values, are sheltered from the federal-aid formula, losses there can still have a trickle-down effect -- if, say, a family was hoping to leverage home equity to pay for college.

Alamy

Syracuse University raised $850,000 to help families in financial trouble.

If you get less aid than you need, you do have other options. The government sets strict formulas for the distribution of federal student aid, but also allows aid officers latitude in assessing special circumstances. These may be things that changed since the family filed its prior-year tax return, or special expenses not otherwise explained in the forms -- such as younger children in private school, huge medical bills or even a parent attending night school.

If you feel you have such an expense that's not addressed in the aid forms, ask for a "professional judgment review." This is simply a letter addressed to the financial-aid officer, ideally supported by documentation, and can be sent anytime during the school year.

Many top-tier private colleges made headlines last year when they increased aid for families, including those in middle and upper-middle income brackets. For example, starting this school year, Columbia University eliminated loans for all students receiving financial aid, replacing them with grants. Dartmouth College eliminated tuition for families earning less than $75,000 a year. Cornell University, too, is reducing or eliminating the amount many parents have to borrow.

Some Ivy League schools say they haven't seen a big increase in requests for additional aid, perhaps helped by that increased aid. But others are: Harvard University says more families are requesting midyear reconsiderations of their financial aid, largely due to job loss or a decline in income or assets. Harvard has seen over 150 midyear appeals, compared with 113 last year.

Princeton University says it has seen an increase in additional aid requests from families experiencing job loss or lowered income, but declined to say how many. Yale University has received 56 midyear requests for additional aid, compared with 43 at this time last year.

Getting Help

Families who feel they've been shortchanged by their school's financial-aid office --or whose circumstances have changed -- can apply for a so-called professional judgment review in order to receive more aid. Apply for a review by writing to the office and attach any supporting documents. Options for families seeking more help may include one or more of the following federal loans available to undergraduates:

Princeton increased its financial-aid budget by about $5 million to meet the additional need. Yale says any additional money needed will come from a combination of endowment and general university funds. Harvard also says it's yet unclear how many additional funds will be needed, but that it will use a combination of endowment assets, gifts and the university's own unrestricted funds.

Many financial-aid officials say they are bracing for the worst next year. "I am anticipating the number of requests for financial aid in general will rise for the 2009-10 school year, given the state of the economy," says Virginia Hazen, Dartmouth's financial-aid director. That comes as the value of endowments, which many schools tap for financial aid, is sinking: A study released late last month by the National Association of College and University Business Officers shows that college endowments' investment returns fell 23% in the first five months of the fiscal year that began in July.

Meanwhile, the credit crunch is making it harder for many students to get a loan. When Syracuse sophomore Nykeba Corinaldi learned that the aid office would no longer accept certain loans from a particular lender, she wasn't able to find another loan company that would do business with her.

Fortunately for Ms. Corinaldi, Syracuse started a fund-raising initiative this year called Syracuse Responds, whose goal is to help families through the financial crisis and "ensure that no student left Syracuse due to extenuating financial situations," says Youlonda Copeland-Morgan, director of scholarships and student aid. The appeal has raised $850,000 so far, helping more than 350 students, including Ms. Corinaldi.

Chapman University, for its part, says it received a $3 million anonymous gift last summer, earmarked for financial aid, which has helped at least 1,000 families so far this year. "Whoever it was, I thank that person every day," says Gregory Ball, the school's financial-aid director.

Write to Anne Marie Chaker at anne-marie.chaker@wsj.com

Downturn Threatens the Faculty's Role in Running Colleges

Chronicle of Higher Education

By ROBIN WILSON

Professors are losing their grip. Tough economic times are leading administrators to propose swift changes that short-circuit faculty governance, long a prized principle that gives professors wide-ranging authority over educational matters.

The results, faculty members say, are hastily conceived plans that reorganize academic programs, decrease professors' roles in shaping the curriculum, and jeopardize tenure applications — all done with little advice from the faculty, in the name of saving money.

The chancellor of the Tennessee Board of Regents, for instance, has proposed a plan to stress online education, hire more adjunct teachers, and put full-time faculty members in an "oversight" role. The University of South Florida's Tampa campus merged programs and shifted some faculty members to different schools in just six months. And Ohio University has a new academic plan that was, many professors charge, an end run around some of their own recommendations.

"A decline in resources has made administrators more interested in becoming independent movers and shakers," says Cary Nelson, president of the American Association of University Professors. He wants his organization to be more aggressive in investigating cases where administrators and boards leave professors out of the loop. "It is faculty members who have the expertise about disciplines," he says, "and if they don't have input, a university's academic integrity can be threatened."

Administrators insist they do consult widely with professors, although they acknowledge they can't always spend months deliberating over a plan. Besides, they say, it is administrators who are held responsible by boards for whether a university thrives. And faculty senates — which have a reputation for being filled with disaffected professors — can be hard to work with.

Ralph C. Wilcox, provost of the University of South Florida, says he had to work fast. When he took the job in January 2008 he was immediately hit with a directive to cut spending. "In Florida, we have a state law that spells out quite clearly that it is the right and the responsibility of the public employer to determine unilaterally the organization and function of the university," he says.

Historic Role

The concept of faculty governance has been in place since the country's first universities were established, and the AAUP's writings on the concept date to 1920. Faculty governance gives professors not just a say but the predominant voice in such academic matters as hiring new colleagues, establishing the curriculum, and figuring out how much time faculty members should spend on research. It also gives professors a seat at the table when it comes to appointing administrators and preparing a university's budget.

The idea that workers, in this case faculty members, should have a major and sometimes the dominant role in an organization's management is unusual. The concept is "founded upon the assumption that faculty are not merely employees, but professionals with special training and knowledge," says a 2007 statement written by Gregory F. Scholtz, who directs the AAUP's department of academic freedom, tenure, and governance. Both the American Council on Education and the Association of Governing Boards of Universities and Colleges have agreed.

The concept, however, hasn't always translated into reality on individual campuses. In one of the higher-profile clashes lately, the provost of Rensselaer Polytechnic Institute announced in August 2007 that administrators would no longer recognize the Faculty Senate there because it had amended its rules to allow voting by those who were not on the tenure track. Professors are still working to try to reconstitute the senate and regain recognition.

Gary Rhoades, the new executive director of the professors' association, says friction between faculty members and administrators is likely to grow. "In so many cases, faculty feel administrators are making decisions without consulting them," he says. "That is going to become the case now more than ever, with administrators saying, 'We don't have time to consult. Because of the economic challenges we're facing, we have to act quickly.'"

That is precisely what some believe Charles W. Manning, chancellor of the Tennessee Board of Regents, was thinking when in late November he issued a "new business model" for the system's six universities and 13 community colleges. The plan, which faculty members had never seen before Mr. Manning unveiled it, asks the Tennessee board to consider sweeping changes. The reason? The system is facing close to a 20-percent reduction in state funds over two years.

Mr. Manning's plan (see chart above) would offer cut-rate tuition to undergraduates who agreed to take courses online "with no direct support from a faculty member." The proposal calls for full-time professors to assume an "oversight" role as the university employs more adjuncts and asks advanced students to start teaching beginning students. It says that, in general, the university system should consider "abandoning some of the ingrained structures that restrict our approach."

Mr. Manning asked professors and administrators to submit "a summary of your thoughts" about the proposal, which he said he hoped the board would act on by this spring.

When faculty members saw the plan they balked. "I agree that this economic situation is difficult, and we may need to be thinking outside the box," says Alfred Lutz, president of the Faculty Senate at Middle Tennessee State University. "But our thinking should not be beyond the pale." Mr. Lutz says the chancellor's proposal strikes at the heart of the way higher education has traditionally operated, and its language about "abandoning ingrained structures" poses a threat to academic freedom and tenure. "I don't think I've ever seen anything quite like this," he adds.

In an interview, Mr. Manning acknowledged that the faculty's reaction to his plan had been "extreme." He now says the plan "was never intended to be brought to the board for action." But the board has already begun discussing it, and the chancellor said he wanted faculty members and others to comment by March 1.

"This is fantastically quick turnaround for a system as large as ours," says Nathan Garner, an associate professor of computers and information systems at Cleveland State Community College, in Tennessee.

Timing was a chief complaint last year when administrators at the University of South Florida pushed through a sweeping reorganization in just six months. Professors say the university's new provost never formally submitted his plan to its Faculty Senate. Instead, they say, he relied on deans and department chairs to get the word out to professors. As a result, faculty members say some of them were extensively involved and some barely knew what was happening before the changes took place last summer.

"The process rubbed a lot of nerves raw," says Sherman Dorn, president of the USF chapter of the United Faculty of Florida, a union affiliated with the American Federation of Teachers. "It left a lot of faculty very skeptical and distrusting." The provost's plan was fueled by the need to cut $52-million and included reorganizing the College of Arts and Sciences, creating a new college, and downsizing the support staff for programs including the Institute on Black Life, Africana studies, the Institute for the Study of Latin America and the Caribbean, and women's studies.

Mr. Dorn says fallout from the swift reorganization has left some junior professors hanging. They found their tenure committees, which had been constituted before the reorganization took place, composed of senior professors who were no longer even in the same college. In other cases, junior professors moved to different colleges with new deans. "Which is the dean who makes the tenure decision?" asks Mr. Dorn, "the new dean or the old one?"

It has taken awhile for department chairs to help junior professors figure out the details. Some of that uncertainty might have been avoided, says Mr. Dorn, if the university had moved more slowly and involved more professors up front.

A half-dozen faculty members filed a grievance with administrators about the reorganization process at South Florida, but the Faculty Senate is now working with administrators on a "memorandum of understanding" that sets out a procedure for how the faculty should be involved in developing any future reorganization plans.

Mr. Wilcox, the provost, says he and his deans "had extensive, broad, and deep consultation with the faculty," including at public hearings on the campus. Some professors, he says, have been quite pleased with the reorganization — including those in science and mathematics who helped shape a new School of Science. But Mr. Wilcox concedes that the memorandum the Faculty Senate is establishing with new procedures is a good idea. "It has been a good lesson learned that we had no such guidelines," he says.

'They Want More Power'

At Ohio University, it is not just the president's new academic plan that has set off faculty members. Professors and administrators there have been at odds for nearly a decade as the university has seen a steady decline in state funds.

Professors charge that the number of administrators has ballooned in that time, and that university leaders have plowed money into athletics facilities, coaches' salaries, and perks for administrators. Meanwhile, they say, faculty salaries have barely budged, and professors have been asked to pay more for health care.

"This has been a long, drawn-out process that has kept pushing the faculty more and more to say: The system is broken, we can't trust the administration, and they won't listen to us," says Joseph Bernt, a Faculty Senate representative and a professor of journalism at Ohio University. Professors have grown so disenchanted that they revived a campus chapter of the AAUP and are now trying to start a union.

Roderick J. McDavis, the university's president, started the process of adopting a new academic plan — called Vision Ohio — in 2004. Faculty members believe the many ad hoc committees he appointed to review the plan side-stepped the Faculty Senate. The ad hoc committees included faculty members but, in the end, it was the administration's own vision that prevailed, says Kevin Uhalde, an associate professor of history and president of the campus's AAUP chapter.

"We spent tons of time talking, but the same plan that the administration walked in with is what they went out with," says Mr. Uhalde, who served on some of the ad hoc panels. "Everything else sort of disappeared."

Kathy A. Krendl, provost of Ohio University, suspects that the Faculty Senate is upset because, while its members were involved in Vision Ohio, the senate "wasn't the only voice" and "it wasn't in charge." Now, she says, the senate has passed a series of resolutions on faculty compensation, health benefits, and faculty governance that she has refused to sign because, she says, they had little to do with academic issues and more to do with "advocacy." She believes professors who are part of the senate have passed the series of resolutions because "they want more power back."

Professors At Fault?

Some faculty members agree. "While the rest of the campus was engaged in rethinking and reshaping the university mission ... our Faculty Senate was focused on protecting its turf," says Don M. Flournoy, a former dean at Ohio University and a professor of media arts and studies there. "In my opinion, shared governance on this campus has become nothing more than a euphemism for faculty control."

Merrill P. Schwartz is doing a study of faculty governance for the association of governing boards, which represents campus trustees and chief executives. It will look at examples of "best practices" in how board members, professors, and administrators work together.

Ms. Schwartz says professors may, in part, be responsible for the breakdown in faculty governance on some campuses. In general, she says, professors have become more focused on their research and less involved in helping to run their universities. That's decreased the faculty's voice in decision making and contributed to a decline in communication between professors and administrators.

And less talk can be dangerous in times like these. "If there isn't a good system on a campus for consultation and communication, this climate is going to make that clear," says Ms. Schwartz, who directs research at the association of governing boards. "Good communication builds trust and good will, which are essential when difficult decisions need to be made in a short amount of time."