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September 24, 2013 by NewsMaker

At Purdue, Russell reconnected with Christopher Bosma, a friend from high school. Bosma’s family was considerably wealthier, but his entire tuition was free — as will be medical-school costs. An outstanding high-school student, he received a prestigious merit scholarship that covered both. Russell told me that he believed the two friends are about “equivalent in intelligence” but acknowledged that Bosma studied much harder in high school. He was unusually driven, he said, but it probably didn’t hurt that Bosma had the luxury of not having to help support his family.

Over the years, many state-university systems — and even states themselves — have shifted more of their financial aid away from students who need it toward those whose résumés merit it. The share of state aid that’s not based on need has nearly tripled in the last two decades, to 29 percent per full-time student in 2010-11. The stated rationale, of course, is that merit scholarships motivate high-school achievement and keep talented students in state. The consequence, however, is that more aid is helping kids who need it less. Merit metrics like SAT scores tend to closely correlate with family income; about 1 in 5 students from households with income over $250,000 receives merit aid from his or her school. For families making less than $30,000, it’s 1 in 10.

Schools don’t seem to mind. After years of state-funding cuts, many recognize that wealthy students can bring in more money even after getting a discount. Raising the tuition and then offering a 25 percent scholarship to four wealthier kids who might otherwise have gone to private school generates more revenue than giving a free ride to one who truly needs it. Incidentally, enticing these students also helps boost a school’s rankings. “The U.S. News rankings are based largely on the student inputs,” said Donald Heller, dean of Michigan State University’s College of Education. “The public universities in general, and the land grants in particular, are moving away from their historical mission to serve a broad swath of families across the state.”

This is obviously troubling for the students who need help, but it is also bad for the state economies that public colleges are supported by and are supposed to help advance. While merit aid sounds like an effective way to combat brain drain, there is no conclusive evidence that it works. One recent study by economists at Cornell and the University of Chicago found that “nearly all” of the spending on state merit-based scholarships had little effect on keeping students in state after they graduated. Merit aid may not even be a good deal for those who earn it. A recent study by researchers at Harvard Kennedy School looked at a scholarship program in Massachusetts in which high-scoring students get tuition waivers at in-state public colleges. It found that taking the scholarship actually reduced a student’s likelihood of graduating because they ended up at a school with a completion rate lower than one of the other schools they could have gone to. Peer effects matter, it turns out. The long-term costs of going to school among those who are more likely to drop out could outweigh the upfront benefits of a cheap education.

Financial aid, however, has a hugely positive impact on whether low-income students graduate. Among needier kids, the six-year graduation rate is 45 percent when grants cover under a quarter of college costs versus 68 percent when they cover more than three-quarters, according to Mark Kantrowitz, the publisher at Edvisors.com, a network of college-planning Web sites. If you look at comparable stats for high-income students, the amount of aid makes almost no difference. Their graduation rates are around 78 percent either way.

The share of Americans with college degrees has risen significantly in the last few decades, but almost all of the growth has been among children of wealthier families. The share of 24-year-olds from families in the top-income quartile who hold college degrees rose from about 40 percent in 1970 to 70 percent in 2011. The share from the bottom quartile, however, remained pretty flat, edging up to 10 percent from 6 percent, according to Tom Mortenson, a higher-education policy analyst with Postsecondary Education Opportunity. These graduation rates also matter. Not only is the gap between the earnings (and employability) of college grads versus high-school grads widening, but an increasing amount of research shows that having a higher density of college-educated workers boosts wages of even those around them without college degrees. Economists refer to the ripple effect as the “positive externalities” of higher education.

By devoting more aid dollars to the likely college students rather than to more marginal ones, states are limiting the overall pool of residents who will be able to obtain college-level skills. Perhaps just as important, they are also limiting the economic prospects of their entire populations. The institutions that try to maintain their commitment to needy students like Russell, even in the face of state-budget cuts, recognize that extending access to college isn’t just about altruism. It’s about investing in your future tax base. And that’s thinking outside the box.

Catherine Rampell is an economics reporter at The Times. Adam Davidson is off this week.

Article source: http://www.nytimes.com/2013/09/29/magazine/freebies-for-the-rich.html?partner=rss&emc=rss

DealBook: Some Analysts Question Numbers in H.P.’s Write-Down

The “kitchen sink” charge, in which all kinds of write-downs and costs are rolled into one gargantuan number, is something of a ritual in corporate America. The $8.8 billion charge that Hewlett-Packard announced on Tuesday, however, shows why such moves should be scrutinized carefully.

H.P. took the charge in its fourth quarter to reflect the reduced value of Autonomy, the British software firm that it bought last year for about $10 billion. The computing giant said it had discovered “serious accounting improprieties” at Autonomy, including what it said were ruses that inflated revenue and profitability metrics.

H.P. contends that such accounting improprieties were behind more than $5 billion of the $8.8 billion charge. For some analysts, that didn’t add up.

“Out of the $8.8 billion, I’d be very surprised if more than a couple of billion was due to accounting improprieties,” said Aswath Damodaran, a professor of finance at New York University’s Stern School of Business.

In other words, the skeptics say they think H.P. may be overstating the financial effects of the supposed accounting chicanery. They say that H.P.’s management may have wanted to write off as much of Autonomy as possible, and that the accounting allegations allowed it to increase the charge.

This move, of course, hurt H.P’s fourth-quarter earnings. But a big charge has the advantage of cleaning the slate for the next fiscal year for the company’s chief executive, Meg Whitman. With Autonomy now only a small part of H.P.’s balance sheet, there is a much smaller chance that the troubled division will lead to more embarrassing write-downs. The Autonomy acquisition was initiated by H.P.’s previous chief executive, Léo Apotheker.

Evaluating the validity of the charge requires understanding exactly what H.P. was writing down.

When a company accounts for an acquisition, it assesses the value of the target, subtracting its liabilities from its assets. It then compares this so-called fair value with the price it is paying. If it is paying more than the fair value, the difference is recorded as good will on the buyer’s balance sheet. When H.P. acquired Autonomy, it got roughly $4 billion of intangible assets (Autonomy’s expertise, intellectual property and brand recognition) and recorded roughly $6 billion of good will. In the charge announced Tuesday, H.P. slashed the value of both, effectively saying Autonomy was worth 80 percent less than it originally thought.

In some ways, an 80 percent reduction might seem deserved, if Autonomy was in fact cooking its books. But despite their accusations, H.P. executives in a conference call did not seem to present a dire picture of Autonomy. The ruses, if that’s what they were, helped revenue and profits, but probably not enough to account for $5 billion of the charge, said Anup Srivastava, an assistant professor at the Kellogg School of Management at Northwestern University. “I can’t justify it,” he said.

Autonomy’s revenue benefited from one alleged ruse, but only by 10 to 15 percent, according to Hewlett. Catherine A. Lesjak, the H.P. chief financial officer, said Tuesday that without accounting tricks, Autonomy would have appeared less profitable. But it was still making money, according to her figures.

Without the tricks, Ms. Lesjak said, Autonomy probably had operating margins as high as 30 percent, compared with as much as 45 percent with them. And on Tuesday, Ms. Whitman said Autonomy could still be something of a “growth engine” for H.P.

Still, some people think the charge may be reasonable. In assessing the size of an impairment charge, companies focus on projections of cash flows from the affected divisions. If H.P. can show that Autonomy’s cash generation is far below its expectations, and that cooking the books largely hid that, the charge may be sound, said Cynthia Jeffrey, associate professor of accounting at Iowa State University.

“If there’s fraud involved and that wasn’t found during due diligence, the whole thing could be valueless,” she said.

H.P. could argue that the high valuation it placed on Autonomy’s cash flows looks all the more untenable in light of the legerdemain allegations, and that that’s why it had to take the charge.

When asked to comment on the charge, an H.P. spokesman, Michael Kuczkowski, e-mailed a list of what he said were the improper accounting maneuvers at Autonomy.

“Because our investigation into the accounting improprieties and misrepresentations at Autonomy remains ongoing, and given our referral of this matter to regulatory authorities in the U.S. and the U.K., it would not be appropriate for us to provide a more detailed description at this time,” he said.

Article source: http://dealbook.nytimes.com/2012/11/21/does-hewletts-big-charge-add-up/?partner=rss&emc=rss

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DealBook: Some Analysts Question Numbers in H.P.’s Write-Down

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