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Two Minute Take-away: Academic Tenure During Financial Distress

January 28, 2021 by in "Two Minute Takeaway"

Covid 19 has devastated finances at U.S. colleges and universities.  It’s an opportune time, therefore, for a primer on the important concept of “financial exigency” as it relates to academic tenure during times of financial distress.   

Tenured faculty in the U.S. enjoy great, but not unlimited, job security.  Institutions typically may terminate tenured faculty for (1) “cause” consisting of some material dereliction of duty or (2) a “financial exigency” at the college or university.  But what is financial exigency?

“Financial Exigency” is a Standard Term in Tenure Agreements

The terms of tenure are similar at many colleges and universities because of a landmark agreement between the American Association of University Professors (AAUP) and the Association of American Colleges and Universities (AACU).  In 1940 the AAUP and AACU jointly issued a “Statement of Principles on Academic Freedom and Tenure” which prohibited institutions from terminating tenured faculty except in cases of  “demonstrably bona fide financial exigency.”  The 1940’s Principles defined financial exigency as “a severe financial crisis that fundamentally compromises the academic integrity of the institution as a whole and that cannot be alleviated by less drastic means.”

Today, the 1940 Principles are set forth in Section 4 of the AAUP’s “Recommended Institutional Regulations on Academic Freedom and Tenure” which many institutions incorporate into their faculty handbooks and employment agreements.  Faculty handbooks are available on most institutions’ websites and it is therefore easy to review their tenure policies.

Legal Guidance on “Financial Exigency”

Courts have developed some guidelines for the meaning of financial exigency.  While the cases are not consistent, courts often hold that a financial exigency exists if an institution can show declining revenues, increased costs, large and increasing deficits, and cuts to other programs.  No doubt such institutions faced serious economic challenges, but their situations typically were not as dire as the AAUP contends is necessary to establish financial exigency under the 1940 Principles.

In a recent Nevada case, for example, the Court readily accepted that the University was experiencing a financial exigency: “Given the mass faculty layoffs and cuts to budgets and departments that were occurring at the time of Plaintiffs’ terminations, it defies credulity that Plaintiffs could have been retained without resulting in the termination of other faculty members.” By contrast, a decision of the Idaho Supreme Court flunked the University of Idaho’s claim that its deteriorated financial condition constituted financial exigency.  Given the complexity of the issue, it is ripe for litigation in the event of layoffs.

Institutions Seek to Avoid Stigma of Financial Exigency

Universities, however, are reluctant to declare a financial exigency.  Regardless of where courts may draw the line, academia has come to view financial exigency as a nuclear option.  The term connotes an institution facing imminent failure.  Few prospective students, donors, or new hires want to commit to an institution in such dire straits.  Further, tenure is sacrosanct to senior faculty and institutions perceived to be toying with a declaration of financial exigency risk war with some of their most important stakeholders.

The University of Kansas Tries a New Strategy

The stigma attached to financial exigency explains a recent controversial move by the University of Kansas Board of Regents.  On January 19th, UK’s Regents voted to permit UK’s six campuses to terminate tenured professors without declaring a financial exigency.  UK apparently wants latitude to address its strained finances without the self-inflicted wound of a declaration of financial exigency.  UK’s Governance Policies, after all, define “financial exigency” in dire terms: “The University of Kansas should not take lightly the possibility of being in a condition of Financial Exigency.  It should view such a condition as a grave danger to its survival.”  The last thing UK wants is for students, donors and faculty to start defecting out of concern for the University’s survival.

UK therefore made a controversial, but rational, trade-off.  It would rather deal with the litigation that will result if it terminates tenured faculty without declaring a financial exigency than deal with the significant reputational harm that would result from declaring a financial exigency suggesting the University is on the brink of failure.  It will be interesting to see if other institutions follow UK’s lead.