NAICU Washington Update

Dept. Ed. Rejects Efforts to Reform Financial Responsibility Standards

July 02, 2013

The efforts of private colleges and NAICU to reform the Department of Education’s Financial Responsibility Standards (FRS) process have been rejected. In a recent letter to NAICU’s president, David Warren, the Department dismissed two years of extensive work by the NAICU Financial Responsibility Task Force that outlined serious flaws in the Department’s current procedures for assessing post-secondary institutions’ financial stability.

Section 498(c) of the Higher Education Act (HEA) requires the Secretary of Education to use the FRS to determine the financial responsibility of post-secondary institutions. That provision was enacted after the unannounced closures of several for-profit institutions in the late 1980s left students in the lurch. The Department developed the regulations in 1996-97 in collaboration with the higher education community in order to guard against precipitous closures of post-secondary institutions. However, the Department has not kept up with subsequent accounting changes nor practices, and so it appears the financial responsibility ratios test used by the Department no longer meets its intended purpose.

The recent economic downturn has exposed significant shortcomings in administration of the ratios test, which affects a college’s eligibility for participation in federal financial aid programs. In 2010 alone, more than 100 nonprofit colleges unexpectedly “failed” the test by scoring below 1.5, leaving them subject to Department oversight, and forced to obtain costly letters of credit. For many institutions, it also triggered additional oversight and demands for letters of credit by state regulators. Institutions that were not at risk of precipitous closure were drained of precious resources which could have been better spent on student financial aid and other institutional priorities.

In response, NAICU, under the leadership of Guilford College President Kent Chabotar -- and in collaboration with NACUBO, CIC, independent accounting experts, and member volunteers -- established a task force in 2010 to examine key issues and develop recommendations. Its report was issued last November.

NAICU’s reform efforts, as well as the impact of Department ratios test miscalculations on small, private colleges, were examined in an article titled Education Dept. Faces Renewed Criticism Over Colleges' Financial-Health Scores, in the July 1 edition of The Chronicle of Higher Education. The article, by reporter Goldie Blumenstyk, profiles the experience of Bethel University of St. Paul, Minnesota, which received a failing score for the 2012 fiscal year. The Department’s remedy is for Bethel to secure a costly letter of credit by July 17, or be barred from participating in federal financial aid programs. Alternatively, Bethel can buy a lesser value letter of credit, but also admit that it failed the financial responsibility test. Bethel maintains it is financially sound.

According to The Chronicle, Bethel enrolls 6,500 students annually, with an annual operating budget of about $100 million and an endowment of about $29 million. In the 2008 and 2009 fiscal years, its financial responsibility ratios test score was 2.0. The institution has not been told its score for 2011. For 2012, the Department maintains that Bethel’s score is 0.4, while the university calculates it at 2.4.

Bethel's Senior Vice President for Finance and Administration, Kathleen J. Nelson, told The Chronicle that the university’s efforts to contest the Department's findings have been met by a "garbledly-gook response" that contradicts the rules on how scores should be calculated. At issue is how to account for a pension liability, one of the matters examined in NAICU’s task force report.

Bethel has turned to Congress for help. Rep. Betty McCollum (D-Minn.) has sent a letter to Secretary of Education Arne Duncan asking for a review and a delay in the action against Bethel.

In a July 1 note to NAICU members, Warren said that, by mid-July, they should receive the association’s preliminary recommendations to Congress for reauthorization of the Higher Education Act. Since NAICU’s efforts to reform the FRS apparently were rejected by the Department, its HEA recommendations will include a request for congressional action to reform the FRS. NAICU will seek establishment of an appeals process for institutions and a standing advisory committee of "objective nonprofit accounting experts to provide technical guidance to the Education Department.”

Warren has invited members to support NAICU’s recommendations by submitting their own similar requests to the House Committee on Education and the Workforce by the August 2 deadline. He also encouraged members to discuss the FRS issue during meetings with their congressional representatives, who may be in their home districts during the August congressional recess.

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