Problems Beyond the $306M Dorm

Bethune-Cookman University has found itself in an increasingly harsh spotlight in recent months.

The private historically black university in Daytona Beach, Fla., was the center of national attention in May when graduating students booed Education Secretary Betsy DeVos when she spoke at commencement. Some students turned their backs on the education secretary, and others walked out of the ceremony. Many supporters of black colleges were surprised Bethune-Cookman would give a platform to DeVos after she had drawn anger by suggesting their institutions traced their history to student choice, when in reality they were founded in an era of segregation when black students had few, if any, educational options. Her appearance also drew objections because it came while President Trump was proposing large cuts to programs that help black students and historically black institutions.

The university’s response to the commencement booing was also controversial -- President Edison O. Jackson warned students their diplomas would be mailed to them if they continued to boo. The university later issued a press release saying only 20 students protested during the secretary’s remarks, despite video from the event appearing to show many more students taking part.

Now, the heated emotions of commencement have given way to a much deeper set of cold financial facts. Bethune-Cookman ran up millions of dollars in losses in recent years and has borrowed heavily from its endowment. It is facing the prospect of paying for a surprisingly expensive $306 million dormitory over 40 years after the facility was approved and built under unusual circumstances. The financial situation has contributed to the university’s credit being downgraded to one step above junk status.

Financial issues have been joined by leadership turnover. Jackson last week said he will retire from the presidency at the end of August, a year earlier than his contract was to expire.

The situation has magnified the voices of advocates who have questioned the university’s governance and finances. It has stoked concern among those who closely watch historically black colleges and universities. And it comes at an inopportune time for HBCU groups that have been pushing against strict federal regulation.

Those dynamics aren't lost on those who know Bethune-Cookman best. Many see the university’s struggles as a result of both its difficult internal dynamics and of national trends putting pressure on small private universities and institutions that enroll large numbers of minority students.

“A lot of folks are getting emotional and taking this personally,” said Lee Rhyant, a Bethune-Cookman alumnus and former trustee who runs a leadership consulting firm. “I think there is a bigger picture about the vulnerability of these schools now, and higher education as a whole.”

Bethune-Cookman did not make leaders available for interview for this article. Inside Higher Ed provided a list of questions to the university. A spokeswoman answered some of those questions, but not all.

She said the university has made strides in shoring up its budget and that Bethune-Cookman anticipates a surplus going forward. The university is also exploring ways to refinance the expensive dormitory deal.

But it is clear the university still has much to do in light of the devastating details about its finances and governance that have become public in recent weeks.

Steep Losses

Many of Bethune-Cookman’s challenges were revealed in a series of articles by The Daytona Beach News-Journal. In June, the newspaper reported on university tax returns showing a $17.8 million operating loss for the fiscal year running from July 2015 to June 2016. That was up drastically from losses of $1.5 million and $254,000 in each of the previous two years.

The university borrowed $7 million from its endowment in the 2015 fiscal year, or about 13 percent of its total value. Jackson, the university’s president, saw his total compensation rise by $40,000, to $410,000, in the 2016 fiscal year despite his base pay being lowered. Other executives’ pay also rose.

Two weeks later, the newspaper published another report breaking down an expensive long-term deal the university used to build a new 1,200-bed dormitory. Construction costs for the building, which opened in 2016, were originally stated at $72.1 million, but they grew to $85 million for unexplained reasons.

Some have questioned those costs, as they are much higher than costs for a dormitory the university built in 2010. More questions swirl about the way the university will pay for the new dorm, though. Bethune-Cookman will pay escalating sums over 40 years under a lease-and-sublease-back agreement, for a total cost of more than $306 million.

Days after the report on the dormitory deal, Jackson (at left) said he will be retiring as president at the end of August. The university’s board chair, Joe Petrock told the News-Journal Jackson’s move was related to “an opportunity for him that presents itself now.” In a statement from the university, Jackson said it is time for him to give “attention and care to my family.”

The university’s dormitory deal has been of particular concern to former trustees and alumni who are worried about financial and governance issues. Not only do many see it as too expensive over time, but it was conducted under extremely unusual circumstances.

A company formed to develop the dormitory became embroiled in in a lawsuit between partners. Documents filed in court claimed the company anticipated a $45 million profit on the deal. They also say that, after construction on the dormitory started, the developer lost its funding, necessitating a substitute lender to be found and contracts between developer and university to be rewritten.

The News-Journal detailed one particularly strange situation in June 2015, when a forensic document examiner determined Jackson had likely not signed a contract with the developer, even though his signature appeared to be on the agreement. The university moved forward with the dormitory anyway.

“This is the type of deal that boards and presidents cannot allow to happen,” said Rhyant, the former trustee and leadership consulting firm president, who has also held executive positions at Lockheed Martin Aeronautics and Rolls-Royce.

“It’s not personal,” Rhyant said. “It’s not questioning people’s ethics. You have to do the diligence and the vetting to make sure you never put yourself in this type of financial situation.”

Rhyant is a Bethune-Cookman donor who has a dormitory named after him -- a different dormitory than the one at the center of the current controversy. He believes the university’s Board of Trustees needs to be reconstituted in order to secure the public’s trust. The board has more than 30 members.

Governance Issues

Rhyant is far from alone in calling for changes. Bethune-Cookman is currently the target of a lawsuit from its own national alumni association after the university’s Board of Trustees refused to seat a trustee who had been elected by the alumni association.

A longstanding agreement between the university and the National Alumni Association of Bethune-Cookman University has the association’s president and two elected alumni serving on the university’s Board of Trustees, the lawsuit says. The agreement is written into the university and the association’s bylaws.

The elected trustee in question, Robert Delancy, is a retired IRS special agent who has questioned Bethune-Cookman’s debt levels and dormitory deal in the past. He was elected in October 2016 to serve as an alumni trustee. But the university’s Board of Trustees rejected him without giving a reason, the lawsuit says. It asks a judge to stop trustees from preventing Delancy from being seated.

Delancy first filed the lawsuit, but a judge determined he did not have standing to bring suit. The alumni association took over the suit this month.

“What I think is important is the lack of transparency between the Board of Trustees and the National Alumni Association, the lack of transparency between the administration and the alumni association,” Delancy said in an interview. “It appeared they felt, because they were a private school, they can operate with this cloak of secrecy and didn’t have to disclose anything.”

Delancy called for the Board of Trustees to be reconfigured. He also called for a forensic audit of Bethune-Cookman’s finances.

Bethune-Cookman was founded in 1904 by Mary McLeod Bethune, an educator, activist and later adviser to President Franklin Roosevelt. She opened the Daytona Literary and Industrial Training School for Negro Girls with $1.50, providing a quality education to her students in an era when those with money and power in the state ignored black youth. The school grew, merging with the Cookman Institute of Jacksonville in 1923, becoming coed and affiliating with the United Methodist Church. The Florida Department of Education approved a four-year baccalaureate program in 1941, and it became a university in 2007.

The college is like a relative to Delancy. At least 10 members of his family have attended. He worries about its future. Its accreditation is due for renewal in 2020. Its finances need to be put in order, Delancy said.

“The question should be, ‘Where do we go from here?’” he said. “How can we save our school? What major donor wants to give Bethune-Cookman money when they look around and see the same Board of Trustees there, when they see the same administration that’s there? Isn’t that like throwing good money after the bad?”

Delancy is not the only one to bring suit against Bethune-Cookman over membership on its Board of Trustees. Arthur Ray Brinson, a former university trustee and the immediate past president of the Bethune-Cookman National Alumni Association, filed suit in March alleging he was removed from the university board without cause and in violation of its own bylaws. Brinson had questioned the way the board dealt with university finances but was not told why he was forced off the board.

Observers say Bethune-Cookman’s Board of Trustees has in the past often been split between alumni members and those who did not graduate from the institution. Regardless of whether that dynamic is playing out today, it’s clear the university has become mired in deep governance issues.

“From my vantage point, I think there are some governance and leadership issues with regard to the financial situation of the campus,” said Marybeth Gasman, professor of education at the University of Pennsylvania and the director of the Penn Center for Minority Serving Institutions. “It appears as though the leadership and board have made some poor choices in this area. I typically recommend that small HBCUs that are struggling focus on what they are really good at and creating an environment that will guarantee retention of students.”

Federal Regulations and Affiliating With For-Profits

Delancy and others who have questioned Bethune-Cookman worry about the man tapped to be Bethune-Cookman’s acting president until it names an interim, Hubert Grimes. Grimes is a retired judge who was the university’s lawyer and director of Bethune Cookman’s Center for Law and Social Justice. He has also been one of the faces publicly attached to a controversial affiliation between Bethune-Cookman and Arizona Summit Law School, which is owned by the struggling for-profit InfiLaw System.

Grimes appeared in a video discussing the affiliation shortly after it was announced earlier this year. Many of Bethune-Cookman’s students want to go to law school but do not have access, he said. InfiLaw started talks with Bethune-Cookman, and the two sides decided Arizona Summit was a better fit than InfiLaw’s school in Florida, Florida Coastal School of Law.

“As we build up the internal function of our legal studies program and school of legal studies and social justice, we know that we’ll be able to enhance the students’ ability to increase their law school LSAT scores,” he said. “We’ll be able to help them with making the bridge between the undergraduate school and law school.”

InfiLaw has been criticized for low bar-passage rates, with some arguing access to law school means little if students cannot enter the legal profession by passing the bar. In fact, the argument goes, attending law school can be harmful if a student runs up high levels of debt but cannot pass the bar and secure a job with a large enough salary to pay off their loans.

Arizona Summit’s bar-passage rate for first-time test takers was 24.6 percent in July 2016 and 29.5 percent in February of this year. That’s far behind the first-time pass rates for Arizona’s public universities, which were in the mid-70 percent range. The lowest bar-passage rate in Florida for any single law school’s first-time test takers was 45.5 percent in July 2016. The lowest rate was 25 percent in February -- a rate posted by Arizona Summit’s corporate sister, the Florida Coastal School of Law. A law school at an HBCU, the Florida A&M University College of Law, had bar-passage rates of 52.9 percent in July 2016 and 46.2 percent in February.

Under the affiliation, Arizona Summit and Bethune-Cookman planned to set up a pre-law institute to prepare undergraduates to succeed in law school. They also planned to develop a program to ready students for the LSAT and to create a program under which students can earn both undergraduate and law degrees in six years. They pledged to invest $12.5 million toward full-tuition scholarships and living assistance for students in order to boost the number of students from HBCUs completing law school.

Bethune-Cookman’s financial challenges and affiliation with a for-profit chain became public at an awkward time -- a time when some HBCU advocates are pushing back against tight federal financial regulations. The presidents of UNCF and the National Association for Equal Opportunity in Higher Education recently urged DeVos to rewrite controversial borrower-defense regulations, which outline circumstances in which former students can have their student loans forgiven if a college or university has engaged in misconduct. In part, they criticized financial responsibility and disclosure provisions of the regulations, which attempt to prevent institutions from engaging in financially risky behavior that could cause borrower-defense claims by students in the future.

“The final financial responsibility and disclosure provisions in the regulation pertaining to private colleges and universities would impose onerous requirements on private HBCUs to pledge collateral or secure new letters of credit based on certain triggering events, some of which are simply inappropriate in that they do not relate to the financial condition of an institution,” they wrote.

“Worse, the increasing financial responsibility requirements and related mandatory disclosures to prospective and current students could cause a cascading negative financial impact on some institutions by prejudicing students against enrolling (or continuing enrollment) in otherwise successful institutions,” they continued. “Put bluntly, these requirements could lead to the irreparable financial and reputational harm to HBCUs that are, in fact, providing quality educational opportunities to students.”

The borrower-defense rules were created with an eye toward curbing abuses of for-profit colleges, but many of their provisions also apply to nonprofit institutions. Other institutions stood against them, however, and HBCUs were some of the most vocal opponents.

DeVos in June said she was delaying implementation of the borrower-defense rule and would start the process of rewriting it.

Bethune-Cookman’s current situation could be seen as an argument for additional financial responsibility regulations on colleges and universities receiving federal financial aid funds. Yet experts said it was unclear whether recent events at the university would have spurred department action under the now-delayed rule’s financial responsibility provisions.

The rule included discretionary triggers that would allow the Education Department to require a financial stress test on an institution if it exhibited negative financial trends like operating losses or negative cash flows. Institutions failing such a test could be required to put up a form of financial protection like a letter of credit.

Recent events at Bethune-Cookman could have drawn regulatory interest under that portion of the rule. But the university might not have been required to undergo a financial stress test -- and it might still have passed a test.

“Without sitting down with their financial statements, it would be hard to figure out exactly what this would do,” said Robert Kelchen, an assistant professor of higher education at Seton Hall University.

Cheryl Smith, senior vice president for public policy and government affairs at UNCF, of which Bethune-Cookman is a member, said in a statement that the organization’s stance is unchanged.

“Bethune-Cookman University’s financial issues don’t change UNCF’s position on the borrower defense rule,” she said. “If anything, the university’s situation reinforces our point of view that the borrower-defense financial responsibility standards may not be good markers of an institution’s financial stability and need a wholesale re-examination.”

‘We Have Got to Restore our Credibility’

Grimes addressed Bethune-Cookman’s troubles in an interview with The News-Journal editorial board this week. He emphasized transparency and rebuilding confidence in the university. He has also started calling for a forensic audit.

Bethune-Cookman had trouble providing documents to auditors and its credit-ratings agency. The lack of control led to high spending. Administrators were surprised to learn about a high number of faculty and staff members drawing salaries over $100,000 when the News-Journal reported on the issue.

“There were no budgets,” Grimes told the newspaper.

The university drew millions from its reserves in order to make repairs after Hurricane Matthew hit last October, he said. The money also went to pay for scholarships, because new requirements for federal Parent Plus loans made it more difficult for parents to qualify for the loans, he said. Bethune-Cookman was faced with the choice between spending or having students drop out, he told the News-Journal.

Bethune-Cookman has a new chief financial officer who started in December. It has put in place governance changes to prevent the CFO from being fired without board approval.

The university now projects a surplus by the end of the fiscal year, according to a spokeswoman. Leaders are also exploring refinancing options for the expensive dormitory deal.

There is reason to believe the university’s finances have stabilized, according to Fitch Ratings. The ratings agency in June downgraded Bethune-Cookman’s debt to BBB-minus, one step above junk status. It was the second downgrade in six months, but Fitch changed its outlook on the university’s debt from negative to stable.

Fitch assigned the outlook because the university’s financial management stabilized, because its enrollment levels recovered in the last year after dropping, and because Bethune-Cookman appears on pace to improve its operating results for the 2017 fiscal year.

Head count enrollment tallied 3,934 in the fall of 2016, according to Fitch. It recovered from 3,831 in the fall of 2015. Both years were below an all-time high of 4,045 posted in the fall of 2014. Freshman matriculation also rose back to normal levels after falling significantly in 2015.

The higher enrollment plus new financial controls put Bethune-Cookman on track for a break-even year in 2017. The ratings agency reviewed unaudited statements through March 31 -- the first nine months of the 2017 fiscal year. It found total revenue growth on track to grow by 15 percent year over year against expenses on pace to grow by only 2 percent.

Bethune-Cookman’s revenue had declined by 4.6 percent to $78.2 million in 2016, Fitch said. Its expenses had grown by 14 percent to $95 million.

The university’s retiring president, Jackson, claimed increased enrollment and retention as among the successes of his tenure. The university enrolled about 3,500 students when Jackson started -- he served 11 months as an interim president before being appointed permanently in 2013. Integrated Postsecondary Education Data System statistics show the university’s full-time retention rates registering in the mid-to-low 60 percent range throughout much of his tenure, however and its six-year graduation rate for students pursuing bachelor’s degrees was only 33 percent for the cohort beginning in the fall of 2010.

Jackson had both critics and supporters. The NAACP Florida State Conference called for his resignation -- and the resignation of Board Chair Petrock -- after DeVos was invited to speak at graduation. Still, Jackson received support for being well-known locally and for trying to improve the university.

“Bethune-Cookman alumni and Board of Trustees will regret their decision to force Dr. Edison O. Jackson to quit before his planned exit,” Daytona Beach resident James Harper wrote to the News-Journal after the announcement of Jackson’s pending departure. “They did not have his vision, nor his foresight. Investing in dormitories now was the right call. Putting B-CU on the map by inviting Education Secretary Betsy DeVos was the right call.”

Yet worries persist that the university has been seriously damaged. Some wonder how it will raise money from alumni and attract quality board members given the current environment. They also fear that the dormitory deal will prevent it from borrowing if the need arises in the future.

Johnny McCray is a former Bethune-Cookman trustee who is a lawyer in Pompano Beach., Fla. He questioned the dormitory deal years ago. In 2015, when he was still a trustee, he wrote the board, calling on it to perform its fiduciary duty and investigate the university’s financial affairs. In addition to the dormitory situation, his letter referenced the university’s then CFO resigning in 2015 after he created a community development corporation committee without the Board of Trustees’ knowledge.

Today, he says he is glad to be on the record having spoken out.

“We’ve got to rebuild the trust of our alumni, of the community,” he said. “We have got to restore our credibility, and I think we have to get to the bottom of this residence hall deal. I think there are a lot of unanswered questions.”