Second Attempt at Becoming a Nonprofit

The environment has changed since Grand Canyon University applied to its accreditor a few years ago to convert from for-profit status to nonprofit, an attempt that was subsequently denied.

There’s a new political administration in Washington, for one, and regulations have eased in the last year. And other for-profit institutions are making moves to alter their business models.

So, on Friday, officials at the Arizona-based Christian institution announced they would make another attempt at converting to nonprofit status and have submitted an application to do so to the university’s accreditor -- the Higher Learning Commission. Grand Canyon enrolls more than 19,000 students at its Phoenix campus and more than 70,000 online, making it one of the nation’s largest online institutions. The university’s parent company, Grand Canyon Education Inc., remains profitable and saw its net income increase 13 percent in 2016, to $148.5 million.

GCU officials deny that politics impacted their decision to attempt conversion again.

“The political environment has changed, but that has no bearing on our decision to do this a second time,” said Brian Mueller, president and chief executive officer of GCU, in a phone call with reporters Friday. “This was the right thing for our faculty, staff, the community we live in and our investors.”

So, what changed?

“This is an identical structure to what we proposed the first time,” he said, adding that in the first attempt, the accreditor, HLC, indicated they didn’t have appropriate rules in place to allow the university to make the conversion. “And that’s why they denied us. They said in November they would be meeting to adopt new rules, and true to their word, they adopted new rules and new language.”

It also helped that HLC has been considering Purdue University’s proposed acquisition of the for-profit Kaplan University in a structure that would in some ways be similar to that of a nonprofit GCU, Mueller said.

HLC can vote on Grand Canyon’s application as early as February. The move would return the university to the nonprofit status it held from 1949 to 2004.

But some experts are critical of for-profit university conversions.

Robert Shireman, a senior fellow with the Century Foundation and a former Obama administration education official who has been critical of for-profits and their conversion attempts, said if GCU is replicating the same nonprofit structure the institution proposed in 2015, then it creates similar financial conflict of interests to those he previously identified.

“I don’t see this as a withdrawal from the [for-profit] sector, because GCE will thrive as co-owner of Grand Canyon under that for-profit cloak,” he said. “The institution is not completely converting; they’re creating a nonprofit shell contracting with a for-profit, and that for-profit can thrive financially and have shareholders and be driven by the same motivations that have created problems at other for-profits over time.”

The proposed new organization would establish a nonprofit corporation that would acquire some academic operations and assets from GCE. That corporation would exist as GCU once the sale closed. But then GCE would establish a long-term service contract with the institution to provide marketing, recruitment, accounting, student service counseling, IT, human resources and other supports.

“Every situation should be dealt with on an individual basis, and every situation ought to be looked at from ‘is this providing a strong experience for students and families?’” Mueller said, adding that he disagrees with anyone who would suggest this decision is driven by the quest for profit to the detriment of students. “Anyone that would infer that is coming from an entrenched philosophical position and they’re not coming from the facts.”

Mueller pointed to the stable tuition the university has held for 10 years, a 6.5 percent default rate that is below national averages, that none of the institution’s programs have failed gainful-employment regulations and that GCU is below the 90-10 rule at 72.3 percent. (The rule prevents for-profits from getting more than 90 percent of their revenue from federal sources.)

The For-Profit ‘Stigma’

Grand Canyon converted to for-profit status in 2004 as a way of providing affordable access to college and to help stimulate the economy, said Mueller. “Now we’ve created a model where we don’t have to go back to the public markets” for further capital.

The conversion also would allow GCE to potentially provide similar services to other universities.

Trace Urdan, managing director for Tyton Partners, a consulting and financial advisory firm focused on education markets, said an arrangement where GCE has multiple contracts would ease the “natural tension” between shareholders who are interested in the service company and accreditors who want to see an independent nonprofit institution.

“That’s the thing that’s new this time apart from the regulatory environment,” he said. “A lot of these [online program management providers] have matured since the last time Grand Canyon tried this. That contract with Grand Canyon could be valued and maybe sold to an existing company that has lots of other contracts like it.”

Or, he said, other universities may show an interest in GCE’s services, a scenario that could mean the for-profit side of the company wouldn’t be reliant on a single contract.

Mueller said the company has been approached by about a dozen other universities about partnerships and that, if the conversion is approved, they would be open to those partnerships.

Roughly four years ago, Grand Canyon started the process to convert to nonprofit status. At the time, GCU officials said they were looking to avoid the “stigma” of being part of the for-profit sector, which has taken significant public relation hits, due in part to high-profile closures, scrutiny from the Obama administration and a drumbeat of state and federal investigations. But Grand Canyon’s regional accreditor, the Higher Learning Commission, rejected the plan.

Then and now, the company argues that Grand Canyon’s proposed conversion would allow students, faculty and staff to participate in academic and co-curricular opportunities with other institutions without being segregated based on tax status. It also would create more philanthropic opportunities, allow GCU to maintain affordable tuition and give the university an opportunity to become a full voting member of the National Collegiate Athletic Association.

GCU is predicting the conversion will lead to significant growth as well. In the next five to seven years, the university expects enrollment in Phoenix to increase to approximately 30,000 students and online enrollment to grow to about 100,000 students. Mueller said they also expect to grow academic programs -- particularly certificates -- from 220 to 320 offerings and to increase the number of employees from 9,500 to 12,000.

Mueller said the proposal is not an attempt to “escape current regulations that are imposed only on the for-profit sector.”

Still, experts point out that the political environment under the Trump administration’s deregulation-oriented Education Department is a positive factor as for-profits consider changing status or seeking a sale.

“No one knows what the landscape will be after 2020,” Urdan said. “If this is something they want to do, they need to get it done in the next three years. If a Democrat is in the White House … all of this activity could be shut down completely.”

The implication is that the department will be open and friendly to this transaction now, he said, adding that it’s less clear what HLC will ultimately do. The Purdue-Kaplan deal is still under HLC consideration.

“HLC was dragged in one direction by the Obama administration,” Urdan said. “There is a funny relationship between accreditors and the Department of Education, and they clearly got the message that the Department of Education wanted them to take a much tougher line. They’re not getting that message anymore.”

But whichever way HLC ultimately falls on the Purdue-Kaplan deal, he said, it could be an indication for what happens with Grand Canyon.