Suspension of Financial Responsibility Scores?

Higher education groups push the Education Department to suspend measure of colleges' financial standing, and the department releases new proposed rules on distance education.

April 2, 2020
 
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This week has been busy on the higher education regulatory front. A coalition of college associations is pushing for the suspension of a federal measure of colleges’ financial standing, and the U.S. Department of Education on Wednesday released new proposed rules on distance education.

Meanwhile, a prominent online program management company’s CEO pushed back at scrutiny of his sector, which appears to have contributed to Congress placing restrictions on reimbursements for colleges' spending on OPMs in the $2.2 trillion stimulus measure it passed last week.

The federal financial responsibility score has long been criticized as an inadequate measure of the fiscal health of colleges and universities. During the Great Recession, for example, its relatively heavy focus on cash and endowment spending led to low scores for some colleges with relatively strong finances. The Government Accountability Office found that the composite scores predicted just half of the closures during the last decade.

The metric uses institutions’ primary financial reserves, equity and net income to create a composite score of -1 to 3. Colleges scoring 1.5 or above are deemed financially responsible. The feds require cash monitoring and other oversight colleges with scores of 1 to 1.5. Those below 1 are considered not financially responsible and can lose federal aid eligibility without posting a letter of credit and being subject to cash monitoring.

Despite the composite score’s widely accepted limitations, it remains the only national standard for monitoring the financial stability of colleges. Regulators that use the metrics include state agencies, accreditors, auditors and the National Council for State Authorization Reciprocity Agreements (NC-SARA), which sets national standards for interstate distance education offerings.

However, the new financial crisis has created urgency among private college leaders who want to suspend the use of the metric by the feds and NC-SARA.

When surveyed recently by Inside Higher Ed about where they need the most support from state and federal governments to navigate the COVID-19 crisis, a full quarter of responding college presidents said they need the ability to tap endowment funds without negatively affecting their financial responsibility score.

Leaders of the National Association of Independent Colleges and Universities and the American Council on Education last week wrote to the department to ask that financial responsibility standards be waived for three years. Signing the letter were 45 other higher education groups representing private colleges.

“We are deeply concerned about the larger effects of the current liquidity crunch facing American higher education, especially the impact that the current economic crisis will have on institutional financial responsibility composite scores at private nonprofit colleges and universities,” the groups wrote.

The formula favors cash, and the impact of the financial downturn will hit hard during the last quarter of this year, said Sarah Flanagan, NAICU’s vice president for government relations. To cope with skewed composite scores, she said many colleges will be forced to resort to dramatic slashing of employee-intensive budgets.

“The bottom falls out in the final quarter,” she said. “The only way they can balance it is to do layoffs.”

Flanagan cited a current example of a small private college with a roughly $20 million annual operating budget. The president of the college told NAICU he needs an $800,000 surplus due to the composite metric. And to do that, the college needs to furlough 25 employees for 90 days and to cut salaries across the board.

However, some criticized the attempt by private college lobbyists to suspend the financial responsibility standard, despite its flaws.

Such a move would be “wildly irresponsible,” said Clare McCann, deputy director for federal higher education policy with New America's Education Policy program. (Earlier this week New America released a report arguing that regulators should pay closer attention to the financial health of colleges.)

“I completely understand why the schools are worried,” said McCann, given the magnitude of the crisis, which has only begun to come into focus.

Lost revenue and spending related to the pandemic likely will exceed the amount of aid colleges and universities receive through the $14 billion in federal stimulus, the credit ratings firm Moody’s said Wednesday. And half of that $14 billion is allocated to students as emergency aid.

Even so, McCann said the federal government and regulators have a responsibility to monitor colleges’ finances to seek to protect students and taxpayers from precipitous college closures. This is particularly true as many colleges face existential threats.

“This is about the worst time to suspend financial responsibility scores,” she said.

Making quick improvements to the metric will be difficult, said McCann and others. One reason is that the feds don’t publish the composite score’s components. And the last overhaul to the measure took years and millions of dollars.

Few other large-scale efforts by regulators to oversee colleges’ financial sustainability are being developed. Massachusetts had been working on such a tool, as had the New England Commission of Higher Education. But those efforts may be set back by the crisis.

Lori Williams, NC-SARA’s president and CEO, shares critics’ view that the composite score is a flawed measure.

“We agree. It’s not a holistic indication,” she said. But Williams said it remains the only nationally recognized tool available to monitor institutions’ financial sustainability.

“As more schools transition to distance learning, NC-SARA and others must continue to enforce appropriate oversight measures to protect students,” she said in a statement. “We are open to collaborating with stakeholders to develop a reasonable alternative that can help reliably evaluate institutions’ financial health, but we will not sacrifice our consumer protection responsibility to students by waiving any consideration of financial health.”

NC-SARA’s board plans to vote in May on whether to continue relying on the metric. Department officials told higher education leaders in a call Tuesday that they plan to use the scores this fall.

Flanagan said she thinks it’s unlikely the department would use the measure to shut down colleges during the crisis. But she said colleges may have to use needed cash to set aside for letters of credit because of their scores.

Dropping the measure is not ideal, she said.

“We don’t want to leave a hole,” Flanagan said, but she added, “People are going to get laid off. We are in an emergency situation.”

Proposed Regulations Governing Innovation and Online Education

The draft rules released by the Education Department Wednesday are faithful (as federal law requires them to be) to a consensus proposal approved last year by a subcommittee of the panel the department convened in 2018 to negotiate new rules.

The package of recommendations approved last spring by the rule-making subcommittee on distance education and innovation was generally supported by educators and online learning supporters, who said the changes in federal law would clarify some murky definitions and give institutions more flexibility to create and enroll students in nontraditional academic programs.

Advocates for students, though, said they worried the new rules would remove vital checks on new programs and providers and create potential for abuse of students.

Since the proposed rules released Wednesday hew to the earlier proposals, reaction to them largely broke down as expected. Consumer advocates, like New America's McCann, said the rules would undermine the quality of online learning at a time when colleges and students are engaging in it more than ever, given the impact of the coronavirus.

Observers who both like and dislike the department's proposed rules commonly cited some aspects of their release. They noted that department officials, in their commentary describing the recommended rules, signaled potential opposition to some elements of the package the negotiating committee put forward, including provisions regarding the credit hour and the definition of distance education.

Both of those were areas in which the Education Department had pushed proposals that were rejected by negotiators as they reached their compromise agreement last spring.

Several experts also noted that the department, in its news release about the proposed regulations, linked their release to the onset of COVID-19, when their release was months overdue and had been drafted before the pandemic was on anyone's radar screen.

"With our support, colleges and universities were among the first to transition to online and distance learning so learning could continue during the coronavirus pandemic," Education Secretary Betsy DeVos was quoted as saying in the news release. "Frankly, though, they are working within the confines of stale rules and regulations that are in desperate need of rethinking. We know there are fewer and fewer 'traditional' students in higher education, and this current crisis has made crystal clear the need for more innovation. It's past time we rethink higher ed to meet the needs of all students."

It's not clear why the department tied the regulations' publication to the coronavirus crisis, although several experts speculated that it might be to justify the 30-day period the department provided for commenting on the new rules (which is shorter than is typical) and to ward off any suggestion that the government shouldn't issue major regulatory guidance at a time when many people are distracted by a national crisis.

OPM Costs Not Reimbursed in Stimulus

One provision in the stimulus bill that has generated attention and controversy in higher education relates to online program management companies.

Colleges and universities that contract with OPMs to help them transition to online instruction amid the pandemic may be unable to have their costs reimbursed under the $2.2 trillion federal stimulus, according to a blog post from the education practice of Cooley, a law firm.

"Funding cannot be used for payments to contractors for 'pre-enrollment recruitment activities,' which could present a challenge for many OPMs that structure their fees as tuition shares and therefore do not distinguish payments made for recruiting activities from payments for other eligible services under the CARES Act," the blog post said.

OPMs have drawn scrutiny in the last year from Democratic senators and from Bob Shireman, a senior fellow at the Century Foundation and former Education Department official during the Obama administration. That attention largely has centered on tuition-sharing agreements between the companies and colleges.

Chip Paucek, the CEO of 2U, a high-profile OPM, on Tuesday posted a thread on Twitter in which he fired back at Shireman. He argued that now is not the right time to push an agenda on OPMs.

“Our entire @2uinc team is working day and night alongside the leadership of some of the world’s greatest colleges and universities to do everything we can to support them through this crisis,” Paucek said.

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