For-Profit, Without Profit

When Michael Clifford and his team stepped in to rescue struggling nonprofit Myers University in 2008, the investor who had helped to transform nearly dead colleges into two publicly traded companies with tens of thousands of students was heralded as the 160-year-old institution’s savior.

Myers was deeply in debt, placed on probation by its regional accreditor and struggling to attract students. Clifford’s Significant Partners LLC bought the institution for $5.25 million and infused millions more into its operations, renaming it Chancellor University and promising rapid growth.

The gambit seemed even more promising after Jack Welch, the former chief executive officer of General Electric and a one-time skeptic of for-profit higher education, bought a minority stake in Chancellor last summer at Clifford’s persuasion. His $2 million went toward creating the university’s M.B.A. program and the Jack Welch Management Institute.

But the condition of the Cleveland university has in some ways only gotten worse since Clifford, Welch and other investors got involved.

Chancellor’s enrollment has fluctuated between 400 and 600 since the fall of 2008; it has yet to see the exponential growth Clifford promised, and it is operating on an annual budget deficit. Rather than improving in the eyes of the Higher Learning Commission of the North Central Association of Colleges and Schools (HLC), its accreditor, Chancellor slipped from probation to “show cause” status in February. (This is the final chance for the university to provide evidence to persuade the HLC not to end its accreditation.) In April, Bloomberg reported that Chancellor “explicitly focused recruiting efforts on local [homeless] shelters” after hearing that the University of Phoenix was doing the same in Cleveland.

And Clifford, who has built a reputation for infusing cash into indebted nonprofit colleges and growing their enrollments and their profits rapidly, has backed away. Though he’s still an investor, he has left Chancellor’s board and isn’t involved with its operations. He says he has “the utmost confidence in the leadership team.”

That leadership team, though, has been spinning through a revolving door. Bob Daugherty, a Cleveland investor, has been president since early this summer. Bob Barker, who spent 20 years as an executive at the University of Phoenix before becoming a for-profit education entrepreneur, was Chancellor’s CEO for about six months earlier this year. George Kidd, a former president of nonprofit Tiffin University, was president of the university until last year. Other top administrators haven’t stayed long either.

Barker says he left for “personal reasons” that “had nothing to do with the business.” At the time of his departure, he “saw things growing and building” at Chancellor. “I didn’t see a sense of falling apart.”

The university’s fall from probation to show cause status with the HLC was the result of “bad management,” Daugherty says, but he is confident that the university is on the right track under his leadership. “A number of changes that have taken place in the past year both from a leadership standpoint and from an institutional standpoint are putting Chancellor in a better position."

Chancellor plans to move from its downtown location to "a brand-new building that will be easier for our students to get to, modern, safer, and a great learning environment," Daugherty says. Significant's purchase price of the university included a $2.25 million mortgage note on its current building owed to the Cleveland-Cuyahoga County Port Authority later this month. Rather than paying it off in its entirety and staying in the building, Chancellor has offered payments totaling $500,000 by the end of the year, and an additional $250,000 to be repaid in the next five years. The agency is expected to approve the offer.

As the for-profit sector faces closer scrutiny by the federal government and accreditors, Daugherty is quick to say that he and his colleagues are “strong advocates of integrity.” Other institutions, he adds, “some bad actors in the postsecondary sector, need to be – quite frankly – better regulated.”

Bloomberg's report about the university recruiting homeless students was, says Barker, "a total misrepresentation of what actually happened ... the person leading it genuinely wanted to help students." Clifford defends the practice of seeking out students who are living in shelters or who are imprisoned. "Obama said he wants everyone to have a college education. Does that mean everyone except those who are down and out in homeless shelters and prisons?" Nonetheless, Chancellor has ended its recruitment at shelters.

Even if Chancellor’s worst days are behind it, they may have done irreparable damage to the institution. While it’s still accredited, the university is required to disclose to current and prospective students that it’s in danger of losing its accreditation in the coming year. Students usually don’t understand or ask about accreditation, but hearing about the university’s tenuous status isn’t likely to convince indecisive students to enroll.

C. Todd Jones, president of the Association of Independent Colleges and Universities of Ohio, says members of his group of nonprofit institutions “continue to have to compete very actively to attract students” who are drawn to lower sticker prices at the state’s public institutions. Part of Chancellor’s growth strategy was to build up its on-the-ground enrollment of low-income, minority students and Cleveland professionals seeking further education. “I’ve never understood how Chancellor thought they’d grow locally, even with tuition cuts,” he says.

In the spring of 2009, Shaun Redgate, who was then the university's chief operating officer but has since left the institution, told Crain's Cleveland Business that the institution was on track for a fall 2010 enrollment of 1,050, the enrollment needed to break even. Chancellor, it now seems, will fall short.

According to HLC data, Chancellor’s enrollment totaled 422 students this spring. In an interview, Daugherty cited the spring enrollment as about 600. In the fall of 2009, the university reported 512 full-time and part-time students to the U.S. Department of Education. Retention, Daugherty says, is “improving,” though he declined to provide statistics.

In the fall of 2008, just as the for-profit team took charge of the university, Chancellor reported a total enrollment of 422. The year before, it was 570, and in the fall of 2006, it was 942. “They’re totally focused on quality,” says Clifford. “They’re not concerned about making money, they’re not concerned about going public. It’s about the students having a superior experience.”

That’s not quite what Clifford told The Wall Street Journal in June of 2009. He said then that he hoped the university would have 800 students that fall and 5,000 by the fall of 2011, and that he would eventually be able to take the company public.

His vision may have changed since then – and he says he does not speak for the management of the institution -- but Clifford still insists that he and his fellow investors did the right thing. “It’s in better shape than when we stepped in,” he says. “The easiest thing would’ve been to close it down and walk away, but we responded and put tens of millions of dollars into it.”

(And, at the same time, Clifford says the Welch M.B.A. program has had "thousands of applicants from around the world" but has intentionally limited its growth.)

Still, Chancellor is struggling. Daugherty says the university has 38 new students who’ve enrolled for fall classes. The university must submit a show cause report to the HLC by Dec. 1 illustrating that it:

• “Operates with integrity to ensure the fulfillment of its mission through structures and processes that involve the board, administration, faculty, staff and students.”
• Plans and allocates resources responsibly “to fulfill its mission, improve the quality of its education, and respond to future challenges and opportunities.”
• Shows evidence of student learning and effective teaching.

An HLC evaluation team will visit Chancellor’s campus in early January to validate the claims the university makes in its report, and to ensure that the concerns identified by HLC’s board in issuing the show cause order have been sufficiently addressed. If the agency isn’t satisfied, it will pull accreditation.

John Hausaman, an HLC spokesman, said the agency and Sylvia Manning, who became its president in July 2008, had no further comments on Chancellor’s status.

Though Chancellor could continue to operate if it were to lose HLC’s imprimatur, its credits would no longer be transferrable to other institutions. It would also lose its eligibility to participate in the federal financial aid program.

The Ohio Board of Regents, which authorizes private institutions’ degree-granting powers, placed Chancellor on three-year “provisional” status last fall, requiring it to submit annual progress reports each September. Michael Chaney, the board’s chief communications officer, says that Chancellor submitted part of its 2010 report in July and has requested an extension until Oct. 1 to fill in the gaps. Even if the report is up to snuff, Chancellor’s authorization is “contingent on their maintaining their regional accreditation,” Chaney says.

Daugherty says he is confident the university will show evidence to HLC that its governance, finances and student outcomes are all in good shape. “I expect we will be reaccredited this winter,” he says. “We don’t want to be de minimis, we want to be the summa cum laude example.”

With Clifford’s active role in the institution diminished, Daugherty says the focus is on having “the standards that you would expect from a guy like Jack Welch are now permeating our institution.” Welch’s assistant said he was on vacation and authorized Daugherty to speak on his behalf.

Welch’s involvement, though, appears limited to the M.B.A. program. “He has read and reviewed every piece in the M.B.A. program,” says Daugherty, who declined to say whether Welch had invested more than his initial $2 million share, which bought him a 12 percent ownership stake. In several interviews, Welch has characterized his decision to invest in the university despite his initial skepticism about for-profit higher education as being about building his “legacy.”

Even as observers eye Chancellor with skepticism, Daugherty says the institution is finally on the track to sustained and sustainable growth, as well as survival. “We’re not here to make a quick buck,” he says. “We’re here to be here for a very long time.”