Who Watches California For-Profits?

California’s law to regulate private, for-profit colleges expired in 2007 and since then attempts to pass a new law have ended in stalemate – leaving the state in the precarious position of having no regulatory system for the sector, at all. Now, the California Private Postsecondary Education Act of 2009, or Assembly Bill 48, has momentum behind it, although, as has also been the case the last two years, not consensus.

The bill, last amended last week and to be considered by the State Senate’s Education Committee today, would establish a Bureau for Private Postsecondary Education in the Department of Consumer Affairs as the regulating entity and also would continue the state's Student Tuition Recovery Fund, as a recourse to students. The legislation outlines minimum standards regarding fair business practices, record-keeping, enrollment agreements and disclosures.

Unlike previous bills put forward, AB 48 exempts all regionally accredited institutions from the bureau’s oversight (regional accreditation is perceived as more prestigious than national accreditation, and most nonprofit colleges have regional accreditation). The bill also provides for an automatic licensure process for other accredited institutions (i.e. those accredited by national agencies). The current version of the bill stipulates: “The bureau shall grant an institution that is accredited an approval to operate by means of its accreditation.” (Those granted state approval "by means of" their accreditation would be required to comply with all applicable elements of the statute.)

“We’re supporting the bill, we can live with it, we can work with it," said Jeff Leshay, senior vice president for public relations and corporate communications at Career Education Corporation, which has both regionally and nationally accredited campuses in California. At the same time, Leshay said, Career Education objects to differential treatment based on type of accreditor. “In other words, we’d like to see fair treatment across the board."

“We’re pleased with licensure by accreditation; that’s just a smart business move,” said Robert Johnson, executive director of the California Association of Private Postsecondary Schools.

Johnson called the bill "a compromise piece of legislation.... It's got something for everybody; it also has something that everybody's unhappy about. They hit it pretty much down the middle."

The unhappiness levels aren't to be underestimated, however. In the first round of debates to replace the old expired law in 2007, consumer advocates generally supported the proposed bill, and the for-profit and career colleges disliked it; now it's the other way around. Betsy Imholz, special projects director for Consumers Union, said consumer advocates would be fighting AB 48 – but acknowledged that given the momentum behind it, their fight would be an uphill battle. “[A]s written, this bill creates a framework that rests primarily on automatic eligibility for schools and dilutes or eliminates consumer protections in prior law,” she wrote in a July 9 letter to the chair of the California Senate’s education committee. In the letter, Imholz objects to the large numbers of accredited colleges that would either be exempt or automatically granted state approval (writing, “Accreditation has been shown over and over again to be wholly inadequate as an indicator of minimal quality”). She also takes issue with what she describes as inadequate disclosures for students and other protections. For instance, whereas the former law regulating California’s proprietary sector (the Maxine Waters Act) set a threshold for minimum job placement and graduation rates, this one simply requires disclosure of the rates and, Imholz argues, poorly defines what counts as success .

As one example, the job placement definition, she writes, “allows schools to count ‘graduates employed in the field’ rather than requiring it apply to those ‘employed in the job trained for.’ We have seen examples of schools counting as a culinary program job placement students sweeping floors at a fast food restaurant.” Last week’s amendments further weakened the section, she wrote, by eliminating the requirement that a student hold a job for at least 60 days to be counted as successfully placed ("Thus, a graduate who stays on a job for an hour would count as a placement.")

Imholz also argues that capping the maximum fees for schools at $25,000 a year will limit the bureau's funding stream, and handicap its ability to provide effective oversight. “There’s a lot of momentum behind this, there’s a lot of pressure to it. But I have come to the conclusion that students are likely better off without a bill than with this bill,” she said in an interview. “My concern is it creates the illusion of state oversight when in fact there won’t be any.”

Johnson, meanwhile, of the state's private postsecondary school association, said one thing his members don’t much care for is the fee structure – “it’s way, way, high” he said – but otherwise the bill strikes him as pretty good. Asked if he thinks it’ll pass, he laughed, but sadly. “We’ve been down this road so many times before.”

“It’s got the best chance of any bill I’ve seen in 10 years."

For his members, which depend on the outside validation offered by state approval (in some cases so students can sit for licensure exams), "lack of state approval law is not a good thing. We certainly never wanted that," Johnson said.

Johnson represents many small, career-oriented institutions, but for the big, publicly traded for-profits, business may not be much different under the proposed regulatory framework, as Trace Urdan, who analyzes for-profit colleges for Signal Hill, a Baltimore investment firm, argued in a research report last week. "We believe the reinstatement of regulation in California is a non-event. Immaterial from a financial point of view, the only real concern is with respect to potential liability. However the publicly-traded institutions with a significant presence in the state ([Corinthian Colleges, Career Education Corp.] among others), never relaxed their standards, knowing full well that regulation would return," he wrote.

"There may well be operators who have been running roughshod in this period, but the big guys, they're so lawyered up that they're more inclined to be even more careful during this period" of lack of regulation, Urdan said in an interview.

There was some alarm on Wall Street last week about the possibility of new regulations in California, which led to a dip in Corinthian's stock price, Urdan said ("Corinthian is seen as the company with the most exposure there"). "I think there was some alarm out there, absolutely, as people were thinking this is something new, this is going to be costly. Then you remind people, this was there before."

"Actually," he said, "this is shaping up to be something at least no worse, and maybe a little bit better [from an investor's perspective] than what was in California before."