Conflicts of Interest Seen as For-Profit Schools Eye Nonprofit Status

March 2, 2018 Emily Wilkins

This analysis was first available to Bloomberg Government subscribers.

Several for-profit universities attempting to convert to nonprofit status appear to have plans with potential conflicts of interest that could allow the heads of newly created nonprofit institutions to reap financial benefits, accrediting agencies and analysts say.

Among the examples flagged are:

  • Grand Canyon University’s plan to convert to a nonprofit that would allow the school’s president to serve also as head of a for-profit servicing company that would work with the school.
  • The sale of Education Management Corp. colleges to the nonprofit Dream Center Foundation, through a loan partially financed by the CEO of the nonprofit’s subsidiary overseeing the schools.
  • The chairman of the nonprofit Center for Excellence in Higher Education’s plan to structure the sale of his for-profit schools to receive more than $400 million from the resulting nonprofit school.

The cases highlight the shifting commercial and regulatory landscape for the for-profit universities industry, which the Obama administration targeted with stricter regulation and penalties for bad actors. The Trump administration has shown more of a willingness to work with the schools.

Proposals for colleges to transition to nonprofits require approvals from the Education Department, as well as the Internal Revenue Service and an accreditation agency, which determines whether the school qualifies for federal funding. Some accreditation agencies have flagged cases where the heads of the nonprofits could remain entangled with the schools’ financial outcomes.

That could lead to the head of a nonprofit school prioritizing the institution’s income over a student’s academic success, said Robert Shireman, a former Education Department deputy undersecretary during the Obama administration.

“It is simply not possible for the CEO to play the balancing role that is required at a nonprofit, while also satisfying the much more clear profit motive of the for-profit corporation,” said Shireman, who now is a fellow at The Century Foundation, a think tank. “It would be like the CEO of Girl Scouts also being the CEO of the cookie baking company. It’s not allowed, it’s not appropriate.”

Under the law, an education nonprofit is defined as one where none of the net earnings benefit private shareholders or individuals. Nonprofits can have deals with insiders that ultimately benefit the institution, but the key is fully disclosing any conflict and ensuring independent members are making decisions—something that doesn’t always happen, said Lloyd Mayer, an associate dean and law professor at the University of Notre Dame Law School who studies nonprofits.

“The question is whether the nonprofit has done its due diligence to make sure those conflicts have been appropriately resolved,” he said. “That sort of vetting is not being done very vigorously.”

Change in Perspective

The image of the for-profit school has been badly battered in recent years, thanks to the bankruptcies of major chains Corinthian Colleges and ITT Technical Institute and Obama administration regulations that denied funding to for-profit programs that left students with degrees that some employers viewed as worthless deeply in debt.

John B. King Jr., education secretary in the Obama administration, cracked down on for-profit schools seeking to become nonprofits to escape increased scrutiny. King rejected a request by the nonprofit Center for Excellence in Higher Education to approve the transition of its for-profit schools as nonprofits. Under the group’s plan, the owner of the schools, Carl Barney, would make millions of dollars from loaning money for the sale and collecting lease payments from the schools for the use of property he owned, King said in an August 2016 letter.

“To anyone who thinks converting to nonprofit status is a way to avoid oversight while hanging onto the financial benefits: Don’t waste your time,” King said in a statement when the decision was made public.

The Trump administration has taken a different path, praising workforce development programs and giving for-profits more leniency. Education Secretary Betsy DeVos has delayed and begun to rewrite regulations that would have established more oversight over the industry.

Under DeVos’s tenure, the department has approved several mergers of for-profit and nonprofit schools, including the sale of 62 schools from the Education Management Corp. to the nonprofit Dream Center Foundation.

DeVos also has taken a new approach with the Center for Excellence in Higher Education. The nonprofit sued the department in August 2016 over the rejection of its deal. In January 2018, the department and the nonprofit asked the judge to delay the proceedings as “both parties agree that the possibility of resolving this case outside the context of litigation is significant.”

‘Completely Destroyed’

Although official numbers are hard to come by, there are at least a half-dozen cases in which for-profit colleges have attempted to convert to nonprofits. Experts are expecting more in the coming years as schools abandon the now-toxic for-profit status.

“The for-profit brand, the for-profit sector, is completely destroyed,” said Trace Urdan, an independent financial analyst studying the for-profit education market. “For-profit has come to mean bad and not in the student’s best interest and nonprofit has come to mean good.”

Although the current administration has relaxed the pressure on for-profit schools, Urdan said investors don’t want to bet on an industry that is only profitable when Republicans are in charge.

Urdan and Neil Lefkowitz, a Washington lawyer at Loeb & Loeb who specializes in transactions involving education companies, told Bloomberg Government in separate interviews that they knew of other for-profit schools planning to make the switch, although they could not name the schools because the plans had yet to be announced.

Lefkowitz said a number of schools are waiting to see whether a merger of Purdue University and the for-profit Kaplan University System is approved.

“If that transaction get approved, I think there will be other transactions,” he said.

Accreditation Oversight

While the current Education Department has shown a willingness to work with for-profit schools seeking nonprofit status, schools also need the blessing of their accrediting agenciesgroups that evaluate colleges to determine whether they qualify for federal funding through the Education Department.

The accrediting agency Higher Learning Commission initially blocked the for-profit Grand Canyon University from making the switch in 2016. The school planned to split into a nonprofit school and a separate servicing company called Grand Canyon Education, which would operate the nonprofit’s technological, administrative, promotional and marketing services.

While servicers are not uncommon among for-profit and nonprofit schools, Grand Canyon’s plan called for Brian Mueller to head both the nonprofit college and the for-profit company, Grand Canyon Education, according to a plan the school submitted to the Internal Revenue Service in October 2015. Grand Canyon Education could also act as a servicer for other schools, Mueller told investors during a February earnings call.

In a letter rejecting the school’s switch to a nonprofit, the accrediting agency said the school “did not allow for the separate school corporation and service corporation model.”

However, the Higher Learning Commission adopted new guidelines about agreements between schools and their servicers last year, and Grand Canyon University renewed its application.

Whether Mueller will play a dual role remains to be seen. Two separate independent governing boards overseeing the nonprofit university and for-profit servicer company would each be responsible for choosing who leads the organization, Bob Romantic, a spokesman for the university, said in an email to Bloomberg Government. He said there is no policy in place that could prevent Mueller from being chosen to lead both.

Peter Appert, a financial analyst who has been following Grand Canyon, he would assume that if Mueller served in both roles, other board members would oversee financial arrangements between the nonprofit and the servicer.

The Higher Learning Commission still needs to sign off on the university’s plan, and is expected to do so in the next several weeks. The IRS and Education Department would also need to approve the plan.

Loaning Limits

Another accrediting agency raised concerns about a potential conflict of interest related to the sale of for-profit schools owned by the Education Management Corp. (EDMC) to the nonprofit Dream Center Foundation, a transaction approved by the Education Department.

The WASC Senior College and University Commission did conditionally approve the sale of EDMC’s Argosy University System, but it also noted a number of concerns. Among them was a potential conflict of interest involving Brent Richardson, the CEO and co-chairman of the Dream Center Foundation’s subsidiary, Dream Center Education. Richardson had the opportunity to help finance the purchase of the schools through a loan, something that could “present potential legal, regulatory compliance, and conflict of interest issues,” according to a July 2017 letter from the accrediting agency.

Richardson’s family did help with 10 percent of the loan to purchase the schools, said Randall K. Barton, co-chairman of the Dream Center Education board. However, he said there was no conflict because Richardson did not participate in the negotiation of the loan between the EDMC and the Dream Center Foundation, of which Richard is not a member.

“I could think of no transaction that more clearly meets the rigorous tests for dealing with conflicts,” Barton said in an email to Bloomberg Government.

A loan from Richardson could indicate his commitment to the schools, but would also give him a personal financial incentive to ensure the school could repay the loan. That could create an incentive to prioritize the school’s profit over the needs of the students, said Shireman, the fellow at The Century Foundation.

“If aggressive recruitment of students is necessary to repay the loan, the lender should not be making the decision about whether to be more aggressive,” he said.

WASC is currently reviewing the sale of the school and whether the sale created a conflict of interest, said Christopher Oberg, the group’s vice president and chief operating officer. If a significant conflict of interest was identified, the accrediting agency would have several options for responding.

For the most egregious examples of conflict of interest, a school would have up to a year to prove there was no conflict of interest or have its accreditation revoked.

The accrediting agency’s report on the sale is expected to be public around the end of July.

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