California Regulatin'

January 29, 2007

California has had anything but a proud history when it comes to monitoring its for-profit institutions. After all, this is a state that in the 1980s gained a suspect reputation as the “diploma mill capital of the world,” as a 2005 independent monitoring report points out. The Private Postsecondary and Vocational Education Reform Act of 1989 was intended to usher in a new era, and while the state may no longer be a haven for diploma mills, people on every imaginable side agree -- for very different reasons -- that the reform efforts have been flawed.

“Fundamentally flawed,” as the state’s Republican governor, Arnold Schwarzenegger, wrote in a message vetoing an extension of the statute and the regulatory body that administers the law, the Bureau for Private Postsecondary and Vocational Education. “Simply extending the existing governing statute ... does nothing to enhance protections for students, allows problems that have been well documented to continue to exist and merely allows mediocrity for California’s students,” Schwarzenegger wrote in his September veto message.

But with the stroke of his pen, Schwarzenegger put the state’s policy makers in  a pickle. The current regulatory bureau -- decried by consumer rights advocates for its failure to enforce the current statute and its perceived tendency to curry the favor of the for-profit institutions, and lambasted by the career colleges for its inefficiency and inconsistency -- is, for better or worse, the state’s sole arbiter in authorizing the operation of those state-approved institutions not accredited by the Western Association of Schools and Colleges.

When the agency sunsets July 1, as the governor's veto will ensure, it’s unclear whether state officials will even have the constitutional authority to replace the bureau immediately, and also what legislation might ultimately replace the Private Postsecondary act when it expires in January 2008. No matter what, there may end up being a six-month gap in enforcement, as Bruce Hamlett, chief consultant for the Democratic chair of the California State Assembly's Higher Education Committee, pointed out.

Given California's history, not to mention its size, the uncertainty surrounding the state's future regulatory process is no insignificant matter to consumer advocates and for-profit college officials from across the country who are watching California closely. Consumer advocates in California insist that the for-profit industry doesn't want any regulation at all, while those on the for-profit side say they want accountability, but in the form of a more understandable law that leaves them less vulnerable to frivolous lawsuits.

A bipartisan legislative committee is currently hard at work at bigger-picture draft legislation intended to streamline the regulatory process and replace the expiring Private Postsecondary and Vocational Reform Act of 1989. The legislation, as described to Inside Higher Ed, would replace the bureau with a board and establish different tiers of oversight to better focus the regulating authority’s resources. But the $64,000 question -- actually, the stakes are much higher than that -- hangs in the balance: Will the state retreat on its regulation of for-profits in the drafting of new legislation, and soften the consumer protections in place, or will it succeed in creating a viable enforcement mechanism for a streamlined but still stringent statute?

So Many Problems, So Little Time

The September 2005 independent monitoring report offered 77 separate recommendations to improve the statute and its enforcement. Most of those recommendations, the report says, “require substantive changes” in the law or the financial and staffing resources allocated to the agency entrusted to enforce it.

The report criticizes the “fragmented structural framework” of the reform act, including “numerous duplicative and conflicting statutory provisions;” and cites a laundry list of problems with the postsecondary private bureau: its practice of issuing licenses to institutions without completing financial reviews, and of renewing licenses without reviewing complaint histories; its tendency to exceed the one-year deadline for issuing licenses (the average time period for degree-granting institutions reported in a 2000 audit was 525 days); its inconsistent mediation of complaints; its history of charging licensing fees higher than those legally allowed; its failure to follow up on complaints and monitor whether institutions meet the 60 percent minimum graduation and 70 percent minimum job placement standards required under the act; and the bureau’s inadequate financial and staffing resources.

In defense of the agency's record, Barbara Ward, its chief, pointed out another of the report's findings -- that the bureau, created in 1998 to replace a council previously in place to enforce the act, inherited a large backlog, and has never had sufficient staffing to "dig itself out." It is, Hamlett said, 40 percent understaffed.

Not surprisingly, nobody is particularly happy with the status quo. But those on the consumer advocate side seem to be most upset about the failure of the bureau to enforce the law that’s on the books.

“The schools don’t want any regulation,” said Elena Ackel, a lawyer with the Legal Aid Foundation of Los Angeles and a leading voice for consumers. “The law since 1998 really hasn’t been enforced except for private attorneys that have sued the schools.”

An uptick in successful cases brought against institutions by private lawyers and the state attorney general’s office, including an attorney general investigation of Corinthian Colleges' student placement rates, has scared the for-profit colleges, Ackel said. And so they’ve used their influence, she said, to bring about the demise of the law.

“Do [private institutions] want an effective agency? No. They’re just mad because the agency didn’t process their papers quickly enough.

“Now that there has been this report showing how worthless the agency is, the schools don’t want it transferred to someone who's actually going to enforce the law. So if there’s a possibility it’s going to be enforced, they don’t want any law at all. They want to be able to continue to provide training when there are no jobs. As long as they make money, that’s fine with them.”

But Robert Johnson, executive director of the California Association of Private Postsecondary Schools, vehemently disagreed. While his organization opposes the current statute, the for-profit sector does not oppose regulation and in fact supported SB 1473, a reform bill despised by consumer advocates, when it was introduced last year, he said. “The idea of deregulating the state cheapens the value of licensure, so nobody on our side sees any reason to deregulate the state and we have not pushed it; we have never pushed it."

“The law has become an open farce,” said Johnson, whose organization represents a couple hundred career -focused institutions. “The folks on the other side like the law even though it doesn’t work and it’s been proven not to work.”

“We have always said that we wanted to see an effective, coherent statute and regulatory system that laid out clear rules of the road and that provided effective protections for students and consumers," added Mark Pelesh, executive vice president for legislative and regulatory affairs at Corinthian Colleges, Inc., a for-profit education company based in California. "We have always said that. Our position really has been that the current statute, and therefore the current regulatory system, is not effective, is not coherent, and does not lay out clear rules of the road and therefore does a poor job of protecting students and consumers."

Johnson said the law’s provisions allowing students to sue for technical errors and omission -- that is, not something an institution did, but what it did not do -- have resulted in unjustified lawsuits. (He cited one case where a student sued an institution because another student stole his dental X-ray; lawyers on the consumer side, however, describe serious irregularities in recruiting and reporting. Mark Kleiman, a lawyer who represents students and whistle-blowing faculty, for instance, described a case in which a student admitted to a paralegal program later tested at a third-grade reading level).

The confusing nature of the law, Johnson believes, has scared institutions away from the state. “A lot of schools choose not to come to California even though there are 36 million people here. The law is too vague.”

“It isn’t that we don’t want to be accountable,” said Johnson. What his sector would like to see, he added, is a new statute that reflects the recommendations of the 2005 report. He’s not optimistic.

The Here and Now

The governor and Legislature are charged with finding both a short and long-term solution. And in the short-term, the stakes are potentially high. An opinion rendered by the Legislative Counsel of California, explained Hamlett, the consultant for the Higher Education Committee's Democratic chair, suggests that lawmakers may not have the power to use an urgency resolution to grant a new agency authority to regulate the law -- meaning that the extension of the bureau’s authority, or the establishment of any new regulatory authority, probably wouldn’t be possible before January 1, the day the statute governing the regulatory process expires.

So even if new legislation is crafted to everyone’s satisfaction, there may not be anyone charged with enforcing the existing legislation in its final six months, said Hamlett. To avoid a legal challenge, any short-term solution would have to be creative, to say the least.

“The question is, what will happen to all those private schools that are operating in the state?” asked Hamlett. He cited concerns about the students’ access to the tuition recovery fund governed by the statute, along with their eligibility for licensure exams and federal financial aid funding under Title IV. The latter concern was dismissed by the U.S. Education Department Friday, when a spokeswoman indicated that in a pending formal response, the department will affirm the continuing Title IV eligibility of students at California’s for-profit  institutions in the absence of the bureau.

The bipartisan legislative committee is working on a long-term solution, but the governor still has not announced his specific long or short-term plans for potential legislation. Perhaps tellingly,  Schwarzenegger, in his veto message, lamented the fact that the industry-supported SB 1473 died during last year's session.

A spokesman for Schwarzenegger’s office affirmed the governor’s commitment to crafting a viable reform package, but in a statement, declined to offer specifics: “Governor Schwarzenegger strongly supports having a bureau that protects the students of California’s private postsecondary and vocational institutions,” said Bill Maile, the spokesman. “He looks forward to working with the legislature to pass a measure that will provide comprehensive reform and address the fundamental flaws that currently exist. The goal is to work on legislation immediately so that our students will have the protections they deserve.”

In remarks at Wednesday's Senate Rules Committee hearing, however, California Senator Don Perata, the Democratic President Pro Tem, shed a bit more light on the governor's plans: "We have learned that the Administration is seeking a two prong solution to this problem. They will be sponsoring one bill to deal with the short term problem and get through December. The Administration is meeting with Legislative Counsel to see how we may achieve this in a manner that is Constitutional. The Administration is also now developing a contingency plan should that effort fail and state oversight fail to continue after June 30. Additionally, the Administration has agreed to join the Legislature in working jointly with all stakeholders to develop a consensus solution to deal with the reforms needed in the long term."

Meanwhile, the California Department of Consumer Affairs, which oversees the bureau, is preparing for its scheduled sunset. Barbara Ward, the bureau's chief, said the staff plans to maintain open communications with the state-approved institutions through regular correspondence and, by tapping into department staff from outside the bureau, reduce the backlog of paperwork.  "We're trying to prioritize workload and to decide how we’re going to deal with existing backlog. One thing we want to make certain is that if the bureau sunsets, everything is fairly organized, so that whatever happens after that for regulating schools, it will be easy for that transition to take place," said Ward.

But, adds Russ Heimerich, the spokesman for the Department of Consumer Affairs, “It wouldn’t surprise me if the governor’s office and the legislature manage to craft some sort of fix." In his recommended budget, after all, Schwarzenegger allocated $11.4 million to fund bureau operations in 2007-8 -- a slight increase from last year's recommended allocation.

A New Act and a New Era?

For the legislature's part, the draft bill currently being prepared to replace the Private Postsecondary act is not available for release. But legislative aides were willing to broadly describe its preliminary framework.

The legislation would seek to maximize resources by using a three-tiered system to focus enforcement efforts on those institutions most in need of oversight,  explained Ted Blanchard, consultant for the Assembly Republican Caucus’s Office of Policy.

Cautioning that he was not speaking on behalf of the Republican delegation, which has not yet endorsed the draft, Blanchard explained what the tiers could look like. Institutions accredited by national or regional accrediting agencies approved by the U.S. Department of Education would be eligible to start at Tier 1 status, meaning that they would pay the lowest fees, and be subject to minimal regulation, in the form of random inspections and annual reports.

Unaccredited institutions, meanwhile, would start in Tier II, pay a higher fee, and be subject to a higher level of reporting and inspections. Private institutions that are deemed substandard would wind up in Tier III, and would be allotted only a short time to climb back into Tier II before they would be shut down. As for the consumer protections included in the current law, “No one’s going to touch them,” Blanchard said. “They might tweak them a little bit, but I think the consumer protections are still going to be there.”

Movement across the tiers would be based on institutions meeting the standards clearly described in any new statute, Blanchard said. Factors that could come into play include completion and placement rates, institutions' finances and substantial complaints lodged against institutions. Unaccredited institutions meeting the standards could move into Tier I, as could accredited institutions fall to Tier II, or even Tier III. “I want to make sure the standards are clear and measurable, and so it’s easy for everyone to know when you drop below those standards,” Blanchard said. “The biggest beef is that the [current] standards are too fuzzy.”

Hamlett, the consultant for the Democrats (who control California’s Legislature) , added that the committee is considering replacing the bureau with a Board for Private Postsecondary Education within the Department of Consumer Affairs. The board would feature public appointees, to ensure that individuals would be accountable for the law’s enforcement, he said.

An advisory working group of for-profit officials and consumer watchdogs hasn't yet seen the draft legislation, he added. No doubt they -- and others -- will be curious to see how California intends to dig itself out of this mess.

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