Fine Print and Tough Questions for the Purdue-Kaplan Deal

University’s boundary-testing deal poses a test for its accreditor and could set new precedents about online education and the role of public universities.

May 30, 2017
 

Calling Purdue University’s acquisition of Kaplan University bold might have been underselling. Depending whom you ask, the deal is either an exciting evolutionary step for public higher education or a dangerous threat to it.

Experts agree, however, that the outcome of Purdue’s big bet on online credentials through the purchase of a for-profit institution could set precedents that will reverberate far beyond Indiana.

“It’s a real crossroads moment for higher education,” said Peter Smith, an endowed professor at the University of Maryland University College and a former U.S. representative whose long career in the academy includes stints at public and private institutions as well as a recent role at Kaplan.

Smith compares the possible influence of the Purdue news, which first broke last month, to the MOOC craze of five years ago -- specifically the shift in how selective institutions view online courses -- and to the employee education partnerships forged by Arizona State University with Starbucks and by Southern New Hampshire University’s competency-based College for America with its participating employers.

Yet before the new Purdue online institution can begin making its mark, federal and state regulators and the Higher Learning Commission will have to review the arrangement struck by the land-grant university to acquire Kaplan University and its 32,000 students, 15 campus locations and 3,000 employees.

The trickiest part, a broad range of observers said, will be the scrutiny by HLC, which is the regional accreditor for both Purdue and Kaplan.

That belief is based in part on the clout wielded at the state level by Purdue and its president, Mitch Daniels, a former Republican governor of the state and a national political figure. Indiana’s government already passed language in a budget bill to lay the statutory groundwork for the new public institution. And the state’s higher education commissioner has spoken positively about Purdue’s move.

As a result, most expect smooth sailing during Indiana’s consideration of the deal.

Predicting how reviews by the accreditor and the feds might go down is more difficult. Several key aspects of the university’s structure have not been publicly disclosed and probably will stay private. Likewise, some of what is known crosses into new territory, particularly that the as-yet unnamed university combines enviable competitive characteristics of both public and private nonprofit universities, with a 30-year contractual service relationship with a for-profit that will no longer offer federal aid-eligible credentials.

On the federal side, however, the political zeitgeist is a major factor, observers said. The Trump White House is unlikely to pump the brakes on Daniels’s gambit, many said, given its stated interest in alternatives to the traditional four-year degree and about displaced workers in the Midwest who might attend Purdue’s new online programs.

"They'll be framed legally and in regulatory terms, but they'll be primarily political," Smith said of the reviews. "The future for both parties is bright."

Even so, the Higher Learning Commission faces a challenging task as it kicks the tires of the new institution.

Faculty members at Purdue have raised a broad range of concerns about the deal, including complaints about shared governance for the new university and not being notified about the negotiations with Kaplan until an hour before the news went public.

In addition to weighing faculty concerns, HLC has been ground zero for contentious fights over sector-crossing partnerships and attempts by for-profit institutions to convert into nonprofits, both of which could relate to the accreditor’s review of the new university.

“Any way you look at it, this is going to trigger a very careful review,” said Judith Eaton, president of the Council for Higher Education Accreditation.

HLC at times has been tugged in two directions, perhaps more so than other regional accreditors. The commission has been criticized for allegedly not doing enough to crack down on bad-actor for-profits as well for failing to adequately support innovation.

“They’re in a position where they feel very vulnerable and they’re working with these anomalous institutions that nobody had in mind when regional accreditation was put together,” said Sally Johnstone, president of the National Center for Higher Education Management and a former vice president for academic advancement at Western Governors University.

Russ Poulin agreed. As the director of policy and analysis for the Western Interstate Commission for Higher Education, Poulin said the HLC review will be where critics of the deal make their stand.

“They’re going to be under tremendous pressure from both sides on this. I wouldn’t want to be in their shoes,” he said. “No answer is the right answer for them. Somebody’s going to be upset.”

Quasi-Public?

A focus area for regulators and the accreditor in their scrutiny of the new university will be its public character, which is a twist on the traditional public institution in ways that are both controversial and clever, experts said.

The budget Indiana’s governor signed -- on the day Purdue and Kaplan announced their deal and had it approved by the university’s governing board -- included language that established the new university as a public institution, but with unusual exemptions that will allow it to operate like a nonprofit corporation.

The university will be a type of public benefit corporation, a nonprofit business that values societal returns -- in this case educating students, many of them low income -- as well as revenue.

The new institution will not, however, be a 501(c)(3) organization, Purdue said. That means the new university won’t have to publicly disclose information that most private colleges do. For example, it appears that the former Kaplan University will not be required to file the annual Form 990 tax form with the U.S. Internal Revenue Service, which includes information about a university’s compensation, revenue and expenses.

If the feds confirm the new university's public status, Purdue said, "it will not be required to obtain recognition as [a] tax-exempt 501(c)(3) entity."

Likewise, the budget language exempts the new university from a few public-record and open-meeting laws, because it is not technically a public agency, as the Lafayette Journal & Courier first reported. The institution, however, will be obligated to provide information about finances, academic programs and student outcomes to the state’s higher education commission, upon request.

Despite these changes to the typical regulatory requirements for a public university, the new state law also says the university will be “considered to be a governmental entity equivalent to the state for purposes of U.S. Department of Education regulations.”

Purdue submitted written answers to questions about the regulatory and accreditation reviews, available in full here.

In unveiling the deal last month, Purdue said it was creating a “new global public university.” The institution will not receive state funding, Purdue said, with its revenue instead coming solely from tuition and fund-raising. (The university’s students could receive financial aid from the state and the federal government.)

Daniels, in a presentation to the university’s trustees, said the new institution would pose “virtually no financial risk,” presumably meaning to Purdue or the state. He has reinforced that message in conversations with faculty members.

Yet the federal government places less financial scrutiny on public institutions because states are considered to be their fiscal backers. This commonly cited legal concept means the “full faith and credit” of a government entity is on the hook to cover a public agency’s debt and other monetary obligations.

For example, the federal borrower-defense rule that goes into effect soon is more lax with its fiscal requirements for public institutions, such as not requiring them to take out letters of credit due to perceived financial vulnerability or in response to allegations of misconduct. Private nonprofit and for-profit institutions are subject to those requirements, however, as a hedge against taxpayers eating the costs of forgiving student debt or other expenditures when a college shuts down.

In addition, the new university will take on Kaplan’s student loan portfolio, according to former department officials, as well as that liability, which could carry some risk.

The new Purdue institution’s degree programs also will not be subject to the federal government’s gainful-employment regulation, which only applies to nondegree programs at public and nonprofit institutions. Kaplan has shut down five programs that would have run afoul of that rule. Likewise, the new university will not be required to get at least 10 percent of its revenue from nonfederal sources, as for-profits must.

Purdue said the new university, which it has temporarily dubbed New University, will be classified as a public institution by the federal government.

"We’re not going to get out in front of our regulatory process, but we believe the state enabling legislation and a fair reading of the federal regulations provide a solid basis for treating NewU as a public institution for Title IV purposes," the university said in a written statement, in reference to the federal law that governs financial aid. "Purdue is a state instrumentality, but it generates and manages financial resources other than state appropriations. The legislation makes clear that only these other nonpublic resources (called 'eligible property' in the statute) may be used if Purdue is ever called upon to provide a financial backstop."

‘Existential Threat’

Bob Shireman is a senior fellow at the Century Foundation who, in his time as an Education Department official during the Obama administration, helped lead a crackdown on for-profit institutions. Recently he's been critical of the conversion of some for-profits into nonprofits, saying the colleges merely changed tax status while continuing to enrich company officials.

The new Purdue institution poses an “existential threat to public education,” Shireman told National Public Radio shortly after the deal was announced. His criticism of the deal drew the ire of Daniels, who called out Shireman personally during a meeting with faculty members.

Shireman hasn't backed down from his assessment. In fact, he says he’s more concerned after having a month to review some of the deal’s fine lines.

How can the department consider this new institution to be a public university, Shireman asks, if it’s structured as a limited liability corporation that poses virtually no financial risk to the state?

Some faculty members share Shireman’s concerns.

“This isn’t going to be a public university,” said David Sanders, an associate professor in the university’s department of biological sciences who is the chair of the University Senate, which earlier this month passed a resolution that called on the university’s Board of Trustees to rescind any decisions about the new university.

“The faculty doesn’t see it as being to the benefit of faculty, students, the university or the state of Indiana,” Sanders said.

HLC tends to focus heavily on faculty concerns, experts said, particularly with regard to academic offerings. This reflects the traditional view that, under shared governance, faculty members play an essential role in the quality control of the programs a college offers.

Another possible issue is that Kaplan will run a large portion of the university’s nonacademic functions for the foreseeable future. While Kaplan and Purdue describe the for-profit education company’s role with the new university as being of the “back office” variety, those contractual services include marketing and advertising, admissions support, financial aid administration, technology and human resources support, accounting, and facilities management, according to an 111-page financial document Kaplan's publicly traded holding company filed last month with the U.S. Securities and Exchange Commission.

The broad partnership with a for-profit education company and the lack of adequate assurances that the new university will put academic quality before revenue is a dangerous combination, Shireman said. “It undermines the core of what a public institution is.”

Purdue compared the oversight of the new institution to that of the university's regional campuses, Purdue Northwest and Indiana University-Purdue University Fort Wayne.

"The Purdue University Board of Trustees will provide an additional layer of oversight by receiving regular reports on NewU’s activities and results -- in much the same manner as this board currently receives regular information from Purdue’s regional campuses," the university said.

Reading the Fine Lines

Purdue did not pay for Kaplan University up front.

According to a simplified description of the terms of the complex deal, Kaplan could be reimbursed for the costs of its support services and also get a 12.5 percent cut of the new university’s annual revenue, but only after the university’s operating costs are covered.

The university will be overseen by a five-member governing board, Purdue has said, with four members coming from Purdue’s board and one from Kaplan University’s.

Shireman and other critics worry that Kaplan will be able to exert control over the new institution’s decision making, an assertion that both Kaplan and Purdue vigorously contest. Likewise, some fear the university’s nonexclusive operations deal with Kaplan means prospective students could be directed to other institutions that Kaplan might contract with as a type of online program management company.

Part of the concern about control relates to documents about the deal that have not been made public, specifically various appendices listed in the SEC filing. Given the new university’s unusual public benefit corporation status, it’s not clear that those documents will be released. But HLC should get them as part of its review, accreditation experts said.

If the new university maintains the record of its actions, rather than Purdue, it likely would not need to comply with public-records requests, said Zachary Baiel, a West Lafayette resident who is the president of the Indiana Coalition for Open Government.

“We’re going to have an unaccountable nonprofit organization run an arm of Purdue University,” Baiel said. “If the public can’t understand what’s going on, how can that be public?”

Purdue said it would not release the agreements.

"Most of the appendices to the agreements governing the transaction, which is itself a unique and novel concept, contain trade secret information," the university said. "Purdue is not allowed to disclose that information under Indiana’s Access to Public Records Act."

To some, a separate nonprofit with operations outside its parent public university is a promising innovation. That’s because public universities tend to move slower than for-profits and private colleges with the creation of academic programs or in reacting to student demand -- both of which are drags on an online institution.

Kaplan’s corporate filing includes references to the new university’s “key academic and operating policy guide,” which is listed as an appendix. The filing said the guide includes mutually agreed upon rules for admissions standards, enrollment requirements and student advancement or academic term structures.

If the new university makes any “material departure” from the policy guide, according to the filing, such a change could “change the assumptions on which the parties based the economic terms in this agreement.” In such a scenario, Kaplan could determine that it would experience a “significant adverse impact,” which would trigger an evaluation process that’s described in another nonpublic document. If Kaplan believes such an impact will decrease current or future revenues by $5 million or more, the evaluation process could lead to Kaplan being compensated for that adverse impact. (See image from filing, below.)

(e) Material departures from NU Policy Guide. Actions taken by New University which are outside the parameters of the NU Policy Guide (whether by amendment to the NU Policy Guide or otherwise) could change the assumptions on which the parties based the economic terms in this agreement and cause contributor material financial harm. Accordingly, if New University, or the New University Board of Trustees, uses its authority to: (i) materially change the NU Policy Guide; or (ii) take an action that is, or allow an omission that results in being, outside of the parameters the NU Policy Guide as described in Part B of Exhibit D (NU Policy Guide Departures), in each case, in a manner not previously agreed by contributor, and contributor believes that there is, or is likely to be, a significant adverse impact, then the parties shall follow the evaluation process set forth in Part C of Exhibit D (the “Evaluation Process”) to determine whether such action or omission has had, or is likely to have, a significant adverse impact and, if so, whether and to what extent contributor is to be compensated for such significant adverse impact. “Significant adverse impact” means the effect of an act or omission that contributor believes in good faith has, or is likely to have, the effect of decreasing either or both of then-current and or future revenues by $5 million or more.

Shireman said it appears that an academic decision by the new university, such as to tighten admissions requirements for a program, could result in such a payment to Kaplan. As a result, he said, Purdue would have a financial incentive to hold off on making potential improvements to the formerly Kaplan-controlled academic programs.

Purdue described the arrangement as being a reasonable approach, given how the deal is structured.

"The NewU Board of Trustees will be responsible for the conduct and management of the institution and have ultimate authority over its operations, including its policies. It may make any policy change at any time it sees fit. Now, it is true that Kaplan may in limited circumstances be compensated for a lost portion of its fee if it is foregone as a result of certain policy changes. But this is a reasonable approach when one considers the nature of Kaplan’s fee, a portion of which is essentially an earn-out of the substantial investment it has made in KU’s academic operations and parted with for one dollar," the university said. "It’s also essential to bear in mind that this fee is deeply subordinated in NewU’s financial structure (i.e., it is paid only after NewU receives its own compensation and recovers its expenses). As we have stated, this structure is very protective of Purdue and NewU and will not hinder the Board of Trustees from taking whatever actions it believes are necessary, appropriate and in the best interests of NewU, its faculty and its students."

Purdue said that it began communicating with HLC about the deal in February, just a few months after the first discussion between Purdue and Kaplan about the acquisition, which occurred in mid-November. In addition, Purdue said it anticipates that the transaction will be viewed as a change of control, which triggers a specific type of review by the accreditor.

"We have commenced the HLC change of control process and anticipate that the matter will be considered by the HLC Board of Directors at its November meeting," the university said.

Kaplan last August received a 10-year renewal from HLC, after a comprehensive accreditation review company officials said generated positive findings. (HLC does not publicly release most of its review documentation.)

“This is a change of control and not a change in the institution itself, and we do not have any plans to change the programmatic mix initially,” Purdue said in a written statement it released when the deal was announced. “Like any university, the programming mix will evolve over time as we evaluate which programs are best suited to meet the needs of our students and the communities we serve. We believe there are areas of expertise within Purdue that will be helpful as new programmatic areas are considered.”

Shireman said HLC should look hard at whether Purdue will have appropriate control over the new institution’s academic programs. Kaplan and Purdue, however, have said Purdue will have total control. And if the new university makes changes that lead to a material departure payment, a Kaplan official said that would just change the timing of how the company gets paid for the sale of its university chain, with those fees being part of a gradual payoff rather than a buyout, which is possible after six years, according to the agreement.

Similar questions of control have tanked other partnerships between nonprofit and for-profit institutions, most notably HLC’s 2013 decision to essentially close Ivy Bridge College, a partnership between Ohio's Tiffin University, a private institution, and Altius Education.

Some critics of that decision said it was influenced by politics, specifically the desire by the Obama administration and congressional Democrats to go after for-profits. Altius, which subsequently shut down, sued HLC, and that lawsuit remains active.

Experts said HLC will need to tread carefully around its Ivy Bridge decision if it approves the Purdue-Kaplan deal. Likewise, the failed bid by Grand Canyon University to become a nonprofit could be a factor. HLC last year rejected the for-profit’s application, in part because the accreditor said the new nonprofit entity would cede too much control to a separate for-profit services division.

Setting Precedents

The deal’s first step toward approval by the federal government will be the filing of a pre-acquisition review form with the Education Department, Purdue said. That should happen within a few weeks.

The U.S. Department of the Treasury and the IRS may not have to conduct a review of Kaplan University's changing corporate or tax status, experts said, if the state’s definition of the new university as a public benefit corporation is accepted.

Next up would be the Indiana Commission for Higher Education, which is slated to review the university’s creation this summer. HLC’s review will follow. It’s unclear how long that might take, and a spokesman for the accreditor said the agency does not know enough about Purdue’s intent at this point to discuss the potential process.

“I hope HLC recognizes the precedent-setting aspect of this deal,” said Ben Miller, senior director for postsecondary education at the Center for American Progress and a former Education Department official.

It’s a safe bet that many across higher education see the potential impact of Purdue’s move.

Greg Ferenbach and Mike Goldstein are two Washington-based lawyers who have been at the forefront of working with colleges on public-private partnerships and nonprofit conversions. In a blog post for their firm, Cooley, they said Purdue’s “full-throated entry” into online education will encourage other, similar institutions to follow suit.

“The political winds appear to have shifted from a hostile regulatory environment to one that may be more favorable to such partnerships. And, given the considerable stature of the parties, we give this one better odds to close than other recent efforts despite the already emerging efforts to derail it,” Ferenbach and Goldstein wrote, adding that “we expect it will go through in the end, and when it does (and perhaps before, if the ringing of the phone is any indication) others will surely follow.”

That’s exciting news to many observers, including some Purdue faculty members, who like that the university appears to be sincere about affixing its brand to an open-access online institution aimed at working adults -- Kaplan’s average student is 34 years old, compared to the 20-year-old who is the typical student at Purdue’s residential campus in West Lafayette.

Michael Poliakoff, president of the American Council of Trustees and Alumni and a former member of the federal panel that oversees accrediting agencies, said he hopes HLC has internalized the bipartisan message that accreditors should be open-minded about new models.

“This is something that we should embrace,” he said. “This really is exactly what we want colleges to do.”

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