Grand Canyon University enrolls nearly 20,000 students at its Phoenix campus, has among the fastest growing online enrollments in recent years and this past spring qualified for the National Collegiate Athletic Association's men's basketball tournament for the first time.
But as a for-profit institution, Grand Canyon could not accept charitable contributions, apply for federal research grants or take part in NCAA governance, the school's president and CEO Brian Mueller told investors last year.
So when the university’s accreditor, the Higher Learning Commission, said in 2017 that it would adopt new guidelines governing outsourcing of various university functions, Grand Canyon jumped at an opportunity to pursue a corporate restructuring that it would allow it to operate as a nonprofit entity. The change would also mean fewer federal regulatory burdens for the company, although Mueller and Grand Canyon have insisted that was not a factor in the decision (as it has been for some other recent converts).
The accreditor had rejected an earlier proposal from GCU because it did not believe its standards allowed for an arrangement Grand Canyon proposed: to set up a nonprofit that would outsource a range of services to a separate for-profit company. But the new guidelines helped clear the way for one deal in a series of recent transactions in which large for-profit entities have sought to change their tax status.
Mueller noted to investors in the 2017 earnings call that HLC could approve the deal, reject it or kick a decision down the road.
“It would be difficult for us to believe it would be the last two because the thing is so similar to what is going on everywhere in the industry,” he said.
That corporate restructuring trend has attracted the notice of consumer advocates and Democratic lawmakers as well. Those critics see pursuit of nonprofit status as attempts to dodge federal regulations and have increasingly focused their attention on the role played by accreditors, pushing those organizations for tougher scrutiny of the deals.
As the approving agencies for higher ed institutions, accreditors are among several entities that must give the OK to such transactions. And under the Trump administration, skeptics of for-profit conversions say their role has become even more crucial as the Department of Education has backed off previous skepticism of nonprofit conversions.
Accreditors aren’t necessarily responding to the new scrutiny by taking a tougher stand publicly on those deals, to the dismay of for-profit critics. The WASC Senior College and University Commission (WSCUC) clarified its standards in response to a string of applications from for-profit colleges to restructure several years ago and says it’s well positioned to evaluate those deals now. HLC added to its guidelines where they previously did not conceive of the outsourcing deal, known as shared services agreements.
“The regionals have definitely paid inadequate attention to this issue,” said Bob Shireman, a senior fellow at the Century Foundation and a former Obama administration official. “And a few years ago that was understandable.”
Changing Regulatory Landscape
Grand Canyon's corporate overhaul comes as a number of for-profit colleges have pursued similar deals. Purdue University, a public state institution, announced last year that it would acquire the for-profit Kaplan University. The nonprofit Dream Center Foundation said in 2017 it would purchase the chain of campuses operated by Education Management Corporation. And Ashford University said earlier this year it would pursue plans to go nonprofit.
In previous years, those transactions could expect to face more regulatory hurdles at the federal agencies that oversee such transactions. The IRS in particular devoted more resources and manpower to reviewing new applications for nonprofit status. But the unit responsible for reviewing nonprofit applications has dramatically reduced enforcement activity thanks to political pressure in recent years. That means accreditors can't rely on IRS scrutiny to safeguard the public interest, wrote Brian Galle, a Georgetown University law professor, in comments to the federal panel that oversees accreditation.
In announcing the denial of an application for nonprofit conversion by a Utah-based for-profit college chain in 2016, the Obama administration said explicitly that those looking to avoid oversight by reclassifying shouldn’t waste their time. Trump's education secretary, Betsy DeVos, however, has praised the Purdue-Kaplan deal as the kind of arrangement that promotes necessary innovation in higher ed.
Early reviews of the Purdue-Kaplan proposal appeared to signal that HLC was open to the more novel corporate arrangements, another signal to Grand Canyon on top of the new guidelines that it should make another go of converting to nonprofit status. The accreditor eventually approved the Purdue-Kaplan and Grand Canyon proposals in March.
(The Education Department said it is considering the Grand Canyon request to convert to nonprofit status in its review of the change of ownership transaction.)
The new Purdue University Global is a novel partnership between public and private institutions. The Grand Canyon deal would involve selling off the academic units of the university to a new nonprofit that would contract a range of functions to a for-profit in exchange for 60 percent of tuition and revenue.
Those involved in the proposal say HLC has begun to recognize wider changes in the higher ed sector. The larger context of the GCU transaction is the growth of online program management companies -- known as OPMs -- that distribute online courses and provide other services like enrollment management, said Neil Lefkowitz, a lawyer who advised Grand Canyon on its application. Restructuring deals where colleges contract out services to outside providers, proponents argue, would allow them to expand access and improve affordability.
“You want to recognize trends in the market. Accreditors don’t want to be the ones saying, ‘We’re inhibiting access and affordability,’” Lefkowitz said.
Supporters expect other for-profit institutions to take their cue from the Grand Canyon deal in pursuing similar arrangements.
Steve Kauffman, a spokesman for HLC, said the accreditor developed the standards in recognition that “higher education is shifting as new and innovative forms of structure and control evolve.”
The new guidelines clarified which types of agreements would require the accreditor's approval, including a scenario where a college creates a separate corporation that would provide a number of services to the accredited institution. And the guidelines require that an institution upgrade its conflict of interest policies and that it be allowed to terminate an agreement with or without cause.
What was critical about HLC's new guidelines is they explicitly addressed the kinds of arrangements that the accreditor's rules hardly conceived of previously. And although they don't even mention the terms "for-profit" or "nonprofit," they set out in detail how an institution could restructure its organization in a manner similar to the one pursued by Grand Canyon. Rather than converting its entire operation to a nonprofit, the university under those guidelines could contract out many of its operating functions from a new nonprofit university to a separate corporate entity.
But the details of the Grand Canyon arrangement came under fire anyway for the role the president, Mueller, would play -- he would continue to serve as company’s CEO and board chairman and also remain as president of the university and serve on the nonprofit board. The HLC guidelines allowed for those dual roles, but critics called them a conflict of interest.
A university spokesman said its December 2017 proposal amended its previous application to address each component of the guidelines governing shared services agreements but said there was nothing materially different between the two proposals.
Long History of Attempts to Reclassify
Democratic lawmakers put a spotlight on nonprofit conversions this year after a string of recent applications from large for-profit institutions. Before conversions involving large institutions attracted the attention of lawmakers, though, smaller educational entities sought to reclassify as well. Two years ago, the Obama administration blocked an application by Utah-based Center for Excellence in Higher Education to reclassify as a nonprofit, a decision that prompted a lawsuit from the for-profit’s owner.
An earlier round of nonprofit conversions drew scrutiny from Shireman, who labeled those institutions “covert for-profits” in a Century Foundation report. Among them were Herzing University, Remington Colleges and Keiser University, whose president, Art Keiser, chairs the board that oversees accreditors.
Keiser said that institutions have been changing tax status since for-profit colleges became part of higher education.
“They key is looking at the governance [of the institution] to make sure it’s done for the right reason,” he said.
But Kevin Kinser, a professor of education at Pennsylvania State University who studies accreditors, said those organizations are being asked to play a larger role in the regulatory and oversight process than they were originally designed to take on.
“I am not sure that accreditation agencies have the expertise to make these kinds of judgments in the ways they're being asked to do it when regulatory implications that are not about accreditation are so significant,” he said.
That perspective is shared by the Education Department's top higher ed official. Diane Auer Jones, principal deputy under secretary, announced recently that the department wanted to rethink the proper role of accreditors through a new rule making. Jones told Inside Higher Ed that accreditors have been asked to do too much that goes beyond their core mission -- including oversight of complex financial transactions where they might not have the necessary expertise.
"The job of the accreditor is to make sure the school continues to operate well and its students continue to be served and that there are adequate resources to keep the thing running," she said. "They've been asked to do a lot more and to opine on financial conditions that are really the expertise of accountants and financial managers."
Jones said the department itself is better suited to provide the scrutiny of conversion deals that many want to see from accreditors.
"Those at the department absolutely have to be scrutinizing these carefully," she said. "That is where the department has expertise, and that is where the department has to take responsibility."
(Note: this story has been updated from a previous version to more accurately reflect the quote from Jones.)
The structure of nonprofit conversion attempts has changed as well. Antoinette Flores, associate director for postsecondary education at the Center for American Progress, said that a decade ago accreditors were reviewing proposals from for-profit companies for to simply purchase nonprofit colleges. More recent classifications have become increasingly complex.
If corporate higher ed restructuring is becoming more sophisticated, regional accreditors say they’ve taken steps to build up their own expertise on areas well outside academics and curriculum. The teams reviewing restructuring proposals at the WSCUC are versed in corporate organization issues, said Jamienne Studley, the president of the organization.
“For complex transactions involving structural changes, we deliberately choose accreditation teams made up of individuals with sophisticated expertise in organizational governance, financial and business arrangements,” she said. “We further backstop these teams with advice from leading lawyers and finance consultants experienced in these issues.”
Studley said accreditors have long been under the microscope at the federal level -- whether for their scrutiny of conversion transactions or for monitoring of poor institutional outcomes. As an Obama administration education official, she spent considerable time examining those agencies herself.
“Given accreditors’ responsibilities and the consequences of our work, that attention is appropriate,” Studley said.
WASC three years ago issued a policy on agreements with unaccredited entities as well as a corporate restructuring questionnaire.
The guidelines the organization already has in place as well as the expertise of its staff prepare it to evaluate those proposals, WASC says.
Other accreditors have taken more recent steps to update their own guidelines for the transactions. The Accrediting Commission of Career Schools and Colleges, the national accrediting body that accredits CEHE, in July approved a policy change barring anyone with a financial stake in a for-profit provider from serving on the board or being a member of a nonprofit entity.
Those deals aren’t just a question of what may happen soon. WASC gave its approval last month to a merger of Ashford University and the University of the Rockies, two online for-profits owned by Bridgepoint Education. That deal is part of broader plans at Bridgepoint for Ashford to eventually go nonprofit, which would require approval from WASC.
Shireman, of the Century Foundation, doesn’t believe either accreditor has done enough, though. And he said the problem has gotten worse, not better.
“Consumers trust colleges labeled ‘public’ and ‘nonprofit’ because public and nonprofit control has been effective in preventing predatory behavior, making the schools safer places for students to enroll by separating institutional control from the financial stakes of investors,” he said.