Regulating College Closures

Massachusetts takes a swing at regulating small colleges at risk of shutting down in order to better protect students. Institutions at risk would have to be public about their financial vulnerabilities 18 months before a possible closure.

January 23, 2019
 
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The Massachusetts Board of Higher Education on Tuesday advanced a plan intended to protect students from unexpected college closures, voting to start working on recommendations including screening all private nonprofit colleges’ finances and warning students 18 months before a college is at risk of closing its doors.

State regulators hope to have a new system in place for the start of the semester in the fall of 2019. But the working group’s recommendations left several key details to be determined, including which entity would be responsible for the work of annually screening colleges’ financial condition, what score on a new financial metric would trigger closer state monitoring and how, specifically, the 18-month warning would be tripped.

Groups representing private nonprofit colleges voiced concern that the proposals could duplicate existing reporting requirements, spread private colleges’ confidential financial information far and wide, and be rushed into place. Some also worried the requirements miss an opportunity to throw small private colleges a lifeline.

Still, in a sign of the intense concerns swirling in Massachusetts about many private colleges’ financial viability, much of the reaction to the proposed changes has not been to push back against the idea of additional regulation -- it’s been to try to tailor regulators’ thinking so they don’t create unintended consequences that would harm private colleges and universities.

“It’s sort of hard to argue that if you can’t show you’ve got 18 months of resources to operate your institution perhaps there needs to be more intervention or work with the board and the school to figure out what the next steps should be,” said Richard Doherty, president of the Association of Independent Colleges and Universities in Massachusetts. “That is one of the things that’s a little dicey. Is 18 months the right amount of time? When do you measure that 18 months? Stuff like that is important, but it’s still unresolved.”

The 18-month recommendation is perhaps the most attention-grabbing idea from the working group, which started meeting in May in the wake of the unexpected closure of Mount Ida College. Mount Ida’s leaders faced fierce criticism after they announced plans to close the college on only a few weeks’ notice last spring, leaving many students uncertain of where they would enroll in the fall. Some of those displaced had just accepted admissions offers and turned down other opportunities. The saga forced the state to grapple with the difficult issues of who should regulate college finances, how closely they should be watched and when students have a right to know their college might close.

In the last several weeks, two more colleges in Massachusetts have made announcements about their futures as going concerns. Newbury College plans to close at the end of the spring semester, and Hampshire College is seeking partnerships and considering not enrolling a new class this fall -- although both of those announcements were arguably handled in a more organized manner than Mount Ida's.

Massachusetts will only be able to require colleges to tell students about a risk of closure 18 months early if other working group recommendations are put into place. A report from the group sketches out a new process that begins with confidential annual screening and ends with the requirement for early notice plus teach-out and contingency plans.

“The proposed plan centers on a clear goal -- to ensure that any college that reaches a defined threshold where its financial condition puts current and recently admitted students at meaningful risk of interruption in their educations must prepare necessary contingency plans and must inform the students and other stakeholders when that risk becomes sufficiently imminent,” the report says.

Under the proposals, the state Department of Higher Education would screen all private colleges in Massachusetts using a new metric developed by EY-Parthenon, a consulting firm, on a pro bono basis. The metric, the Teachout Viability Metric, would use publicly reported data in order to estimate how well a college can teach-out students who are currently enrolled based on their expected graduation dates.

A college scoring 100 percent would be able to wind down and meet all obligations to its current undergraduates, according to the report. One scoring 75 percent could teach-out students for three years, one scoring 50 percent could teach-out for two years, and so on.

The metric is not supposed to be used to determine which colleges will have to close or issue public notice of viability concerns -- it is only recommended as a screening tool. Yet to be determined is whether the screening should be conducted by the state agency or outsourced and what cutoff would invite additional state scrutiny.

Nonetheless, a cutoff would in fact be established. State regulators would contact colleges and universities falling below that level to determine whether they need additional monitoring. Certain circumstances could mean regulators would deem some institutions not at risk, while others would be actively monitored.

Again, the specifics of the monitoring protocol have not been determined. The working group called for it to allow regulators to assess changing conditions of nonprofit colleges and universities but still fit with the 18-month notification threshold.

Up to this point, all new regulatory actions would be confidential.

“All information about the existence of the monitoring and the contents of communication and data shared by the [institution] in accord with the protocol should be held to strict confidentiality guidelines,” the report says.

Active monitoring would continue until the institution is deemed not at risk of closure or until it is determined it will soon violate the 18-month notification cutoff. When state regulators determine a college or university only has the financial resources to complete its current and next academic years, it is deemed to have triggered a “North Star” principle and would have to notify students.

“That is to say that the trigger for moving beyond active monitoring to action is the determination by no later (but possibly quite a bit earlier) than each December 1st whether [a nonprofit college or university], in the reasonable judgment of the [Department of Higher Education], has the financial resources to complete the current and subsequent school years,” the report says. “If they do have such confidence, the [college or university] should remain in active monitoring; but if they do not, December 1st should be the latest date (earlier would be better) by which [the state Department of Higher Education] should ensure the [college or university] takes two critical actions: contingency planning and student notification.”

Once the 18-month threshold is crossed, the college or university would submit transfer, teach-out and contingency plans identifying at least two alternative programs at “geographically accessible” colleges that would accept full transfer credits for students. Plans would also be required to address issues including where historical student records would be maintained.

A college or university would also have to tell all of its current students, all of its students who have been admitted but not matriculated and all of its pending applicants that it is at meaningful risk of financial distress that would prevent it from being able to teach them through their degrees. The notification would also tell other stakeholders like faculty and staff members about the situation.

“By notifying students on a sufficiently timely basis -- with enough lead time to consider and act on alternatives before annual deadlines at alternative institutions -- and by developing a thorough contingency plan, these actions should prove sufficient to greatly reduce the risk of harm to students,” the report says.

The report acknowledges that some colleges and universities could resist the process proposed. It suggests making them ineligible for state student financial aid if they do not agree to the plan, a considerable penalty in a state with meaningful grants for state residents who enroll at private colleges.

“It is fair and appropriate for Massachusetts to place such strings upon publicly financed aid provided to schools,” the report says.

Although some elements of the plan could be put in place using regulators’ existing authority in Massachusetts, some will need legislative changes. Laws would need to be changed to protect institutions’ confidentiality, said Carlos Santiago, Massachusetts commissioner of higher education.

“There is a lot of work to do,” he said. “What is important is we’ve gone down this path and had a conversation with stakeholders, predominantly the private, nonprofit institutions in Massachusetts.”

The vast majority of the state’s dozens of private colleges and universities are doing well, Santiago said.

Yet troubling trends cloud the horizon. Working group documents indicate that 24 percent of private nonprofit four-year institutions in the state experienced enrollment decreases of 10 percent or more between 2011 and 2016. Meanwhile, 34 percent experienced expense increases of at least five percentage points.

At the same time, existing metrics that could mark stressed institutions, like the federal government’s Financial Responsibility Composite Score, have failed to identify problems with colleges and universities in the years leading up to their closure and have sometimes flagged colleges with considerable resources.

The working group concluded that the risk of challenges at colleges and universities leading to possible student disruption is “significant, ongoing and likely growing.” It also found current standard financial metrics are insufficient for identifying at-risk institutions in a timely manner.

With all the concern, some wonder why Massachusetts is worried about closing its private colleges instead of propping them up or removing public competition.

“I think consumer protection is a valuable thing to do, and timely notice makes sense,” said Richard Ekman, president of the Council of Independent Colleges, a national association. “What I worry about is that unless that is accompanied by steps taken by the state of Massachusetts to lower the artificial competition that puts pressure on some of these private colleges, it could lead to a worsening of the situation.”

And the president of a nonprofit organization that advocates for zero-debt college delivered testimony at Tuesday’s Board of Education meeting pushing for the department to approach the issues at hand with an eye toward more expertise. The Massachusetts Department of Higher Education should create a financial institution role that is able to deal with complicated matters like liquidity and debt, argued Bob Hildreth, president of the Hildreth Institute. He also advocated for the board to turn to experts in bankruptcy or mergers and acquisitions.

“The 18-month threshold may not be viable as well, as colleges may close much sooner,” he said, according to a written copy of his testimony. “Sometimes a 10-seat enrollment drop is enough to spell financial doom. As word leaks out, credit lines may be pulled and bonds called.”

That last point brings up the issue of when, specifically, parties should be told about a college’s financial struggles. Make information public too late, and students arguably haven’t been able to make an informed decision about where to pursue their education. Make it public too early, and many college leaders worry students will enroll elsewhere, taking their tuition revenue with them and accelerating a struggling college’s crisis -- or even causing one.

“The Association of Independent Colleges and Universities will say we’ve had institutions that lived almost paycheck to paycheck,” Santiago said. “They get through that one year, and they’ve been doing that for years and years. I think we need to be sensitive to the differences across the institutions.”

Also of concern are the student populations most likely to be hit by closures. Institutions most at risk of closure are the smallest, least wealthy, most dependent on tuition and fees, and those that have seen enrollment decline in recent years, according to the working group’s report.

“It is also notable that they are the most likely to serve low-income (Pell-eligible) students, our most vulnerable population,” it says.

The Association of Independent Colleges and Universities in Massachusetts is ready to work with regulators to examine issues, according to its president, Doherty. All involved indicate details have to be worked out or changed. Nonprofit colleges remain concerned, though, that the most challenged institutions will face additional reporting requirements under a plan that is being put in place on a rapid timeline.

Regulators hope to add no work for colleges, at least in the screening phase. The metric proposed uses publicly available data through the federal government’s Integrated Postsecondary Education Data System.

“The additional information that would be needed would be simply for the subset of institutions that are viewed through the metric as being in a more financially difficult position,” Santiago said. “By and large, most institutions won’t hear from us.”

Going forward, regulators, the regional accreditor and chief financial officers from institutions will dive in to the metrics in question while the state Department of Higher Education starts crafting regulations.

“There are a lot of moving parts, but there are elements we can move forward with now,” Santiago said. “The longer term would be the Legislature giving it confidentiality.”

Meanwhile, private colleges have arguably been on their best behavior in the months since Mount Ida collapsed. Newbury College announced in December that it will close at the end of the spring 2019 semester. Hampshire College said this month it is seeking a partner and may not enroll a freshman class this fall. The regional accreditor, the New England Commission of Higher Education, is said to have been active in addressing concerns about financial viability, closure and public disclosure.

“Since last spring, we’ve had a couple of announcements, and they have been perhaps textbook announcements with a lot of notice and lots of cooperation between the institutions and NECHE,” Doherty said. “Without anything new in place, the system is sort of doing a good job right now.”

Of course, there is no guarantee the good behavior would continue after the public’s attention drifts. Given projected population declines and demographic changes in Massachusetts, colleges may continue to face challenges.

Some public assurance could arguably be good for all involved.

“I certainly am hopeful that the institutions say this is to our benefits that the students are well treated -- and to the industry’s benefit,” Santiago said. “We have an industrywide reputation to keep. If I don’t have to force these agreements, but rather the institutions come forward, I think that would be the best of all worlds.”

The plan voted on Tuesday focused on private nonprofit institutions granting four-year undergraduate degrees. But the work group acknowledged challenges facing public institutions, for-profit institutions, private two-year colleges and private graduate-only institutions. Regulators should evaluate ways to address risk among many of those colleges, the working group recommended.

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