Financing College Facilities

The College Construction Loan Insurance Association (Connie Lee) is a for-profit bond insurance holding company that insures municipal bonds issued by schools of higher education (colleges, universities, and teaching hospitals) who have difficulty obtaining insurance because their bonds have relatively low credit ratings--BBB and below. Connie Lee insures bonds issued to finance the construction and renovation of academic buildings. Although federal law generally limits Connie Lee to insuring bonds that are relatively greater credit risks, state law constrains bond insurance companies, including Connie Lee, to insuring 95 percent of their business in bonds rated BBB and above. Industry practice further constrains these companies. Rating firms' guidelines require larger amounts of capital for insuring bonds rated below BBB than for insuring bonds rated BBB and above. Among those schools that Connie Lee is permitted to serve, some, including some historically Black colleges and universities, do not need or want to issue bonds or to insure the bonds that they issue. For example, some bonds that public schools issue do not require insurance because the bonds have the states' credit rating. These high ratings reduce or eliminate the benefits of insurance. Some schools, both public and private, are fundamentally strong, and do not have to take out loans to finance their construction projects. Yet other schools find the cost to issue bonds of the size of the debt incurred makes using bonds to finance a project impractical. Finally, some schools find other sources of financing, such as the Education Department.

GAO found that: (1) Connie Lee insured 95 bonds totalling $2.6 billion from October 1991 through September 1995, 90 of which received the lowest investment grade rating; (2) Connie Lee offered to insure 8 HBCU bonds, declined to insure 3 HBCU bonds it considered risky, determined that 13 HBCU were rated above the category of risk they applied for, and was undecided on whether to issue insurance for 1 HBCU bond; (3) Connie Lee is limited to insuring low grade bonds by federal and state laws, as well as by industry practices; (4) some HBCU may finance the construction and renovation of HBCU facilities by issuing bonds without insurance, obtaining bond insurance from companies other than Connie Lee, and using loans or grants from federal and state governments, alumni, and private foundations; and (5) officials suggest removing federal limits and credit ratings on certain types of bonds Connie Lee insures, guaranteeing federal loans to pay for defaulted bonds, and providing Connie Lee with additional loans and grants for capital.