Capital Financing
Department Management Improvements Could Enhance Education's Loan Program for Historically Black Colleges and Universities Gao ID: GAO-07-64 October 18, 2006Historically Black Colleges and Universities (HBCU), which number around 100, undertake capital projects to provide appropriate settings for learning, but many face challenges in doing so. In 1992, Congress created the HBCU Capital Financing Program to help HBCUs fund capital projects by offering loans with interest rates near the government's cost of borrowing. We reviewed the program by considering (1) HBCU capital project needs and program utilization, (2) program advantages compared to other sources of funds and schools' views on loan terms, (3) the Department of Education's (Education) program management, and (4) certain schools' perspectives on and Education's plan to implement loan provisions specifically authorized by Congress in June 2006 to assist in hurricane recovery efforts. To conduct our work, we reviewed applicable laws and program materials and interviewed officials from federal agencies and 34 HBCUs.
HBCU officials we interviewed reported extensive and diverse capital project needs, yet just over half of available loan capital ($375 million) has ever been borrowed. About 23 HBCUs have taken steps to participate in the program, and 14 have become borrowers. Education has collected and reported limited data on the program's utilization and has not established performance measures or goals to gauge program effectiveness, though Education officials noted they are developing measures and goals. The HBCU loan program provides access to low-cost capital financing and flexibilities not always available elsewhere, but some loan terms and conditions discourage participation, though school officials said they remain interested in the program. The low interest rate and 30-year repayment period were regarded favorably by participants and nonparticipants alike, and the program makes funds available for a broader range of needs than some federal grant programs. However, the requirement to place in a pooled escrow 5 percent of loan proceeds--an insurance mechanism that reduces federal program costs due to any program borrower's potential delinquency or default--monthly payments versus semiannual ones traditionally available from private sources of loans, and the extent to which some loans have been collateralized could discourage participation. While Education has taken steps to improve the program, significant weaknesses in its management control could compromise the program's effectiveness and efficiency. Education has recently provided schools with both fixed and variable interest rate options, allowed for larger loans, and afforded more opportunities to negotiate loan terms. Also, Education has increased its marketing efforts for the program. However, Education has not established effective management control to ensure that it is (1) communicating with schools in a useful and timely manner, (2) complying with statutory requirements to meet twice each year with an advisory board composed of HBCU experts and properly account for the cost of the program, and (3) monitoring the performance of the program's contractor. Officials from 4 HBCUs in Louisiana and Mississippi told us that in light of the extensive 2005 hurricane damage to their campuses, they were pleased with certain emergency loan provisions but concerned that there would not be sufficient time to take advantage of Education's authority to waive or modify the program provisions. School officials from the 4 schools noted that their institutions had incurred extensive physical damage that was caused by water, wind, and, in one case, fire, and that the full financial impact of the hurricanes may remain unknown for years. Although Education officials told us that they have not yet determined the extent to which the authority under the emergency legislation to waive or modify program provisions for hurricane-affected institutions would be used, the department would be prepared to provide loans to hurricane-affected HBCUs.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-07-64, Capital Financing: Department Management Improvements Could Enhance Education's Loan Program for Historically Black Colleges and Universities
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
October 2006:
Capital Financing:
Department Management Improvements Could Enhance Education's Loan
Program for Historically Black Colleges and Universities:
GAO-07-64:
GAO Highlights:
Highlights of GAO-07-64, a report to congressional requesters
Why GAO Did This Study:
Historically Black Colleges and Universities (HBCU), which number
around 100, undertake capital projects to provide appropriate settings
for learning, but many face challenges in doing so. In 1992, Congress
created the HBCU Capital Financing Program to help HBCUs fund capital
projects by offering loans with interest rates near the government‘s
cost of borrowing. We reviewed the program by considering (1) HBCU
capital project needs and program utilization, (2) program advantages
compared to other sources of funds and schools‘ views on loan terms,
(3) the Department of Education‘s (Education) program management, and
(4) certain schools‘ perspectives on and Education‘s plan to implement
loan provisions specifically authorized by Congress in June 2006 to
assist in hurricane recovery efforts. To conduct our work, we reviewed
applicable laws and program materials and interviewed officials from
federal agencies and 34 HBCUs.
What GAO Found:
HBCU officials we interviewed reported extensive and diverse capital
project needs, yet just over half of available loan capital ($375
million) has ever been borrowed. About 23 HBCUs have taken steps to
participate in the program, and 14 have become borrowers. Education has
collected and reported limited data on the program‘s utilization and
has not established performance measures or goals to gauge program
effectiveness, though Education officials noted they are developing
measures and goals.
The HBCU loan program provides access to low-cost capital financing and
flexibilities not always available elsewhere, but some loan terms and
conditions discourage participation, though school officials said they
remain interested in the program. The low interest rate and 30-year
repayment period were regarded favorably by participants and
nonparticipants alike, and the program makes funds available for a
broader range of needs than some federal grant programs. However, the
requirement to place in a pooled escrow 5 percent of loan proceeds”an
insurance mechanism that reduces federal program costs due to any
program borrower‘s potential delinquency or default”monthly payments
versus semiannual ones traditionally available from private sources of
loans, and the extent to which some loans have been collateralized
could discourage participation.
While Education has taken steps to improve the program, significant
weaknesses in its management control could compromise the program‘s
effectiveness and efficiency. Education has recently provided schools
with both fixed and variable interest rate options, allowed for larger
loans, and afforded more opportunities to negotiate loan terms. Also,
Education has increased its marketing efforts for the program. However,
Education has not established effective management control to ensure
that it is (1) communicating with schools in a useful and timely
manner, (2) complying with statutory requirements to meet twice each
year with an advisory board composed of HBCU experts and properly
account for the cost of the program, and (3) monitoring the performance
of the program‘s contractor.
Officials from 4 HBCUs in Louisiana and Mississippi told us that in
light of the extensive 2005 hurricane damage to their campuses, they
were pleased with certain emergency loan provisions but concerned that
there would not be sufficient time to take advantage of Education‘s
authority to waive or modify the program provisions. School officials
from the 4 schools noted that their institutions had incurred extensive
physical damage that was caused by water, wind, and, in one case, fire,
and that the full financial impact of the hurricanes may remain unknown
for years. Although Education officials told us that they have not yet
determined the extent to which the authority under the emergency
legislation to waive or modify program provisions for hurricane-
affected institutions would be used, the department would be prepared
to provide loans to hurricane-affected HBCUs.
What GAO Recommends:
We recommend that Education
(1) comply with the law by regularly convening and consulting its
Advisory Board, (2) improve school communications, (3) allow semiannual
repayments, (4) properly account for costs in conformance with the law,
and (5) formally monitor its contractor. Education agreed with our
findings and four of the five recommendations made in this report. The
department disagreed with our third recommendation. We continue to
believe Education should allow semiannual repayments.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-64].
To view the full product, click on the link above. For more
information, contact Cornelia Ashby at (202) 512-7215 or
ashbyc@gao.gov.
[End of Section]
Contents:
Letter:
Results in Brief:
Background:
HBCUs Reported Substantial Capital Project Needs, but Only About Half
of Available Program Funds Have Been Borrowed:
The Program Provides Needed Access to Low-Cost Capital Financing, but
Certain Loan Terms and Conditions Discourage Participation:
Education Has Taken Some Steps to Improve the Program, but Weaknesses
in Management Control Exist:
HBCUs Affected by Hurricanes Expressed Satisfaction with Special Loan
Provisions and Concerns with Application Deadline, while Education
Officials Said They Would Evaluate Loan Processes:
Conclusions:
Recommendations for Executive Action:
Agency Comments:
Appendix I: List of Historically Black Colleges and Universities GAO
Interviewed:
Appendix II: Number of HBCUs Eligible to Participate in Capital
Financing Program by State (as of August 31, 2006):
Appendix III: HBCUs Located in Geographic Area Affected by Hurricane
Katrina in 2005:
Appendix IV: Comments from the Department of Education:
Appendix V: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Key Terms and Conditions for HBCU Capital Financing Loans:
Table 2: History of Loan Activity of the HBCU Capital Financing
Program:
Table 3: Education's Indicators Measuring Program Utilization:
Table 4: Designated Bonding Authority's Attendance and Scope of
Activities at Conferences since 2002:
Figures:
Figure 1: The Renovated Kellogg Conference Center at Tuskegee
University:
Figure 2: Xavier University Science Building Auditorium Before and
After Restoration from Flood Damage:
Figure 3: Exterior of Southern University's Library with Waterline
Indicating the Extent of Flooding:
Figure 4: Removed Asbestos from Dillard University Library Awaiting
Disposal:
Abbreviations:
APPA: Association of Higher Education Facilities Officers:
DBA: designated bonding authority:
FCRA: Federal Credit Reform Act:
FEMA: Federal Emergency Management Agency:
FFB: Federal Financing Bank:
HBCU: Historically Black Colleges and Universities:
HEA: Higher Education Act:
NACUBO: National Association of College and University Business
Officers:
NAFEO: National Association for Equal Opportunity in Higher Education:
NASULGC: National Association of State Universities and Land Grant
Colleges:
OMB: Office of Management and Budget:
SACS: Southern Association of Colleges and Schools:
SBA: Small Business Administration:
UNCF: United Negro College Fund:
United States Government Accountability Office:
Washington, DC 20548:
October 18, 2006:
The Honorable Dale E. Kildee:
Ranking Minority Member:
Subcommittee on 21st Century Competitiveness:
Committee on Education and the Workforce:
House of Representatives:
The Honorable Major R. Owens:
House of Representatives:
The nation's Historically Black Colleges and Universities (HBCU), like
many of the approximately 6,500 other institutions of higher education
in the country,[Footnote 1] undertake capital improvements, including
renovating existing or constructing new instructional facilities, to
provide their students appropriate settings for learning and social
development. Many HBCUs, which number around 100 schools, face numerous
challenges in funding capital projects because they have relatively
small enrollments, limited endowments, and face other financial
constraints. Despite these challenges, HBCUs have distinguished
themselves by granting a substantial portion of the degrees earned by
African-Americans. For example, in school year 2003-2004, HBCUs granted
about 13.5 percent of all degrees earned by African-Americans while
constituting only 1.5 percent of the nation's postsecondary
institutions.
To help these schools fund capital projects, Congress created the HBCU
Capital Financing Program in 1992 under the Higher Education Act of
1965 (HEA) to provide eligible HBCUs with access to low-cost financing.
The Department of Education (Education) is responsible for overall
program management and is expected to regularly consult with the HBCU
Capital Financing Advisory Board (Advisory Board). The Advisory Board
is composed of the Secretary of Education, or the Secretary's designee,
presidents of private and public HBCUs, and other experts on HBCUs.
Operation of the program is contracted to a designated bonding
authority (DBA) that, among other lending functions, raises funds by
issuing bonds for purchase by the Federal Financing Bank (FFB)--a
government corporation under the supervision and direction of the
Department of Treasury (Treasury) that assists federal agencies in
financing agency-issued or agency-guaranteed securities. Funds raised
are subsequently lent to eligible HBCUs at an interest rate slightly
above the government's cost of borrowing to finance qualified capital
projects. As part of its responsibilities in managing a federal credit
program subject to the Federal Credit Reform Act of 1990 (FCRA),
Education is required to determine the net cost to the government of
extending credit over the life of a loan--the subsidy cost--in the year
the loan is made. Congress must provide Education with budget authority
to cover these costs before loans are provided to HBCUs. Since the
program was first funded, appropriations legislation has, in general,
limited the subsidy costs of the HBCU capital financing to no greater
than zero.
In August of 2005, the campuses of some HBCUs in the Gulf Coast were
severely damaged by Hurricane Katrina or Rita. To assist these HBCUs in
their recovery efforts, in June 2006, Congress, in the Emergency
Supplemental Appropriations Act for Defense, the Global War on Terror,
and Hurricane Recovery, 2006 (Emergency Act), amended certain statutory
provisions for institutions affected by the Gulf Coast hurricane
disasters and granted the Secretary of Education the authority to waive
or modify any statutory or regulatory provisions of the program in
connection with a Gulf Coast hurricane disaster. In addition, the
Emergency Act provides that the authority to enter into, waive, or
modify the terms of a loan agreement expires 1 year after the
legislation's enactment.
In light of the upcoming reauthorization of the Higher Education Act,
you had questions about the utilization of the program and Education's
management of the program. To address your interests, we reviewed the
program by considering (1) the capital project needs of the nation's
HBCUs and the extent to which HBCUs have used the program; (2) the
relative advantages of the program, if any, compared with other sources
of funding, and schools' perspectives on the loan terms and conditions;
(3) whether Education's administration and management of the program
ensures program effectiveness; and (4) schools' perspectives on the
emergency loan provisions of the Emergency Act and Education's plans
for implementing them.
To conduct our work, we reviewed and analyzed applicable laws and
regulations as well as program data and documents pertaining to program
participation, program policies, and agreements among Education, the
DBA, the FFB, and participating schools. We also reviewed the methods
and procedures--management controls--Education had in place or was
planning to implement to manage the program. To provide some context
for understanding HBCUs' capital project needs, we analyzed available
national studies concerning such needs of postsecondary institutions
and HBCUs in particular. In addition, we reviewed alternative capital
funding sources, including private sector financing and federal grants
available to HBCUs and asked schools how these sources or funding
options compare to the program. We interviewed officials representing
Education, its DBA, the Advisory Board, the FFB, the Office of
Management and Budget (OMB), the Small Business Administration (SBA),
associations knowledgeable about HBCUs, and the Bond Market
Association. We conducted semistructured interviews with 34 HBCUs. (See
app. I.) We interviewed all 13 program participants that originated
loans prior to 2006, and a purposive sample of 21 nonparticipants. We
selected nonparticipating schools based on (1) location, (2) type (2-
year and 4-year, public and private), and (3) enrollment size. Our
selection of nonparticipating schools was made to obtain a variety of
institutional perspectives and was not intended to be representative.
During the course of our review, we conducted site visits to 5
schools,[Footnote 2] 3 of which were institutions affected by the
hurricanes in 2005,[Footnote 3] and the other 2 institutions were
program participants. Our interviews with program participants also
included another institution affected by the 2005 hurricanes. We
conducted our work from May 2005 to August 2006 in accordance with
generally accepted government auditing standards.
Results in Brief:
HBCU officials we interviewed reported extensive and diverse capital
project needs, including construction and renovation of facilities and
addressing deferred maintenance, yet just over half of the available
HBCU Capital Financing Program loan capital has been borrowed. While
capital project needs have not been well documented by national
studies, the schools have individually identified and documented them.
Despite reported needs, only 14 schools became borrowers--borrowing
about $200 million, well below the $375 million limit Congress
established. Education has collected and reported limited information
on the program's utilization and has not established performance
measures or goals to gauge program effectiveness, though Education
officials noted that they are currently working on developing such
measures and goals.
The program provides access to low-cost capital financing and
flexibilities not always available elsewhere, but some loan terms and
conditions could discourage participation, though school officials said
they remain interested in the program. Participants and nonparticipants
alike looked favorably on low interest rates and long repayment periods
(up to 30 years) offered by the program and noted that these may not be
available in the private market for some borrowers. Further, while
HBCUs may qualify for a variety of federal grants for capital projects,
school officials said that the program makes funds available for a
broader range of needs. However, school officials found that certain
provisions of the program have discouraged participation. In
particular, many officials remarked that the requirement that they
place in a pooled escrow account 5 percent of loan proceeds was a
disincentive to participate in the program. The escrow funds, which
reduce the federal budget cost of the program by offsetting the
estimated costs of any program borrower's loan delinquency or default,
are returned to program participants if no such losses occur. The
recent default of one borrower, however, has heightened awareness among
participants of the financial risk for them inherent in the pooled
escrow arrangement. Though not as prevalent a concern, Education's
requirement for monthly loan repayments was viewed by some as an undue
burden, given that the DBA remits these payments to the FFB
semiannually. Although the range of capital projects permissible under
the program is wider than that offered through some federal grant
programs we reviewed, many school officials would like to see
additional projects funded, such as multipurpose community centers and
campus beautification projects. While concerns were noted, many schools
expressed an interest in participating again or for the first time,
provided that certain program improvements were made.
While Education has taken some steps to improve the program, we found
significant weaknesses in its management controls that compromise the
extent to which Education can ensure program objectives are being
achieved effectively and efficiently. Specifically, with respect to
program improvements, Education has recently provided schools the
choice of fixed or variable interest rates, allowed for larger loan
amounts, and afforded more opportunity for schools to negotiate loan
terms that appealed to schools. In addition, Education has increased
marketing of the program. However, Education has not established
effective management control in several areas, including:
² Communication with HBCUs: Several HBCU officials reported that they
lacked clear, timely, and useful information from Education and the
DBA. For example, several officials said they did not receive updates
about the status of their loans. For some schools, the process of
getting the loan took more than a year. As a result of the lengthy
process, capital project costs for some schools increased. School
officials told us that the process could have been expedited had
Education and the DBA made use of previous borrowers' experiences to
apprise them of problems that could affect their own applications.
² Compliance with laws and regulations: Despite a statutory requirement
that the Advisory Board meet with and advise the Secretary of Education
at least twice each year, the Advisory Board has met only three times
in the last 12 years. In addition, Education has not complied with
requirements of the Federal Credit Reform Act of 1990. In particular,
Education has not properly accounted for the costs of the program
because it has excluded certain fees paid by borrowers to the
government from its cost estimates, thereby overestimating program
costs. Moreover, Education has allowed the DBA to collect and hold in
trust fees paid, but has not established policies or procedures for the
DBA concerning how it is to remit these funds to the government.
² Monitoring the program contractor: Although the DBA has been under
contract with Education for over 5 years, it has not been formally
assessed for performance. Also, Education has not monitored the
marketing activities of its DBA to ensure that loans are being fairly
allocated among as many eligible institutions as possible. Because the
DBA's compensation is determined as a percentage of the amount
borrowed, and the costs it incurs may not vary significantly from loan
to loan, it is important to monitor its activities to ensure it is not
making loans exclusively to schools that are likely to borrow larger
amounts and for which its potential for profit is highest.
Additionally, we found several instances of poor record keeping by the
DBA, including missing key loan documentation, and until our review,
Education was unaware that such documents were missing.
HBCU officials whose campuses were affected by the hurricanes expressed
satisfaction with the special loan provisions but had concerns about
the time allowed to take advantage of them, while Education officials
told us they are taking steps to evaluate the department's loan
processes. School officials from the 4 schools we spoke with noted that
their institutions had incurred extensive physical damages caused by
water, wind, and, for one school, fire. Many of these officials said
that they have not been able to fully assess all hurricane-related
costs, such as replacing property, repairing plumbing systems,
landscaping, and replacing sidewalks, and that the assessment process
was lengthy because of the time required to prioritize campus
restoration needs, undertake complex assessments of historic
properties, follow state assessment processes, and other factors. They
noted that the difficulties they face in making their assessments may
make it challenging for them to apply prior to the expiration of the
specially authorized provisions. School officials appreciated the
reduced interest rate and cost of issuance (both set at 1 percent or
less) and that the Secretary of Education was provided authority to
waive or modify statutory or regulatory provisions for affected
institutions to better assist them with their recovery. Although
Education officials told us that they have not yet determined the
extent to which the department would make use of its authority to waive
or modify program provisions, including statutory loan limits, the
department would be prepared to provide loans to hurricane-affected
HBCUs. They noted that the department has already notified eligible
institutions of the availability of funds and would hold additional
meetings with schools to gain an understanding of their capital
improvement and restoration needs.
In this report we are making several recommendations to the Secretary
of Education to ensure that the department is complying with provisions
of the Higher Education Act of 1965 and the Federal Credit Reform Act
of 1990. Furthermore, Education should also implement a number of
program improvements, such as revising the repayment frequency for
HBCUs and increasing monitoring of the DBA to ensure program
effectiveness and efficiency.
In written comments on a draft of this report, Education agreed with
our findings and all but one of our recommendations. Education's
written comments appear in appendix IV. Education also provided
technical comments, which we incorporated where appropriate.
Background:
Congress established the HBCU Capital Financing Program in 1992 under
Title III, Part D, of the Higher Education Act of 1965, as amended, to
provide HBCUs[Footnote 4] with access to low-cost capital to help them
to continue and expand upon their educational missions. (See app. II
for locations of HBCUs eligible to participate in the program.) Program
funds, raised through bonds issued by the DBA and purchased by the FFB,
are lent to eligible schools with qualified capital projects.[Footnote
5] Loan proceeds may be used for--among other things--repairing,
renovating, or in exceptional circumstances, constructing and acquiring
new instructional or residential facilities, equipment, or research
instrumentation. Additionally, schools are able to refinance prior
capital loans. Education guarantees loan repayment.
Program Description:
Although Education administers the program, the DBA is responsible for
many of the program's operations and is subject to departmental
oversight[Footnote 6]. Specifically, the DBA works with prospective
borrowers to develop loan applications and monitors and enforces loan
agreements. The loan process consists of multiple steps. HBCUs
interested in obtaining funds through the program must first complete a
preliminary application that includes information such as enrollment,
some financial data--including a description of existing debt--and
proposed capital projects. On the basis of this information, the DBA
determines whether the school should formally complete an application,
which includes more detailed financial information, such as audited
financial statements and various campus plans and assessments. To be
approved for the loan, an HBCU must satisfy certain credit criteria and
have qualified projects. Once the DBA determines a school's eligibility
status, a memorandum is sent to Education for final approval. When
approved, the loan goes through a closing process during which certain
terms and conditions may be negotiated. Table 1 describes key loan
terms and conditions to which schools are subject.
Table 1: Key Terms and Conditions for HBCU Capital Financing Loans:
Loan term: Life of loan; Description: Loan maturity can be for 30 years
or less.
Loan term: Interest rates;
Description: Schools may choose either variable or fixed interest rates
for loans. Interest rates are generally based on the government's cost
of borrowing. The FFB adds a surcharge of 1/8[TH] of 1 percent per year
to cover federal administrative expenses. While the FFB levies the
surcharge, Education is responsible for collecting it.
Loan term: Escrow;
Description: By law, schools are required to place 5 percent of the
outstanding loan balance in an escrow account to cover risks against
delinquency and default. Funds held in escrow are pooled and available
to cover the costs of any program borrower's delinquent or defaulted
loan.
Loan term: Other fees;
Description: By law, the cost of bond issuance is limited to no more
than 2 percent of the loan (including the DBA's origination fee--
currently set at 1.25 percent).
Loan term: Collateral;
Description: Schools must provide collateral to obtain loan funds.
Loan term: Disbursement;
Description: Loan disbursements are made incrementally as projects
progress.
Loan term: Repayment;
Description: Borrowers repay their loans monthly to the DBA, which in
turn remits loan repayments to the FFB semiannually. The law requires
that borrowers make payments to the DBA at least 60 days prior to the
date for which payment on the bonds is expected to be needed.
Loan term: Other;
Description: Each year, schools are required to submit financial
statements for the DBA's review.
Source: GAO analysis.
[End of table]
Federal Credit Reform Act of 1990:
The Federal Credit Reform Act of 1990, along with guidance issued by
OMB and accounting standards, provides the framework agencies are to
use in calculating the federal budget costs of federal credit programs,
such as the HBCU Capital Financing Program. The two principles of
credit reform are defining subsidy cost and requiring that budget
authority to cover these costs be provided in advance before new loan
obligations are incurred. OMB is responsible for coordinating the
estimation of subsidy costs. Subsidy costs are determined by
calculating the net present value[Footnote 7] of estimated cash flows
to and from the government that result from providing loans and loan
guarantees to borrowers. (Guaranteed loans that are financed by the FFB
are treated as direct loans for budgetary purposes, in accordance with
FCRA.) Cash flows for direct loans include, for example, loan
disbursements to borrowers and borrower repayments of principal and
payments of interest to the government. Estimated cash flows are
adjusted to reflect the risks associated with potential borrower
delinquencies and defaults, and estimates of amounts collected on
defaulted loans. Subsidy costs can be positive or negative. If the net
present value of cash outflows exceeds the net present value of cash
inflows, the government incurs a positive subsidy cost. On the other
hand, the government realizes a gain in revenue if there is a negative
subsidy. Since the program was established, appropriations legislation
has, in general, limited the subsidy costs of the program to be no
greater than zero. In addition, the legislation authorizing the program
established a credit authority limit of $375 million; of this amount,
private HBCUs are collectively limited to borrowing $250 million, and
public HBCUs are collectively limited to borrowing $125 million.
2005 Gulf Coast Hurricanes and Disaster Assistance:
Over a period of 2 months in 2005, three hurricanes struck the Gulf
Coast region of the United States, resulting in more than $118 billion
in estimated property damages.[Footnote 8] Two of these hurricanes,
Katrina and Rita, struck New Orleans and surrounding areas within a
month of each other, resulting in significant damages to several
institutions of higher education in the region and including the
campuses of several HBCUs,[Footnote 9] including Dillard University,
Southern University at New Orleans, and Xavier University, in
Louisiana, and Tougaloo College, in Mississippi. (See app. III for
locations of the 8 hurricane affected HBCUs.)
In June 2006, Congress passed the Emergency Act which, among other
things, amends the HBCU Capital Financing Program to assist hurricane-
affected HBCUs in their recovery efforts. To be eligible, a school must
be located in an area affected by a Gulf Coast hurricane disaster and
demonstrate that it (1) incurred physical damage resulting from
Hurricane Katrina or Rita; (2) has pursued other sources of
compensation from insurance, Federal Emergency Management Agency
(FEMA), or the Small Business Administration, as appropriate; and (3)
has not been able to fully reopen in existing facilities or to the
levels that existed before the hurricanes because of physical damage to
the institution. Key provisions include a lowered interest rate and
cost of issuance (both set at 1 percent or less), elimination of the
escrow, and deferment of principal and interest payments from program
participants for a 3-year period. The Emergency Act also provides the
Secretary of Education with authority to waive or modify any statutory
or regulatory provisions related to the program in connection with a
Gulf Coast hurricane disaster.
Disaster Assistance Agencies:
FEMA assists states and local governments with the costs associated
with disaster response and recovery efforts that exceed a state or
locale's capabilities. Grants are also provided to eligible
postsecondary educational institutions to help them recover from the
disaster. Some institutions of higher education are subsequently
provided with referrals to SBA when seeking assistance from FEMA. For
private, nonprofit institutions, SBA's disaster loans are designed to
be a primary form of federal assistance. Unlike their public
counterparts, private colleges must apply for low-interest, long-term
disaster loans prior to seeking assistance from FEMA. Schools may apply
for SBA loans, and the aggregate loan amount cannot exceed $1.5
million. In general, the loan terms for each loan include a maximum of
30 years for repayment with interest rates of at least 4 percent.
HBCUs Reported Substantial Capital Project Needs, but Only About Half
of Available Program Funds Have Been Borrowed:
HBCU officials we interviewed reported extensive and diverse capital
project needs, including construction and renovation of facilities and
addressing deferred maintenance, yet just over half of the available
program loan capital has been borrowed. While HBCU capital project
needs are not well documented by national studies, the schools
themselves have individually identified and documented them. Despite
reported needs, only about a quarter of HBCUs have taken steps to
participate in the program, and about half of these HBCUs became
borrowers. Education has collected and reported limited information on
the program's utilization and has not established performance measures
or goals to gauge program effectiveness, though Education officials
noted that they are currently working on developing such measures and
goals.
HBCUs Reported Having Substantial Capital Project Needs, although Such
Needs Are Not Well Documented in National Studies:
There are few national studies that document the capital project needs
of HBCUs, and they do not provide a current and comprehensive national
picture. The four that we identified and reviewed are more than several
years old, narrowly scoped, or had limited participation.[Footnote 10]
Specifically, the studies are between 6 and 17 years old, and two
studies focused only on specific types of need--renovation of historic
properties and campus wiring for computer networks.[Footnote 11] One
study that addressed a broader range of needs and was among the most
recent had a low response rate--37 percent.
Despite the lack of national studies, schools that we interviewed
reported extensive, diverse, and ongoing capital project needs. School
officials reported that they routinely conduct facility
assessments[Footnote 12] as part of their ongoing strategic planning
and that these assessments help determine the institutions' short-and
long-term capital needs. They said that capital projects, including the
construction of new dormitories, renovation of aging or historic
facilities, repair of infrastructure, and addressing long-standing
deferred maintenance are needed for a variety of reasons. New
facilities such as dormitories and student centers are often needed as
a result of enrollment growth, for example, while modernization of
existing facilities is needed to accommodate technological advances.
For example, Tuskegee University renovated an existing facility to
house its hospitality management program, creating modern meeting
facilities along with a full-service hotel, which provides students
with a real-world laboratory in which they gain immediate hands-on
experiences (see fig. 1). In addition, many of the school officials who
we interviewed reported that their schools had particularly old
facilities, many of which are listed in the National Register of
Historic Places.[Footnote 13] Some school officials cited their need to
repair or replace campus infrastructure. For example, some schools
reported needing to replace leaking underground water pipes, while
others reported the need to replace 100-year-old water and gas pipes.
Many of the school officials we interviewed reported having deferred
maintenance projects, some for over 15 years, and officials from 3
schools estimated their schools' deferred maintenance to be over $50
million. For some schools, the deferred maintenance is substantial in
light of existing resources, according to HBCU officials. These types
of capital projects are essential to ensuring student safety and
preserving assets that directly affect their ability to attract,
educate, and retain students.
Figure 1: The Renovated Kellogg Conference Center at Tuskegee
University:
[See PDF for image]
Source: Tuskegee University.
Note: The University relied in part on the HBCU Capital Financing
Program to renovate and expand this facility. In particular, a program
loan was used to finance the upgrades of the heating and ventilation
system.
[End of figure]
Approximately 14 Percent of HBCUs Have Borrowed Just Over Half of the
Available Program Funds:
Over the life of the program, approximately 14 percent of HBCUs have
borrowed just over half of the available funds despite the substantial
needs reported by schools. Specifically, 23 HBCUs, according to
Education, have taken steps to participate in the program, and 14
became borrowers, with loans totaling just over $200 million--below the
program's $375 million total limit. About 20 percent of the eligible
private institutions have borrowed a little more than half of the $250
million allotted for private schools, and less than 8 percent of public
institutions have borrowed less than two-thirds of the $125 million
allotted for public schools. To date, loan participants have all been 4-
year institutions. Taking into account loan repayments, the total
amount of outstanding loans was about $168 million as of August 2006,
leaving about $207 million available for loans (about $66 million for
public schools and about $141 million for private schools). Table 2
shows the participants and the amounts of their loans. Regarding other
schools that took steps to participate in the program but did not
become borrowers, 6 schools were reported to have withdrawn their
applications, and 6 others had applications pending. To date, only one
school has been denied a loan.
Table 2: History of Loan Activity of the HBCU Capital Financing
Program:
Institution: Barber-Scotia College;
Institution type: Private, 4-year;
Amount borrowed: $7,000,000.
Institution: Miles College;
Institution type: Private, 4-year;
Amount borrowed: $7,835,000.
Institution: Tougaloo College;
Institution type: Private, 4-year;
Amount borrowed: $8,200,000.
Institution: Virginia Union University;
Institution type: Private, 4- year;
Amount borrowed: $8,218,000.
Institution: Bennett College;
Institution type: Private, 4-year;
Amount borrowed: $8,700,000.
Institution: Livingstone College;
Institution type: Private, 4-year;
Amount borrowed: $13,000,000.
Institution: Shaw University;
Institution type: Private, 4-year;
Amount borrowed: $10,015,000.
Institution: Bethune-Cookman College;
Institution type: Private, 4- year;
Amount borrowed: $20,295,000.
Institution: Clark Atlanta University;
Institution type: Private, 4- year;
Amount borrowed: $23,905,000.
Institution: Tuskegee University;
Institution type: Private, 4-year;
Amount borrowed: $35,931,000.
Institution: Subtotal for private institutions;
Institution type: [Empty];
Amount borrowed: $143,099,000.
Institution: West Virginia State University;
Institution type: Public, 4-year;
Amount borrowed: $3,500,000.
Institution: Lincoln University;
Institution type: Public, 4-year;
Amount borrowed: $13,850,000.
Institution: Harris Stowe State University;
Institution type: Public, 4-year;
Amount borrowed: $15,264,000.
Institution: South Carolina State University;
Institution type: Public, 4-year;
Amount borrowed: $42,000,000.
Institution: Subtotal for public institutions;
Institution type: [Empty];
Amount borrowed: $74,614,000.
Institution: Total;
Institution type: [Empty];
Amount borrowed: $217,713,000.
Source: GAO analysis of Education data.
Note: Some schools have more than one loan; amount borrowed reflects
total for all loans.
[End of table]
Education Has Taken Limited Steps to Determine Schools' Financing Needs
and Collect Information and Report on Program Utilization and
Effectiveness:
Education has collected and reported limited information concerning
HBCUs' capital financing needs and the schools' utilization of the
program. Education officials said that, beginning in 2005, to
understand schools' financing needs and whether the program could
assist schools, the DBA engaged in an outreach effort through which it
identified 15 schools that might be candidates for the program. Over
the history of the program, Education has collected some information to
track program utilization, including the number of inquiries and
applications received and the loan volume requested, approved, and
awarded. However, Education has not widely reported such data.
Education has provided certain elements of its program utilization data
to Congress' appropriations committees via its annual justifications of
budget estimates documents. Table 3 shows the data collected by
Education to track program utilization.
Table 3: Education's Indicators Measuring Program Utilization:
Dollars in millions.
Inquiries;
1996: --;
1997: --;
1998: 25;
1999: 30;
2000: --;
2001: --;
2002: 11;
2003: 22;
2004: 36;
2005: 23;
2006: 8;
Total: 155.
Pre-applications received;
1996: --;
1997: --;
1998: --;
1999: --;
2000: 1;
2001: 2;
2002: 2;
2003: 8;
2004: 7;
2005: 5;
2006: 1;
Total: 26.
Applications received;
1996: 4;
1997: 4;
1998: 3;
1999: 3;
2000: 1;
2001: 2;
2002: 2;
2003: 3;
2004: 2;
2005: 1;
2006: 1;
Total: 26.
Loan volume requested;
1996: $20.5;
1997: $21.8;
1998: $12.3;
1999: $37.6;
2000: $100;
2001: $20.7;
2002: $32.1;
2003: $34.9;
2004: $29.5;
2005: $57.5;
2006: $18;
Total: $384.90.
Loans approved;
1996: 4;
1997: 1;
1998: 2;
1999: 3;
2000: 1;
2001: 2;
2002: 2;
2003: 3;
2004: 4;
2005: 1;
2006: 1;
Total: 24.
Loan volume approved;
1996: $20.5;
1997: --;
1998: $8.3;
1999: $37.6;
2000: $13.85;
2001: $20.7;
2002: $32.1;
2003: $24.9;
2004: $51.8;
2005: $42;
2006: $15.5;
Total: $267.25.
Loans awarded;
1996: 1;
1997: 1;
1998: 0;
1999: 3;
2000: 1;
2001: 2;
2002: 2;
2003: 2;
2004: 3;
2005: 1;
2006: 1;
Total: 17.
Volume awarded;
1996: $3.5;
1997: $4.8;
1998: $0;
1999: $37.6;
2000: $7;
2001: $20.7;
2002: $32.1;
2003: $24.9;
2004: $29.8;
2005: $42;
2006: $15.3;
Total: $217.70.
Source: Education and GAO analysis of budget justification documents.
Note: (--) indicates that Education was unable to provide information
for the indicator in that particular year.
[End of table]
Education officials noted that while the data they collect are useful
to indicate the extent to which the schools have used or accessed the
program, they are inadequate to address questions concerning whether
the program is under-or overutilized or to demonstrate program
effectiveness. These officials noted that they believe program
performance measures would be useful but that developing such measures
is particularly challenging for a credit program like the HBCU Capital
Financing Program. This is so in part because participation in a loan
program is dependent on complex factors, such as schools' funding
needs, the availability of other sources of financing, and schools'
desire and capacity to assume debt. Program officials cautioned against
setting firm program participation goals, for example, because they
would not want Education to be perceived as "pushing" debt onto schools
that either do not want to, or should not, assume loan obligations
before their circumstances warrant doing so. Another complicating
factor program officials cited was the small number of potential
program beneficiaries. One Education official noted that Education has
established performance goals and measures for its student grant and
loan aid programs, which are based on sophisticated survey mechanisms
designed to measure customer (students, parents, and schools)
satisfaction with the department's aid application, receipt, and
accounting processes. Because the scope of the student aid programs is
large, encompassing millions of students and parents and thousands of
schools, it is reasonable to develop and use such measures, the
official noted. In contrast, such measures may not be meaningful given
the small number of HBCUs and the frequency with which loans are made
under the Capital Financing Program. Nevertheless, these officials told
us that they believe program performance measures would be useful to
gauge program effectiveness. They have established a working group to
develop performance measures for the program and were consulting with
OMB and other federal officials with expertise on federal credit
programs to guide their efforts. The officials noted that they do not
have any firm schedule with respect to completing their development of
program performance measures.
The Program Provides Needed Access to Low-Cost Capital Financing, but
Certain Loan Terms and Conditions Discourage Participation:
The HBCU loan program provides access to low-cost capital financing and
flexibilities not always available elsewhere, but some loan terms and
conditions discourage participation, though school officials said they
remain interested in the program. The low interest rate and long
repayment period were regarded favorably by participants and
nonparticipants alike, and the program makes funds available for a
broader range of needs than some federal grant programs. However, the
pooled escrow arrangement, monthly repayment terms, and the extent to
which some loans have been collateralized could discourage
participation.
The Program Provides Low-Cost Financing and Certain Flexibilities in
Comparison to Other Capital Funding Sources:
The HBCU Capital Financing Program provides lower-cost financing and
longer loan maturities and may be used for a broader range of capital
projects by a greater number of schools than other funding sources,
according to HBCU officials. Some officials noted that the program
offers loans with lower interest rates than traditional bank loans.
Moreover, the program's interest rates are typically less than the
interest rates schools would be required to pay investors if they
issued their own bonds to raise funds. According to school officials
and bond industry experts, some HBCUs could obtain, and some have
obtained, lower interest rates than those offered under the program by
issuing their own tax-exempt bonds.[Footnote 14] However, this is
predicated on a school's ability to obtain a strong credit rating from
a credit rating agency.[Footnote 15] Schools with weaker or
noninvestment grade credit ratings would likely have to pay investors
higher interest rates. In addition, schools issuing taxable bonds would
likely pay higher interest rates to investors, compared to the
program's interest rates, regardless of the schools' credit ratings.
While schools can lower interest rates paid to bond investors by
purchasing bond insurance, the cost to do so may be
prohibitive.[Footnote 16] For these reasons, officials at Education and
HBCUs, as well as bond industry experts, told us that the HBCU Capital
Financing Program may be ideally suited for schools that have or would
receive a noninvestment grade rating. Participation in the program may
also benefit schools by enhancing their ability to issue their own
bonds in the future. An official at one HBCU, for example, told us that
obtaining and repaying a loan under the program had allowed the school
to demonstrate its fiscal stability and to subsequently issue its own
bond with a lower interest rate than was then being offered under the
program.
In addition to citing lower interest rates, a large majority of the
HBCU officials we spoke to said that the program's 30-year loan
repayment period was attractive, and some noted that private funding
sources would likely offer 20 years or less. Some school officials
noted that the longer repayment period allowed schools to borrow more
or reduce the amount of monthly payments. Borrowing larger amounts,
officials reported, allowed them to finance larger or more capital
projects. Another school we spoke with that once considered using the
program said that even though it was able to issue a tax-exempt bond
and obtain a more favorable interest rate, it could only obtain a 20-
year maturity period for the bond.
Some HBCU officials told us they preferred grants to loans but noted
that, in general, compared to other federal grant programs, more HBCUs
are eligible for the HBCU loan program, and that it also funds a wider
variety of projects. Grants are available for most HBCUs under the
Higher Education Act's strengthening institutions programs, also
administered by Education, which fund capital projects as well as other
activities, such as faculty and academic program development. However,
fewer HBCUs are eligible for other federal grant programs that provide
funding for capital projects. For example, the Department of
Agriculture's 1890 Facilities Grant Program is only for those 18 HBCUs
that are land grant institutions. Similarly, the Department of Health
and Human Services' facilities improvement program provides only for
those HBCUs with a biomedical and behavioral research program. While
there are a variety of other assistance programs offered by charitable
foundations, and state and local governments, available funding is
limited.
The Escrow Arrangement, among Other Terms and Conditions, Was Cited as
a Disincentive to Participating in the Program:
HBCU officials we spoke with--participants and nonparticipants alike--
reported that a disincentive to participation in the program was the
pooled escrow; additionally, other terms and conditions, such as the
monthly repayment schedule and the extent to which loans are
collateralized, were also viewed by some as deterrents. Over half of
HBCU respondents we spoke with--both participants and nonparticipants-
-agreed that the pooled escrow was a drawback, and over one-fifth said
that it actually deters participation. The escrow funds, which reduce
the federal budget cost of the program by offsetting the estimated
costs associated with delinquent loan repayments and borrower defaults,
net of collections, are returned to program participants if no such
losses occur. However, a recent default by one borrower--the first to
occur in the program's history--has heightened awareness among program
participants of the financial risk for them inherent in the pooled
escrow arrangement.[Footnote 17] Since the default, Education has
withdrawn funds from participating schools' escrow accounts twice and
will continue doing so until the default is resolved, leaving other
schools uncertain as to how much of their own escrow accounts will
remain or be replenished.[Footnote 18] The pooled escrow feature also
presents a problem for state institutions because they are prohibited
from assuming the liability of another institution. One program
official said that this issue was common for state schools because
state law prohibits the lending of public funds to nonstate entities--
considered to be the case when state funds in escrow are used to hedge
against the delinquency of another institution. One participating
public HBCU reported that it had to resolve this problem by accounting
for its escrow payments as a fee that would not be returned to the
school rather than a sum that could be recovered, as the program
intends. Because the escrow feature is mandated by law, any changes to
this arrangement would require congressional authorization.
Additionally, in order to maintain the federal subsidy cost of the
program at or below zero, other alternatives--such as assessing
additional fees on borrowers, or requiring contributions to an
alternative form of a contingency reserve--would be necessary in the
absence of the pooled escrow arrangement.
While frequency of payments is not as prevalent a concern as the pooled
escrow, some schools objected to the program's requirement that
repayments be made monthly as opposed to semiannually, as is common in
the private market. Schools participating in the HBCU Program have been
required by the DBA to make payments monthly, although FFB lending
policy is to require repayments only on a semiannual basis. Despite the
fact that participants have met the terms of an extensive credit
evaluation process, DBA officials expressed the view that the monthly
repayment requirement promotes good financial stewardship on the part
of the schools. However, some HBCU officials said that they incur
opportunity costs in making payments on a monthly versus a semiannual
basis. They also noted that it would be more practical if payments were
to coincide with the beginning of their semesters, when their cash
flows are typically more robust.
Additionally, almost half of the participating schools expressed
concern about the amount of collateral they had to pledge in order to
obtain a loan. In most cases, program participants have pledged certain
real property as collateral, though endowment funds and anticipated
tuition revenue are also allowed as collateral. Some HBCU officials
said their loans were overcollateralized in that the value of the real
estate pledged as security exceeded the value of the loan. They noted
that such circumstances can present a problem for those schools trying
to obtain additional capital financing without sufficient assets
remaining available as collateral. One nonparticipant cited the
collateral required of other institutions as a reason for its decision
not to participate. When asked about the amount of collateral required,
Education and DBA officials reported that the extent and amount of
collateral required to obtain a loan under the program varies depending
on the individual circumstances of an institution. The amount of
collateral required may be less for institutions that have maintained
relatively large endowments and stable tuition revenue and more for
institutions that have few or no physical properties to use as
collateral, for example. Education officials further noted that
requiring the value of collateral to be greater than the value of the
loan was not an uncommon business practice.
Overall, more than two-thirds of the participant schools and more than
a third of the nonparticipants said they are interested in using the
program but some said that their continued or future interest in the
program would depend on its being modified. Several schools suggested
the types of projects eligible for funding could be broadened, which
might allow them to undertake capital projects that would, in turn,
assist them in attracting and retaining additional students. Campus
beautification projects and multipurpose community centers were cited
as examples. In addition, they regarded new construction--for which
program loans are available only under exceptional circumstances--as
particularly important because new construction attracts more students
and because renovations often incur unexpected costs. Nevertheless,
many public HBCU school officials we spoke with said that in view of
their states' continuing fiscal constraints, they expect to consider
the loan program as a future funding resource.
Education Has Taken Some Steps to Improve the Program, but Weaknesses
in Management Control Exist:
While Education has taken limited steps to improve the program, we
found significant weaknesses in management controls that compromise the
extent to which Education can ensure program objectives are being
achieved effectively and efficiently. Education has recently provided
schools the choice of fixed or variable interest rates, allowed for
larger loan amounts, and afforded more opportunity for schools to
negotiate loan terms, which appealed to schools. In addition, Education
has attempted to increase awareness of the program among HBCU officials
through increased marketing of the program by the DBA. While Education
has taken steps to improve the program, we found significant weaknesses
in its management control with respect to its communications with
HBCUs, compliance with program and financial reporting laws and
guidance, and monitoring of its DBA.
Education Has Recently Introduced Some Program Improvements, Including
Flexible Loan Terms:
Since 2001, Education has taken some steps to improve the program--in
some cases by allowing greater negotiation of certain loan terms and
conditions. Department officials said that changes to the program were
necessary to remain competitive with other programs and the private
market. These flexible terms included a variable interest rate option
and the opportunity to negotiate the amount of additional debt that a
school can subsequently assume through other financing arrangements. In
fact, since 2003, 4 of the 7 schools that have received loans have
taken advantage of the variable interest rate. Regarding the
department's monitoring of their debt, officials at another school said
that they were able to negotiate with the DBA the amount of additional
debt they could assume--from $500,000 to $1 million--before they would
have to notify the department. School officials said this change was
important because it not only reduced their administrative burden but
it also gave them additional leeway to pursue other capital financing.
The program made greater use of loans for the sole purpose of
refinancing existing debt since 2003[Footnote 19]. Two participants
reported an estimated savings of at least $3.7 million by refinancing
under the program. According to department officials, Education has
also made greater use of the Secretary's authority to originate loans
exceeding $10 million and to make multiple loans to an institution,
providing schools with more purchasing power. Program officials said
that while the limit on the amount and number of loans that could be
made was to prevent disproportionate use of the loan fund by larger and
more affluent schools, it no longer reflected the reality of current
costs for construction and renovation or the budgetary constraints
facing many states.
Additionally, program officials we spoke with said they had enhanced
program marketing. For example, the DBA has developed a Web site
describing the program and offering answers to frequently asked
questions. In addition, officials reported attending the national and
regional conferences for college executives shown in table 4,
completing over 60 campus site visits and contacting other school
officials by telephone. Program officials also reported that most
schools received written correspondence or an e-mail to inform them of
the program. By these efforts, all HBCUs have been contacted in 2005,
according to DBA officials. They also said they timed these outreach
efforts to correspond with schools' annual budgetary and enrollment
processes in order to prompt schools to think about potential capital
projects that could fit the program. DBA officials said that their
marketing approach for fiscal year 2006 would be the same as in the
previous year.
Table 4: Designated Bonding Authority's Attendance and Scope of
Activities at Conferences since 2002:
Conference name: Southern Association of Colleges and Schools (SACS)
regional meetings;
Years attended[A]: 2002: ;
Years attended[A]: 2003: ;
Years attended[A]: 2004: ;
Years attended[A]: 2005: ;
HBCUs in membership[B]: 77 HBCUs in 11 states;
DBA's activity: Breakfast and luncheon sponsorships, exhibit space,
receptions, and dinners.
Conference name: National Association of College and University
Business Officers (NACUBO) national or regional conferences;
Years attended[A]: 2002: [Empty];
Years attended[A]: 2003: ;
Years attended[A]: 2004: ;
Years attended[A]: 2005: ;
HBCUs in membership[B]: c;
DBA's activity: Exhibit space, client dinners.
Conference name: United Negro College Fund's annual events;
Years attended[A]: 2002: [Empty];
Years attended[A]: 2003: ;
Years attended[A]: 2004: ;
Years attended[A]: 2005: ;
HBCUs in membership[B]: 39 private 4-year colleges;
DBA's activity: Event sponsorships, contact with meeting participants.
Conference name: National Association of State Universities and Land
Grant Colleges (NASULGC) Annual Meeting;
Years attended[A]: 2002: ;
Years attended[A]: 2003: [Empty];
Years attended[A]: 2004: [Empty];
Years attended[A]: 2005: [Empty];
HBCUs in membership[B]: 18 land grant HBCUs/other members;
DBA's activity: Contact with meeting participants.
Conference name: Thurgood Marshall President's and Member Schools'
Professional Conference;
Years attended[A]: 2002: [Empty];
Years attended[A]: 2003: ;
Years attended[A]: 2004: [Empty];
Years attended[A]: 2005: [Empty];
HBCUs in membership[B]: School executives at 47 HBCUs;
DBA's activity: Contact with meeting participants.
Conference name: National Association for Equal Opportunity in Higher
Education's annual conference;
Years attended[A]: 2002: ;
Years attended[A]: 2003: ;
Years attended[A]: 2004: ;
Years attended[A]: 2005: ;
HBCUs in membership[B]: All HBCU executives/other members;
DBA's activity: Exhibit space, evening receptions.
Conference name: White House Initiative on HBCUs National HBCU Week
Conference;
Years attended[A]: 2002: ;
Years attended[A]: 2003: ;
Years attended[A]: 2004: ;
Years attended[A]: 2005: ;
HBCUs in membership[B]: All HBCU executives;
DBA's activity: Direct contact with meeting participants, client
dinners.
Source: GAO analysis.
[A] GAO did not confirm conference attendance with host association/
organization:
[B] Information on HBCUs included in membership based on most recent
data available.
[C] No description of HBCU membership was available.
[End of table]
Weaknesses in Management Control Exist:
While Education has taken some steps to improve the HBCU loan program,
we found significant weaknesses in its management control of the
program with respect to its (1) communications with HBCUs, (2)
compliance with program and financial reporting laws and guidance, and
(3) monitoring of its DBA, as described below.
Communication with HBCUs:
Many HBCU officials we interviewed reported a lack of clear, timely,
and useful information from Education and the DBA at various stages of
the loan process, and said the need to pursue such information
themselves had sometimes led to delays. While program materials
represent the loan application as a 2-to 3-month process, about two-
thirds of the loans made since January 2001 were not closed until 7 to
18 months after application. Officials from one school said that it had
taken 6 to 7 months for the DBA to relay from Education a clarification
as to whether its proposed project was eligible. Other schools reported
that Education had not provided timely or clear information about the
status of their loans. In some cases, schools reported that the lengthy
loan process resulted in project delays and cost increases over the
intervening time period. An official from one school told us that it
remained unclear to him why his school was denied a loan.
Education officials acknowledged that the loan process was lengthy for
some borrowers and said its DBA had attempted to work with these
borrowers to address problems with applications. School officials told
us that in some cases the loan process could have been expedited had
Education and the DBA made use of previous borrowers' experiences to
apprise them of problems that could affect their own applications--such
as the fact that title searches can be especially time consuming and
problematic for private HBCUs, some of which did not receive all
property deeds from their founders when they were established in the
1800s. With regard to making loan payments, several officials we
interviewed said that DBA officials had not provided information that
was in sufficient detail. In one situation, officials from one school
reported that school auditors had questioned the accuracy of the loan
payment amount for which the school was billed by the DBA because the
billing statements omitted information concerning the extent to which
the amount billed included escrow payments. Other officials noted that
they had not received written notification from the DBA concerning the
full amount of their potential liability after funds had been withdrawn
from the schools' escrow accounts to cover payments on behalf of
another borrower that had recently defaulted on a loan.
Compliance with Program and Budget Laws and Federal Financial
Accounting Standards:
Education has not complied with certain statutory requirements relating
to the program's operations and how federal agencies are to account for
the government's cost of federal loan programs. In creating the
program, Congress established within the Department of Education an
HBCU Capital Financing Advisory Board composed of the (1) Secretary of
Education or the Secretary's designee, (2) three members who are
presidents of private HBCUs, (3) two members who are presidents of
public HBCUs, (4) the President of the United Negro College Fund or
his/her designee, (5) the President of the National Association for
Equal Opportunity in Higher Education or his/her designee, and (6) the
Executive Director of the White House Initiative on HBCUs. By law, the
Advisory Board is to provide advice and counsel to the Secretary of
Education and the DBA concerning the capital financing needs of HBCUs,
how these needs can be met through the program, and what additional
steps might be taken to improve the program. To carry out its mission,
the law requires that the board meet with the Secretary of Education at
least twice each year. Despite this requirement, the board has met only
three times in the past 12 years, the most recent meeting occurring in
May 2005. According to Education officials, the Advisory Board did not
routinely meet because of turnover among Education staff as well as
HBCU presidents designated to serve on the board. Education officials
told us that there could have been other reasons why the Advisory Board
did not meet in earlier years, but none that they had knowledge of.
Although Education officials told us that they had believed another
Advisory Board meeting would be convened soon after the May 2005
meeting, no such meeting has yet been scheduled.
We also found that Education has not fully complied with requirements
of the Federal Credit Reform Act of 1990, which, along with guidance
issued by OMB and accounting standards, provide the framework that
Education is to use in calculating the federal budget costs of the
program. In particular, Education has excluded certain fees paid by
HBCUs from its calculations of program costs. The interest payments
made by HBCUs on program loans includes a surcharge of 1/8TH of 1
percent assessed by FFB in accordance with its policy and as permitted
by statutory provisions governing its transactions.[Footnote 20] Under
the Federal Credit Reform Act of 1990, these fees--i.e., the surcharge-
-are to be recognized as cash flows to the government and included in
agencies' estimated costs of the credit programs they
administer.[Footnote 21] In addition, these fees are to be credited to
the program's financing account.[Footnote 22] OMB officials responsible
for coordinating agencies' subsidy cost estimates acknowledged that
Education should include the fees in its budgetary cost estimates and
noted that other agencies with similar programs do so. Further, the
written agreement among Education, the FFB, and the DBA that governs
the issuance of bonds by the DBA for purchase by the FFB for the
purpose of funding loans under the program also stipulates that these
fees are to be credited to Education. Despite these provisions,
Education has not included the fees in its calculations of the federal
cost of the program, thereby overestimating the program's costs; nor
has Education accounted for the fees on its financial
statements.[Footnote 23] Instead, the DBA has collected and held these
fees in trust.[Footnote 24] Although the contract between Education and
the DBA generally describes how the DBA is to manage the proceeds from
and the payment of bonds issued to fund loans made to HBCUs, it does
not specifically address how the DBA is to manage the payments that
reflect the 1/8th of 1 percent paid by borrowers. In general, the DBA
collects borrower repayments and remits the proceeds to the FFB to pay
amounts due on the program's outstanding bonds. However, the amounts
paid to the FFB do not include the fees paid by borrowers. As a result,
it is unclear how these funds, retained by the DBA, are to be
eventually returned to the federal government. Moreover, Education has
not monitored the DBA's handling of these funds and is unaware of the
accumulated balance.
Monitoring the Performance of the DBA:
Although the current DBA has been under contract with Education for
over 5 years, Education has not yet assessed its performance with
respect to key program activities and contractual obligations, although
Education officials said that they have been pleased with the DBA's
performance. One of these major activities is "marketing" the capital
financing program among HBCUs in order to raise awareness and help
ensure that the program is fully utilized. Although the DBA is required
by its contract with Education to submit annual reports and audited
financial statements to Education, it has not done so. While DBA
officials told us the department has offered some informal assessments,
Education officials have not guided their marketing efforts. Still, we
found indications that the DBA's marketing strategy has likely suffered
from a lack of guidance and monitoring by Education. Officials we spoke
with at 4 schools did not know of the program, and another eight told
us they had learned about it from peers or advocacy organizations.
Others were aware of the DBA's marketing activities, but offered a
number of suggestions for improvement, citing a need for more specific
information as to the extent to which collateral would be needed, how
the program meets the needs of both private and public schools, or
examples and testimonials about funded projects. Several school
officials said DBA outreach through conferences was not necessarily
well targeted--either because the selected conferences covered a full
range of topics for a variety of schools and not only HBCUs, or because
they focused on issues relating to either public or private HBCUs, or
because they drew school officials not involved in facilities planning.
Additionally, the DBA has reserved its direct contact marketing largely
for 4-year schools. DBA officials justified this decision on grounds
that smaller schools tended to have more difficulty borrowing and that
they had targeted larger schools that they believed would be most
likely to benefit from the program. However, as prescribed by law,
loans are to be fairly allocated among as many eligible institutions as
possible. Because the DBA's compensation is determined as a percentage
of the amount borrowed, and the costs it incurs may not vary
significantly from loan to loan, it is important to monitor its
activities to ensure it is not making loans exclusively to schools that
are likely to borrow larger amounts and for which its potential for
profit is highest.
With regard to the DBA's basic responsibility for keeping records, we
found several cases in which critical documents were missing from loan
agreement files. Moreover, the DBA was unable to provide us with
entirely complete files for any of the 14 institutions that had
participated or were participating in the program. For example,
documents that included loan applications, decision memoranda,
financial statements, and real property titles were missing for several
schools. In our file review, we found that files for 9 schools did not
include the original application. Files for 8 schools did not include
the required financial statements for demonstrating long-term financial
stability, and 5 lacked DBA memoranda pertaining to the decision to
make the loan. Moreover, until our review, key Education officials were
unaware that such documents were missing.[Footnote 25]
HBCUs Affected by Hurricanes Expressed Satisfaction with Special Loan
Provisions and Concerns with Application Deadline, while Education
Officials Said They Would Evaluate Loan Processes:
Officials from four HBCUs in the Gulf Region we spoke with (Dillard
University, Southern University at New Orleans, Xavier University, and
Tougaloo College) told us that, in light of the extensive hurricane
damage to their campuses, they were pleased with the emergency loan
provisions but concerned that the 1-year authorization would not
provide sufficient time for them to take advantage of the special
program features. School officials from each of the four schools noted
that their institutions had incurred physical damages caused by water,
wind, and, in the case of one institution, fire, and that the actual
financial impact of the hurricanes may remain unknown for years.
Although Education officials told us that they have not yet determined
the extent to which the department would make use of its authority to
waive or modify program provisions for hurricane-affected institutions,
the department would be prepared to provide loans to hurricane-affected
HBCUs.
Gulf Area HBCUs Experienced Significant Hurricane Damage, and the Full
Financial Impact May Remain Unknown for Years:
Officials from the three HBCUs we visited reported extensive damage to
their campuses as a result of the 2005 hurricanes and noted that it may
take another few years to determine the full financial impact. School
officials told us that they have not been able to fully assess all
hurricane-related costs, such as replacing property, repairing plumbing
systems, landscaping, and replacing sidewalks, and as result, current
estimates are only preliminary. School officials noted that the
assessment process was lengthy because of, among other things, the time
required to prioritize campus restoration needs, undertake complex
assessments of historic properties, follow state assessment processes,
and negotiate insurance settlements. Each of the four schools we
contacted incurred physical damages caused by water and wind; one
school also incurred damage by fire. For example, the campuses of all
three schools in New Orleans were submerged in 2 to 11 feet of water
for about a month after the hurricanes, damaging the first floors of
many buildings as well as their contents. As a result, schools required
removal of debris and hazardous waste (e.g., mold and asbestos), repair
and renovation, and the taking of actions recommended by FEMA to
mitigate future risks. Xavier University officials, who preliminarily
estimated $40 million to $50 million in damage to their school, said
that they faced the need to undertake several capital projects,
including replacing elevators, repairing roofs, and rehabilitating the
campus auditorium and replacing its contents. According to officials
from Southern University at New Orleans, state officials have estimated
damages at about $17 million; at the time of our visit 10 months after
the hurricanes, state insurance assessors were beginning their work on
the campus library, where mold reached all three floors, covering
books, art collections, card catalogues, and computers. Officials at
Dillard University also reported extensive damage, preliminarily
estimated as high as $207 million[Footnote 26]. According to officials,
five buildings--which were used for academic support services and
residential facilities--had to be demolished because of extensive
damage; three of these buildings were destroyed by fire. Further, they
also reported that the international studies building, built adjacent
to a canal levee in 2003, will have to be raised at least 18 feet to
make it insurable. Officials at Tougaloo College, in Mississippi,
reported wind and water damage to the roofs of some historic
properties, which along with other damages, they preliminarily
estimated at $2 million. Figures 2-4 show some of the damages and
restoration under way at the three schools we visited.
Figure 2: Xavier University Science Building Auditorium Before and
After Restoration from Flood Damage:
[See PDF for image]
Sources: Xavier University.
[End of figure]
Figure 3: Exterior of Southern University's Library with Waterline
Indicating the Extent of Flooding:
[See PDF for image]
Source: GAO.
[End of figure]
Figure 4: Removed Asbestos from Dillard University Library Awaiting
Disposal:
[See PDF for image]
Source: GAO.
Note: All of the affected HBCUs have resumed operations but are still
in the process of restoring their campuses to varying degrees. In the
case of Southern University, it has created a new campus nearby
consisting of more than 400 trailers constructed by the U.S. Army Corps
of Engineers while damage assessments are being made. By contrast,
Dillard University had moved its operations--classes, student services,
administration--and students to a local hotel and other buildings as it
undertook the restoration of its campus. Officials were scheduled to
reopen that campus in September 2006. Xavier University had resumed
operations on its campus in January 2006 while it continued to restore
its facilities.
[End of figure]
Schools Found Select Terms for Emergency Loans Favorable, but Said They
Would Be Challenged to Make Application in the Time Allotted:
The school officials we spoke with found certain emergency provisions
of the loan program favorable, but they expressed reservations about
the time frame within which they are required to make application for
the special loans. Most school officials appreciated the reduced
interest rate and cost of issuance (both set at 1 percent or less) and
that the Secretary of Education was provided discretion to waive or
modify statutory or regulatory provisions, such as credit criteria, to
better assist them with their recovery. They said the normal sources of
information for credit evaluation--such as audited financial records
from the last 5 years--would be difficult to produce. Other conditions
of the emergency loan provisions some officials found favorable were
the likelihood that loans would be awarded sooner--providing a timely
infusion of funds--with more flexibility compared to other programs.
Officials at both Dillard and Xavier Universities said that because
their institutions had already spent a significant amount of their
available resources, the emergency loans could be used to bridge any
emerging financial difficulties they experience as they continue to
pursue insurance settlements and assistance from other federal
agencies, including FEMA and SBA. Additionally, some school officials
said that the program may allow for greater flexibility compared to
FEMA and SBA aid. For example, some officials told us that in
addressing damages caused by the hurricanes they would like to improve
upon their facilities to mitigate potential environmental damages in
the future and, at one school, upgrade an obsolete science laboratory
with state-of-the-art equipment. They said, however, that in some cases
FEMA aid is limited to restoring campus facilities to their prestorm
conditions and in other cases desired improvements might not be
consistent with requirements for historic preservation.
While most school officials we spoke with found select provisions
favorable, they expressed concerns with stipulations that limit the
extension of the special provisions to 1 year, primarily because all of
the costs associated with damage from the hurricanes have not been
fully identified. Further, officials at Southern University at New
Orleans--a public institution--said that they are subject to an
established capital improvement approval process involving both its
board of directors and state government officials that alone normally
requires a year to complete. Additionally, some of the schools are
concerned that they may not be able to restore damaged and lost records
needed to apply to the program. Officials reported that a time frame of
at least 2 to 3 years would allow them to better assess the costs of
the damages. Other concerns cited included eligibility requirements for
the deferment provision, and officials from one institution expressed
disappointment that the emergency provisions did not include some form
of loan forgiveness.
Education Is Preparing to Take Steps to Ensure It Can Provide Loans
from Available Funds to Help Hurricane-Affected HBCUs Restore Their
Campuses:
According to Education officials, they are preparing to take the steps
necessary to ensure that the department is prepared to provide loans to
hurricane-affected HBCUs. Education officials noted that in light of
the statutory limit on the total amount of loans it can make under the
program and the balance of loans outstanding as of August 2006, about
$141 million in funding is available for private, and $66 million for
public, HBCUs--both those affected by the hurricanes and others. The
officials noted that the department had not yet determined to what
extent the Secretary would use her discretion to waive or modify
program requirements, including the statutory loan limits. They told us
that some of their next steps included determining how the program's
application processes could be changed to ensure that funds can be
provided to hurricane-affected schools in a timely manner. They said
the department would need to consider to what extent it would apply
credit criteria to hurricane-affected institutions in light of the fact
that these institutions would likely be experiencing fiscal stresses as
they seek to rebuild their campuses and attempt to return to their
prior levels of enrollment. They noted that they would talk with school
officials to gain a better understanding of which program criteria
remain applicable, but anticipate using fewer credit criteria in their
determinations. Education officials also noted that they will likely
have to decide on the appropriate level of flexibility to exercise with
respect to collateralizing loans for hurricane-affected HBCUs because
some institutions may lack the collateral they had prior to the
hurricanes. Moreover, these officials stated that the department would
need to consider establishing limits on the types of projects for which
it would provide funding to ensure that loans are not provided for
capital projects for which other federal aid is available, such as that
provided by FEMA. For example, program officials recognized that a
significant cost of recovery for the schools in the Gulf Coast region
is debris removal, but believe FEMA is likely to provide funding for
such costs. Even with these challenges and outstanding questions,
program officials said that they are confident the department will be
able to lend funds to hurricane-affected institutions prior to
expiration of the special legislative provisions applicable to
hurricane-affected HBCUs. They noted that the department has already
notified eligible institutions of the availability of funds and would
hold additional meetings with schools to gain an understanding of their
capital improvement and restoration needs.
Conclusions:
HBCUs play an important role in fulfilling the educational aspirations
of African-Americans and others and in helping the nation attain equal
opportunity in higher education. In establishing the Capital Financing
Program, Congress sought to help HBCUs continue and expand their
educational mission. The program has in fact assisted some HBCUs in
financing their capital projects. Factors, however, including awareness
of the program; clear, timely, and useful information concerning the
status of loan applications and approvals; and certain loan terms and
conditions, may be discouraging other schools from participating in the
program. Some HBCUs have accessed even more attractive financing
outside of the program, while yet others may face financial challenges
that make it unwise to borrow through the program--factors that affect
program utilization and make the development of program performance
goals and measures challenging. Despite the challenge, Education is
attempting to design performance goals and measures--a positive step
that if successfully completed could be useful in informing Congress
and others about the extent to which the program is meeting Congress'
vision in establishing it.
HBCU officials had a number of suggestions, such as changing the
frequency of schools' loan repayments from a monthly to a semiannual
basis, that they believed could improve the program and positively
influence program utilization. By soliciting and considering such
feedback from HBCU officials, Education could ensure that the program
is optimally designed to achieve its objectives effectively and
efficiently. However, Education has not made consistent use of the
mechanism--the HBCU Capital Financing Advisory Board--Congress provided
to help ensure Education received input from critical program
stakeholders. Receiving feedback from schools would also allow the
department to better inform Congress about the progress made under the
program.
Effective management control is essential to ensuring that programs
achieve results and depends on, among other things, effective
communication. Agencies must promote relevant, reliable, and timely
communication to achieve their objectives and for program managers to
ensure the effective and efficient use of resources. Effective
management control also entails ensuring that an agency complies with
applicable laws and regulations and that ongoing monitoring occurs
during the normal course of an agency's operations. In failing to
follow the requirements of the Federal Credit Reform Act, Education has
overstated the budgetary cost of the program. Accurately accounting for
the cost of federal programs is all the more important in light of the
fiscal challenges facing the nation. Moreover, failing to adequately
monitor the DBA's performance with respect to critical program
responsibilities--record keeping, marketing, accounting, and
safeguarding the federal funds it has been collecting from program
borrowers--increases the program's exposure to potential fraud, waste,
abuse, and mismanagement.
Recommendations for Executive Action:
To better ensure that the HBCU Capital Financing Program can assist
these schools to continue and expand their educational missions, GAO is
making the following five recommendations for Executive Action. To
ensure that it obtains the relevant, reliable, and timely communication
that could help ensure that program objectives are being met
efficiently and effectively, and to meet statutory requirements, we
recommend that the Secretary of Education regularly convene and consult
with the HBCU Advisory Board. Among other things, the Advisory Board
could assist Education in its efforts to develop program performance
goals and measures, thereby enabling the department and the board to
advise Congress on the program's progress. Additionally, Education and
the Advisory Board could consider whether alternatives to the escrow
arrangement are feasible that both address schools' concerns and the
need to keep federal costs at a minimum. If Education determines that
statutory changes are needed to implement more effective alternatives,
it should seek such changes from Congress.
To ensure program effectiveness and efficiency, we recommend that the
Secretary of Education enhance communication with HBCU program
participants by (1) developing guidance for HBCUs, based on other
schools' experiences with the program, on steps that applicants can
take to expedite loan processing and receipt of loan proceeds, and (2)
regularly informing program applicants of the status of their loan
applications and department decisions.
In light of the program's existing credit requirements for borrowers
and the funds placed in escrow by borrowers to protect against loan
delinquency and default, we recommend that the Secretary of Education
change its requirement that borrowers make monthly payments to a
semiannual payment requirement consistent with the DBA's requirement to
make semiannual payments to the FFB.
To improve its estimates of the budgetary costs of the program, and to
comply with the requirements of the Federal Credit Reform Act, we
recommend that the Secretary of Education ensure that the program
subsidy cost estimation process include as a cash flow to the
government the surcharge assessed by the FFB and paid by HBCU borrowers
and pay such amount to the program's financing account. Additionally,
we recommend that the Secretary of Education audit the funds held by
the DBA generated by this surcharge and ensure the funds are returned
to the Department of the Treasury and paid to the program's financing
account.
To ensure adequate management control and efficient program operations,
we recommend that the Secretary of Education increase its monitoring of
the DBA to ensure its compliance with contractual requirements,
including record keeping, and that the DBA is properly marketing the
program to all potentially eligible HBCUs.
Agency Comments:
In written comments on a draft of this report, Education agreed with
our findings and all but one of our recommendations and noted that our
report would help it enhance the program and better serve the nation's
HBCUs. Education agreed with our recommendation to regularly convene
and consult with the HBCU Advisory Board and noted that the department
would leverage the board's knowledge and expertise to improve program
operations and that the department had scheduled a board meeting for
October 27, 2006. Education also agreed with our recommendation to
improve communications with HBCUs, noting that it would take steps
including developing guidance based on lessons learned to expedite loan
processing and receipt of proceeds, and regularly informing applicants
of their loan status and department decisions. Moreover, Education
agreed with our recommendation to improve its budget estimates for the
program, indicating that it would work with OMB and Treasury to do so.
Further, with regard to our recommendation that the department increase
its monitoring of its DBA, the department stated that it would require
the DBA to submit quarterly reports on program participation and
financing, identify and locate missing loan documentation, and maintain
these efforts for each subsequent loan disbursal. Additionally, the
department said that it was planning to conduct an audit of the DBA's
handling of loan funds and associated fees, as we recommended.
With respect to our recommendation that would allow participating
schools to make semiannual payments, Education said it would be
imprudent to implement the recommendation at this time because of the
potential for default as well as the exposure from a default by a
current program participant. We considered these issues in the
development of our recommendation and continue to believe that the
credit evaluation performed by the DBA, the funds set aside by
borrowers held in escrow, and the security pledged by borrowers provide
important and sufficient measures to safeguard taxpayers against
potential delinquencies and default. Further, while not noted in our
draft report reviewed by the department, the law requires that
borrowers make payments to the DBA at least 60 days prior to the date
for which payment on the bonds is expected to be needed. In addition,
borrowers have been required to submit, on an annual basis, audited
financial reports and 3-year projections of income and expenses to the
DBA. These measures provide additional safeguards as well as a
mechanism to alert the department of potential problems. We added this
information to our description of program terms and conditions in table
1.
Education also provided technical comments that we incorporated into
this report where appropriate.
As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
from its issue date. At that time, we will send copies to the Secretary
of Education appropriate congressional committees, the Director of OMB,
and other interested parties. We will also make copies available to
others upon request. In addition, the report will be available at no
charge on GAO's Web site at [Hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-7215 or AshbyC@gao.gov. Contact points for our
Office of Congressional Relations and Public Affairs may be found on
the last page of this report. GAO staff that made major contributions
to this report are listed in appendix IV.
Signed by:
Cornelia M. Ashby:
Director, Education, Workforce, and Income Security Issues:
[End of section]
Appendix I: List of Historically Black Colleges and Universities GAO
Interviewed:
1.
Alabama Agricultural and Mechanical University;
Ala.
2.
Albany State University;
Ga.
3.
Allen University;
S.C.
4.
Barber-Scotia College;
N.C.
5.
Bennett College;
N.C.
6.
Bethune-Cookman College;
Fla.
7.
Bowie State University;
Md.
8.
Central State University;
Ohio.
9.
Cheney University of Pennsylvania;
Pa.
10.
Clark Atlanta University;
Ga.
11.
Dillard University;
La.
12;
Fisk University;
Tenn.
13;
Florida Memorial College;
Fla.
14;
Jarvis Christian College;
Tex.
15;
Kentucky State University;
Ky.
16;
Lincoln University;
Pa.
17;
Livingstone College;
N.C.
18;
Miles College;
Ala.
19;
Norfolk State University;
Va.
20;
North Carolina Agriculture and Technical State University;
N.C.
21;
Saint Philip's College;
Tex.
22;
Shaw University;
N.C.
23;
South Carolina State University;
S.C.
24;
Southern University at New Orleans;
La.
25;
Tennessee State University;
Tenn.
26;
Texas College;
Tex.
27;
Tougaloo College;
Miss.
28;
Tuskegee University;
Ala.
29;
Philander Smith College;
Ark.
30;
University of the District of Columbia;
D.C.
31;
University of Maryland Eastern Shore;
Md.
32;
Virginia Union University;
Va.
33;
West Virginia State University;
W.Va.
34;
Xavier University;
La.
Source: GAO.
[End of table]
[End of section]
Appendix II: Number of HBCUs Eligible to Participate in Capital
Financing Program by State (as of August 31, 2006):
[See PDF for Image]
Source: GAO data; Map Resources.
[End of section]
Appendix III: HBCUs Located in Geographic Area Affected by Hurricane
Katrina in 2005:
[See PDF for Image]
Source: GAO data; map, U.S. Department of Commerce, Economics and
Statistics Administration, U.S. Census Bureau.
[End of section]
Appendix IV: Comments from the Department of Education:
United States Department Of Education:
Office Of Postsecondary Education:
The Assistant Secretary:
OCT 2 2006:
Ms. Cornelia M. Ashby:
Director, Education, Workforce, and Income Security Issues:
United States Government Accountability Office:
Washington, DC 20548:
Dear Ms. Ashby:
Thank you for the opportunity to review and comment on the U.S.
Government Accountability Office's (GAO) draft report entitled "Capital
Financing: Department Management Improvements Could Enhance Education's
Loan Program for Historically Black Colleges and Universities" (GAO-07-
64). We appreciate GAO's examination of this important program, and, in
accordance with the draft report's recommendations, the Department of
Education (Department) intends to take numerous steps towards
strengthening the program's ability to serve the nation's Historically
Black Colleges and Universities (HBCUs).
The Department's increased leadership and oversight of program
activities, including those of the Designated Bonding Authority (DBA),
will ensure that the statutory requirements discussed in your report
are met and enable us to better address the needs of prospective and
current participants as they arise. As part of our effort to more
closely monitor the DBA, the Department will require quarterly reports
on the status of program participation and financing.
In addition, plans are underway to retain an independent firm to audit
the DBA during fiscal year (FY) 2007, at which time the handling of
loan funds and associated fees will be assessed.
The Department will leverage the knowledge and expertise of the HBCU
Capital Financing Advisory Board (Board) by consulting the Board
regarding how to maximize the value of marketing and outreach to the
HBCU community. In addition, as required by the statute, we will
convene Board meetings on a more regular basis. The next meeting has
been scheduled for October 27, 2006.
In order to increase program awareness among HBCU administrators, the
Department will review and adjust promotion strategies to ensure that
the program targets relevant administrators (i.e. facilities officers)
at a diverse range of institutions (2-and 4-year, public and private).
We must also identify the most effective means and sites of outreach,
such as conference participation and school visits, and track the
outcomes of these efforts. To support schools that have expressed
interest or that appear to be strong candidates for the program, the
Department will place greater emphasis on technical assistance in
preparing and applying for program loans.
Efforts will be made to simplify each stage of the loan process -
including pre-application activities (e.g. obtaining property titles
and financial statements), formal initiation of the process, and
subsequent evaluation, decision, and negotiations - and to clearly
convey this process in marketing materials and conversations with
school administrators. Experiences of past borrowers will be studied to
determine realistic time projections for each phase and to identify
lessons that can be shared with new applicants. Throughout the process,
the Department and the DBA will provide schools with clear and timely
information regarding the status of their inquiries. Anticipated delays
will be discussed with applicants as early as possible and monitored
closely to minimize project delays and related cost increases.
We recognize schools' frustration with the pooled escrow requirement
described in your report; however, modifying this requirement would
require legislative action. Given Congress' historical desire to limit
program costs, it is unlikely that such a change will occur in the
foreseeable future. Furthermore, while the Department understands
institutions' preference for semi-annual rather than monthly payments,
the potential for default, as well as exposure from the default of a
current program participant, leads us to believe that it would be
imprudent to implement a less frequent payment schedule at this time.
As suggested in your report, the Department is in the process of
revising its fiscal procedures to ensure that fees are accurately
collected and recorded. The Federal Financing Bank fee should be held
in the program's financing account, and we are currently working with
the Treasury Department and the Office of Management and Budget (OMB)
to incorporate the fee into the Department's cash flow model as part of
our ongoing efforts to improve the estimates of the budgetary costs of
the program. These changes should take effect early in FY 2007.
In order to ensure the completeness of program files, the Department is
working with the DBA to identify and locate any documents that are
currently missing from program records, including property titles, loan
applications, and decision memoranda. Future loans will be issued only
when an applicant's file is complete, and a more diligent effort will
be made to maintain those files following disbursement of a loan.
To determine the program's effectiveness, the Department has begun to
develop performance measures that will be implemented in FY 2007. Key
stakeholders, including the Board, will be consulted during the
development stage of this process. Looking forward, the Department will
make certain that rigorous standards are used to measure the
performance of both program staff and the DBA.
Special attention will continue to be given to the implementation of
emergency provisions related to the Gulf Coast hurricanes, as the
Department works closely with affected HBCUs to support their recovery
and rebuilding efforts. On September 27, 2006,1 visited New Orleans to
discuss these provisions with HBCU administrators and to offer the
Department's assistance in helping them access these funds in a timely
manner. We are committed to working with these institutions to ensure
that available resources are used to meet their critical needs, but we
will remain vigilant about properly segregating and accounting for the
various streams of funding that have been awarded to hurricane-affected
schools to avoid duplication or misuse of funds.
Once again, I would like to thank you for taking the time to research
and report on the HBCU Capital Financing Program. Your findings and
recommendations will be most helpful as we strive to enhance this
valuable program.
Sincerely,
Signed by:
James Manning:
Acting Assistant Secretary:
Enclosure:
[End of section]
Appendix V: GAO Contact and Staff Acknowledgments:
GAO Contacts: Cornelia M. Ashby, Director, (202) 512-7215:
Staff Acknowledgments:
In addition to those named above the following individuals made
important contributions to the report: Jeff Appel, Assistant Director;
Tranchau Nguyen, Analyst-in-Charge; Carla Craddock; Holly Gerhart;
Lauren Kennedy; Sue Bernstein; Margie Armen; Christine Bonham; Jessica
Botsford; Michaela Brown; Richard Burkard; Carlos Diz; Kevin Jackson;
Tom McCool.
[End of section]
(130466):
FOOTNOTES
[1] These are institutions recognized by the Department of Education as
accredited institutions eligible for participation in federal student
financial aid programs.
[2] Schools we visited included Barber-Scotia College, Dillard
University, Southern University at New Orleans, Tuskegee University,
and Xavier University.
[3] A total of 8 HBCUs were affected by the 2005 hurricanes.
[4] For purposes of this program, the Higher Education Act of 1965, as
amended, generally defines an HBCU as a college or university that was
established before 1964, whose principal mission was and is the
education of Black Americans, and is accredited or making reasonable
progress toward accreditation by an accrediting agency or association
recognized by Education.
[5] Funds can also be raised through the private market. However, to
date, Education has used only the FFB to finance the loans.
[6] Education has had two DBAs. The current DBA, Commerce Capital
Access Program Corporation, was selected by Education in 2001. The
first DBA, selected in 1994 and terminated in 2000, was Educational
Direct Loan Mortgage Company and Pryor, McClendon, Counts and Company.
[7] "Present value" is the worth of future streams of returns or costs
for a program in terms of money paid immediately. In calculating
present value, future amounts are converted into their "money now"
equivalents using a discount rate. The discount rate is determined by
OMB and is generally the average annual interest rate for marketable
zero-coupon U.S. Treasury securities with the same maturity from the
date of disbursement as the cash flow being discounted.
[8] That is, Hurricanes Katrina, Rita, and Wilma, which have been
collectively referred to as the Gulf Coast hurricanes.
[9] Four HBCUs in Mississippi and Alabama (Jackson State University,
Alcorn State University, Bishop State Community College, and Hinds
Community College-Utica Campus) also reported damages to property
totaling $4.5 million.
[10] (1) The Association of Higher Education Facilities Officers
(APPA)/National Association of College and University Business Officers
(NACUBO), The Decaying American Campus: A Ticking Time Bomb 1989, (2)
APPA/NACUBO and Sallie Mae, A Foundation to Uphold, 1996, (3) U.S.
Department of Commerce/National Association For Equal Opportunity In
Higher Education (NAFEO), Historically Black Colleges and Universities:
An Assessment of Networking and Connectivity, 2000, and (4) GAO,
Historic Preservation: Cost to Restore Historic Properties at
Historically Black Colleges and Universities, GAO/RCED-98-51,
(Washington, D.C.: Feb. 6, 1998).
[11] In 1998, HBCUs reported that an estimated $755 million was needed
to restore 712 historic properties. See GAO/RCED-98-51.
[12] About 29 percent of HBCUs we contacted reported that their own
staff conducted their needs assessment, and the remaining schools
reported that they relied on either an architectural or an engineering
firm to perform such assessments.
[13] Authorized under the National Historic Preservation Act of 1966,
the National Register is part of a national program to coordinate and
support public and private efforts to identify, evaluate, and protect
our historic and archeological resources. Properties listed in the
register are significant to American history, architecture, archeology,
engineering, and culture.
[14] Under the Internal Revenue Code, qualified education facilities,
such as HBCUs, are permitted to issue tax-exempt bonds. In contrast to
taxable bonds, tax-exempt bonds produce interest income that is exempt
from federal taxation and may also be exempt from state and local
taxation, especially if the owners live in the state in which the bond
is issued. Because these investors do not pay taxes on their interest
earnings, they are willing to accept a lower pretax rate of return on
their investment, which lowers the financing costs for schools that
issue such bonds.
[15] Schools that issue bonds pay credit agencies, such as Standard &
Poor's, or Moody's Investors' Service, to assess their potential risk
of default. Credit agencies assign ratings for bonds reflecting a
spectrum of highest to lowest credit quality to help investors
determine the risk associated with investments. Ratings can generally
be grouped into two larger categories--investment and noninvestment
grades.
[16] Bond insurance guarantees the payment of principal and interest on
a bond issue if the issuer defaults. Credit rating agencies assign a
bond rating based on the insurer's ability to pay claims against
defaults, rather than on the underlying credit of the issuer.
[17] Barber-Scotia College defaulted on its loan payments in September
2005. The outstanding balance of the defaulted loan is about $7
million. Funds to cover the school's delinquent payments were withdrawn
from the school's escrow account. When the school's escrow account was
depleted, the funds required to cover the school's subsequent payments
were drawn upon a pro rata basis from each program participant's escrow
account--schools with larger outstanding loan balances will have more
money withdrawn from their escrow accounts than schools with smaller
outstanding loan balances.
[18] According to Education, escrow account funds are sufficient to
make loan repayments on behalf of the defaulted borrower for up to 12
years, provided no additional borrowers default on their loans.
Education officials said they are attempting to maintain close contact
with the defaulting school and offering to work with it to resolve the
default. Since the school pledged its entire campus as collateral for
the loan, Education could ultimately foreclose and sell it to recover
loan proceeds.
[19] Previously, refinancing was always coupled with a requirement that
most proceeds be used for construction or renovation purposes,
according to department officials.
[20] 12 U.S.C. § 2285(c).
[21] 2 U.S.C. § 661d(c).
[22] A financing account records all of the cash flows resulting from
direct loans or loan guarantees. It disburses loans, collects
repayments and fees, makes claim payments, holds balances, borrows from
the Department of the Treasury, earns or pays interest, and receives
the subsidy cost payment from the credit program account. The credit
program account receives and obligates appropriations to cover the
subsidy cost of a direct loan or loan guarantee and disburses the
subsidy cost to the financing account.
[23] According to 31 U.S.C. § 3515, federal agencies are required to
prepare and submit to OMB audited financial statements covering their
operations.
[24] The DBA has collected this fee from all but one borrower--West
Virginia State University, which received a loan in 1996 prior to the
requirement that Education collect the fee.
[25] Several of the files had been compiled by a prior bonding
authority. Nevertheless, the DBA is required under its contract with
Education to maintain files on participants for the life of the program
and a minimum of 6 years thereafter.
[26] Officials also noted that the school had incurred additional
costs, such as renting temporary space, architectural and legal
services, and lost revenues, which collectively amounted to about $130
million.
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