May 1, 2020

Massachusetts Begins Financial Screening of Private Colleges and Universities

Holland & Knight Alert
Matthew W. Sloane

Highlights

  • Massachusetts will begin financial screening of independent institutions of higher education (IHEs) this month after the first-of-its-kind program was postponed until the Board of Higher Education approved internal processing procedures and a memorandum of understanding with the New England Commission of Higher Education (NECHE).
  • NECHE will conduct the annual financial screening for IHEs that it accredits. The Massachusetts Department of Higher Education will conduct the screenings for IHEs not accredited by NECHE.
  • IHEs "screened in" must submit risk mitigation plans and contingency plans, and a public notice of risk of imminent closure may also be required.

Massachusetts begins financial screening of independent institutions of higher education (IHEs) this month. The state legislature enacted the first-of-its-kind legislation in late 2019. The Board of Higher Education (BHE) subsequently issued implementing regulations, which can be found at 16 C.M.R. Part 13.00. (See Holland & Knight's previous alert, "Massachusetts Issues First-of-Their-Kind Regulations for Financial Screening of Private Colleges," March 9, 2020.) Screening was postponed, however, until the BHE approved internal processing procedures and a memorandum of understanding (MOU) with the regional accreditor, the New England Commission of Higher Education (NECHE). The procedures and the MOU are now final, and initial screening has commenced.

In the following alert, Holland & Knight's education attorneys provide insight and an overview regarding some of the key provisions in the screening process.

THREE-STEP ASSESSMENT

Step 1: Annual Financial Screenings. NECHE, pursuant to the MOU, will conduct the annual financial screening for IHEs accredited by NECHE. The Massachusetts Department of Higher Education (DHE) will conduct the screenings for IHEs not accredited by NECHE. NECHE will share its screening results with the DHE for further review and assessment.

Guiding Principles and Methodology

Annual financial screening is intended to assess whether an IHE "may be at risk of imminent closure" within 1.5 academic years, measured from December 1. The BHE's recent guidance provides more clarity regarding how NECHE and the DHE will conduct these assessments. As reported, NECHE will use multiple metrics applied to a range of financial and non-financial indicators, have the DHE validate the screening methodology and process, share information about at-risk IHEs and certify to the DHE no later than December of each year all IHEs that NECHE determined may be at risk of imminent closure. The stated goal is "protecting enrolled and prospective students from sudden institutional closures and ensuring a process which allows IHEs reasonable prospects of returning to reasonable financial stability."

Like NECHE, the DHE plans to use multiple methods, measures and data sources. The DHE will apply initially the Student Educational Resources (SER) metric. The SER metric calculates how long an IHE can teach its enrolled and admitted students in the event of a hypothetical closure or wind down of institutional operations, relying only on known or reasonably predictable revenues and assuming no new student admissions. The DHE will use data reported annually to the federal Integrated Postsecondary Education Data System (IPEDS).

In addition to the SER metric, the DHE intends to incorporate NECHE's analytical framework, the Composite Financial Index (CFI) and external ratings. Other financial and non-financial indicators may include "tuition discounting rates; tuition dependency; trends in student enrollment, retention and completion; credit ratings assigned to institutions by credit rating agencies or services; and U.S. Department of Education Heightened Cash Monitoring (HCM) or Letter of Credit status."

Notice of Findings and Opportunity to Review

IHEs identified as possibly at risk of imminent closure will be notified and will have an opportunity to review the findings of the screening process and submit additional information. The review provides an opportunity for validating the findings and screening out false positives. To challenge the findings, IHEs may submit updated or corrected financial data or evidence that a liability has been resolved by, for example, "the sale of property or the receipt of a large gift not yet reported… ."

If the findings are affirmed, the IHE will be referred to as "screened in."

Step 2: Risk Mitigation Plan. IHEs that are screened in must submit to the DHE a risk mitigation plan that will "inform the BHE of any known liabilities, risk or financial issues; outline the institution's plans, initiatives and goals to resolve its financial challenges and sustain operations that meet basic quality standards and reasonable student expectations; and substantiate the institution's current and prospective resources and financial capacity to address the risk of imminent closure."

The DHE will evaluate the risk mitigation plan and advise the Commissioner of Higher Education, who will determine whether the institution has successfully mitigated the risk of imminent closure. If successful at this stage, an institution can expect the DHE to monitor implementation of the risk mitigation plan. If an institution is unsuccessful, the DHE will require further contingency planning for closure and, after notice and an opportunity to cure, internal and public notification.

Step 3: Contingency Planning for Closure and Notice to the Public. The DHE will provide a template contingency closing plan (not yet available) that will be posted on the DHE's website and available upon request. The contingency closing plan must, at a minimum, address the following:

  • arrangements for current and incoming students to complete their programs of study, including transfer and articulation agreements with other IHEs
  • the transfer and long-term maintenance of student records, including costs
  • the rights and responsibilities of student loan borrowers
  • the IHE's financial condition, accreditation status, and any outstanding compliance issues with federal and state financial aid programs
  • the refund of student deposits
  • a comprehensive budget with sufficient resources to sustain educational offerings through closure
  • impact on faculty, staff, host communities and other "key constituents"

The public notice requirements may differ among IHEs depending on the circumstances. The commissioner has discretion to set "the timing, manner, and format of notification to the public… ." The DHE will post on its website a list of all IHEs required to give public notice of their risk of imminent closure.

Advisory Committee

At any time during the screening process the Commissioner may convene an ad hoc or standing advisory committee to participate in the review of an at-risk IHE. An IHE required to submit a contingency plan may also request an advisory committee. The Commissioner may not "unreasonably withhold assent" to such requests.

Conclusion

The state's first financial screening process imposes substantial administrative burdens on IHEs. How effective it will be in protecting students and supporting higher education in Massachusetts remains to be seen.

IHEs are well advised to implement compliance measures now, including ensuring accurate and updated financial data on IPEDS, regular analysis and auditing of financial resources, proactive planning to address financial challenges in the short and long terms, and contingency planning for exigent circumstances. IHEs should seek assistance in these efforts from experienced financial and legal professionals.

For more information or assistance on this topic or to address financial exigencies, please contact the authors or other members of Holland & Knight's Education Team.


Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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