Performance audit, Arizona State Board for Private Postsecondary Education

              PERFORMANCE AUDIT
ARIZONA STATE BOARD FOR
PRIVATE POSTSECONDARY
EDUCATION
Report to the Arizona Legislature
By the Auditor General
June 1994
Report 94- 2
DOUGLAS R. NORTON, CPA
& UDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
DEBRA K. DAVENPORT, CPA
DEPUTY AUDITOR C. ENERaL
June 2 1994
Members of the Arizona Legislature
The Honorable Fife Symington, Governor
Mr. James A. Dugan, Chairman
Arizona State Board for Private Postsecondary Education
Transmitted herewith is a report of the Auditor General, A Performance Audit of the
Arizona State Board for Private Postsecondary Education. This report is in response
to a May 5, 1993, resolution of the Joint Legislative Audit Committee. The
performance audit was conducted as part of the Sunset review set forth in A. R. S. 55
41- 2951 through 41- 2957.
We found that past abuses in the proprietary school industry, as well as numerous
school closures, have demonstrated a need for regulation. However, the Board's
effectiveness is limited by its small staff size and lack of resources. We also found
that the Student Tuition Recovery Fund has never had sufficient revenues to pay all
the claims from students whose schools have closed. Currently there is a five to six
year backlog of claims against the Fund. Steps need to be taken to see that students
are better protected financially and that the burdens created by " problem" schools are
not continually shifted onto the remaining schools.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on June 3, 1994.
Sincerely,
D O ~ RS. N orton
Auditor General
2910 NORTH 4 4 T H STREET I SUITE 410 I PHOENIX, ARIZONA 85018 l( 602) 553- 0333 1 FAX ( 602) 553- 0051
Summary
The Office of the Auditor General has conducted a performance audit and Sunset review
of the Arizona State Board for Private Postsecondary Education, pursuant to a May 5,
1993, resolution of the Joint Legislative Audit Committee. This audit was conducted under
the authority vested in the Auditor General by A. R. S. @ 41- 2951 through 41- 2957.
The Board is responsible for licensing and regulating approximately 120 private
postsecondary institutions that provide education and training to students in both
nondegree and degree- granting programs. Past abuses in the proprietary school industry,
as well as numerous school closures, have demonstrated a need for the Board's oversight
Students impacted by school closures have been left with incomplete educations or
training, and are thousands of dollars in debt.
More Can Be Done To Protect
Students From Financial Harm
( see pages 5 through 9)
The Student Tuition Recovery Fund ( STRF), which offers full tuition reimbursement to
students displaced by a school closure, does not have sufficient monies to satisfy the
hundreds of claims filed in recent years. With approximately $ 900,000 in outstanding
claims and an annual revenue source of about $ 150,000, students may have to wait
anywhere from three to six years to receive a refund. To address this backlog, the
Legislature should consider increasing revenues to the fund by raising fees, and the Board
should consider providing partial rather than full tuition refunds to students. In addition,
the Board should shift more of the financial responsibility to those schools which create
the financial harm by strengthening existing bonding requirements to have schools post
a bond in an amount commensurate with their operational and financial risk.
Additional Resources Would Enable
The Board To Improve Enforcement
( see pages I1 through 15)
Limited staff resources impact the Board's ability to provide effective oversight of licensed
schools and take timely intermediate action to protect students. Only one professional staff
person is available to conduct investigations of problem schools, investigate consumer
complaints, and review license applications. As a result of limited staff resources, the
Board has repeatedly postponed enforcement actions against schools so that staff can
obtain more information. An in- depth review of three individual cases found that students
are harmed by these postponements. For example, our review found that during these
delays:
228 new students enrolled at two schools unaware of problems that could, and did,
lead to their closure after the students enrolled, and
Approximately 800 students were subsequently displaced by the closure of these same
two schools, resulting in approximately $ 600,000 in STRF claims being filed.
These cases are indicative of situations where the Board could not play a useful
enforcement role. By the time the Board has sufficient information to act, it is " too little,
too late." Either schools close, displacing hundreds of students, or many students enroll
in a school unaware of its problems and potential for closing.
Another professional- level staff person would enhance the Board's oversight function. This
additional employee could allow the Board to conduct timely and thorough investigations
of schools, improve its complaint- handling process, and possibly prevent future problems
by permitting more thorough license application reviews.
Consumer Education Can Enhance
The Board's Effectiveness
( see pages 17 through 18)
The Board can further enhance its consumer protection role by providing more
information to students. Consumer education materials that iden* factors students
should consider when selecting a school, such as cost, length of programs, and retention
rates, offer a cost- effective, efficient way to protect students from harm.
The Board could develop its own informational pamphlets for distribution, or
redistribute informational materials already in use by other states and the U. S.
Department of Education. These materials could be distributed to high schools, private
postsecondary schools, consumer groups, libraries, and the Better Business Bureau.
TABLE OF CONTENTS
Pane
INTRODUCTION AND BACKGROUND . . . . . . . . . . . . . . . . . . . .
FINDING I: MORE CAN BE DONE TO
PROTECT STUDENTS FROM
FINANCIAL HARM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recovery Fund
Is Overwhelmed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Several Options
Should Be Considered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FINDING II: ADDITIONAL RESOURCES
WOULD ENABLE THE BOARD
TO IMPROVE ENFORCEMENT . . . . . . . . . . . . . . . . . . . . . . .
The Board
Lacks Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Staff Resources Will
Improve Board's Oversight Role . . . . . . . . . . . . . . . . . . . . . . . . .
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FINDING Ill: CONSUMER EDUCATION
CAN ENHANCE THE
BOARD'S EFFECTIVENESS . . . . . . . . . . . . . . . . . . . . . . . . .
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TABLE OF CONTENTS ( CO~ CIU
Pane
OTHER PERTINENT INFORMATION . . . . . . . . . . . . . . . . . . . . . 19
SUNSET FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
AGENCY RESPONSE
TABLES
Table 1 Board For Private Postsecondary Education
Statement of Revenues, Expenditures,
and Changes in Fund Balance
Fiscal Years 1991- 92, 1992- 93 Actual,
and 1993- 94 Budgeted ( unaudited) . . . . . . . . . . . . . . . . . . .
Table 2 Comparison of STRF Revenues To
Claims Received, Paid, and Outstanding
Fiscal Years 1989- 90 through 1993- 94
( as of December 31, 1993)
( unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INTRODUCTION AND BACKGROUND
The Office of the Auditor General has conducted a performance audit and Sunset review
of the Arizona State Board for Private Postsecondary Education, pursuant to a May 5,
1993, resolution of the Joint Legislative Audit Committee. This audit was conducted under
the authority vested in the Auditor General by A. R. S. 5541- 2951 through 41- 2957.
In 1971, the Board of Private Techcal and Business Schools was established to license
private vocational programs which were designed to provide students with sufficient skills
for entry into a paid occupation. The Board's regulatory authority, however, was expanded
in 1984 when it was reconstituted as the Board for Private Postsecondary Education.
Under its present authority established by A. R. S. $ 532- 3001 through 32- 3077, the Board
licenses and regulates approximately 120 private vocational and degree- granting
institutions serving approximately 79,000 students annually.(') These schools offer a variety
of programs ranging from dog- grooming and massage therapy to the University of
Phoenix, which provides bachelois and maskis degrees in a number of disciplines.
The Board consists of seven members appointed by the Governor for four- year terms. Five
of the seven members hold executive or managerial positions in institutions licensed by
the Board. The remaining two members are required to have at least three years'
experience in commerce or industry.
Need For Regulation
Past and potential abuses experienced in the proprietary school industry at both the
national and state level demonstrate the need for regulatory oversight During the 1980' s,
some schools, eager to receive federal financial aid, recruited and enrolled students based
on false representations. While promising high- paying jobs, many schools provided little
or no training, instead pocketing thousands of dollars in student loans.( 2) In response to
such abuses, the federal government strengthened its oversight activities of schools
receiving federal financial aid monies. As a result of this strengthened oversight, many
schools closed, leaving students with incomplete educations or training, and thousands of
dollars in debt
In Arizona, since 1983, 120 schools have closed; 71 in the last five years. These school
closures, impacting over 5,000 students, have been attributed to a poor economy as well
as stricter federal fmancial aid and state licensing requirements. The following comments
illustrate the impact school closures can have on students:
The Board does not have jurisdiction over cosmetology, barber, real estate, and professional driving
schools. These schools are regulated by the Board of Cosmetology, the Board of Barbers, the
Arizona Real Estate Department, and the Department of Transportation, respectively.
(" Consumer Reports, ' 5chools For Scandal," May 1992.
1
One woman enrolled in an Arizona vocational program at the age of 52. After she
attended the school for 11 months, it closed, leaving her " physically, mentally, and
financially broke." She is now 54 and has " notfung except $ 7,000 in student loans to
pay and no job." She felt this program was her " ace in the hole, ... the thought of
another 36 months ( in school) is devastating."
Another student had only one class remaining prior to receiving his certification. He
had received his last installment of financial aid, which he signed over to the school
only two days prior to its closure. He now pays over $ 150 a month on three loans,
totahg over $ 8,500, which he obtained to receive training that would enable him to
get a better paying job.
Another student indicated that she had to go on public assistance as a result of the
school's closure. She has continually deferred her loans. And, although she is
continuing her education in a public institution, many of the credits she obtained at
her previous school were not transferrable, meaning that she basically had to start
over.
In addition, some schools have engaged in misleading advertising and recruitment
practices. For example, a federal investigation of one Arizona school, conducted in
February 1991, found that it advertised courses that were not available or not licensed;
recruited at unapproved sites, such as plasma centers, homeless shelters, and
unemployment offices; used an employment agency to recruit students; misrepresented
potential earnings; and unethically counseled students that they could receive free food
at a local food bank.
Personnel and Budget
Although regulation is needed, the Board lacks the staff and resources to adequately
perform its regulatory activities. Currently, the Board is assisted by only three staff,
consisting of an executive director, a part- time administrative assistant, and an
administrative secretary. These three employees are responsible for numerous tasks,
including reviewing all license applications, investigating complaints, supporting
enforcement activities, retrieving and maintaining student records from closed schools, and
administering the Student Tuition Recovery Fund.
Monies for Board operations are appropriated from the Board for Private Postsecondary
Education Fund. The fund comprises fees collected for license applications and renewals
that average approximately $ 117,000 annually. In addition to the license application and
renewal fees, licensed schools pay an assessment to the Board for the Student Tuition
Recovery Fund. Approximately $ 100,000 to $ 150,000 in assessments is collected each year
for this purpose. The Board retains 90 percent of the fees it collects, while the remaining
10 percent is deposited in the state General Fund. As shown in Table 1 ( see page 3), the
Board has continually collected revenues that are less than its operational costs, further
depleting its fund balance each year. Currently, the Board spends approximately $ 7,000 .
more per year than it receives in revenue. The Board proposed a fee increase to raise an
additional $ 7,000 in revenues, however, the bill was not heard during the 1994 legislative
session.
TABLE 1
Board For Private Postsecondary Education
Statement of Revenues, Expenditures,
and Changes In Fund Balance
Fiscal Years 1991 - 92, 1992- 93 Actual,
And 1993- 94 Budgeted
( unaudited)
Source: Arizona Financial Mormation Svstems Fiscal Years 1991- 92 and 1992- 93 Financial
1991 - 92 1992- 93 1993- 94
( Actual) ( Actual) ( Budneted)
Revenues $ 112,225 $ 114,875 $ 123,300
Expenditures
Personal Services 73,392 77,374 81,600
Employee- related expense 16,198 17,869 17,900
Professional services 4,479 1,669 5,000
Travel instate 3,024 2,241 4,000
Travel, out- of- state 275 0 0
Equipment 64- 54 0 0
Other operating expenses 21,319 23,721 22,100
Total Expenditures 125,141 122,874 130,600
Excess of expenditures
over revenues 12,916 7,999 7,300
Bewing fund balance 77,138 64,222 56,223
Ending fund balance U& 22 $ 56.223 - A
Reports and the State of Arizona ~ ~ ~ r o ~ n a tRieoponrtr fo r the Fiscal Year Ended June
30,1993.
.
Scope and Methodology
The purpose of the audit was to determine whether the Board for Private Postsecondary
Education is needed and the extent to which it has accomplished its statutory goals. Our
work included a review of the Board's licensure requirements and application review
process, complaint handling, utilization of its Student Tuition Recovery Fund, and its
effectiveness in taking action against licensees in violation of Board statutes. In addition,
we contacted ten state(') and reviewed recommendations made in a 1991 report of the
State Higher Education Executive Officers ( SHEE0).( 2)
Our report, focusing on the Board's ability to provide adequate consumer protection,
presents findings and recommendations in three areas:
Several options the Board and Legislature should consider to provide students greater
protection from financial harm,
The useful oversight role the Board could play if it had adequate staff resources and,
Steps the Board can take to improve its consumer education efforts.
The report also presents other pertinent information on a new federally mandated
program requiring increased oversight and scrutiny of postsecondary schools eligible to
receive federal financial aid ( see pages 19 through 20).
This audit was conducted in accordance with government auditing standards.
The Auditor General and staff express appreciation to the Board and its staff , for their
cooperation and assistance during the audit
(') States contacted, identified by several national accrediting bodies as having strong regulatory
programs, include: California, Connecticut, Florida, Illinois, Indiana, Missouri, Ohio, Oklahoma,
Texas, and Wisconsin.
( 2) SHEEO is a nonprofit, nationwide association of the chief executive officers serving statewide
coordinating and governing boards of postsecondary education. SHEEO prepared a report dated
September 1991, based on a survey of 20 states, addressing " The Methods and Ejfectiveness of State
Licensing of Proprietary Institutions. "
FINDING I
MORE CAN BE DONE TO PROTECT STUDENTS
FROM FINANCIAL HARM
Wlule fmancial remedies have been established to assist students, more can be done to
protect them from financial harm. The Student Tuition Recovery Fund (! 3TRF), designed
to cover student losses resulting from school closures, is overwhelmed and unable to meet
the nearly $ 900,000 in claims filed against it The Board and Legislature should consider
several options to address current deficiencies with the recovery fund.
Recovery Fund
Is Overwhelmed
Wlule the STRF was created to assist students in the event of school closures, claims
against the fund have eroded its adequacy and abfity to serve students in a timely
manner.
STRF created to offer financial protection - In 1989, the Student Tuition Recovery Fund
was created, providing a mechanism to protect students from financial harm in the event
of school closure. Prior to the STRF, limited protection was offered to students in the form
of performance bonds posted by some schools. The impact of this limited protection was
evidenced when numerous schools closed, leaving hundreds of students with no recourse
for recovering their tuition.
Currently, the STRF offers full tuition reimbursement to students who have been displaced
by a school closure and cannot or choose not to pursue a " teach out" at another
institution. A " teach out" means that a student from a closed school is able to complete
lus or her training at a different school. The Board attempts to secure these opportunities
at no additional cost to the students or the state. Schools pay an assessment to the Board
for deposit in the STRF based on a percentage of their tuition revenue. In fiscal year
1993- 94, approximately 80 out of 120 schools(') ( representing approximately 47,000 students)
were assessed fees totaling $ 157,330.
STRF protection in- uate - Revenues generated for the STRF have never been sufficient
to satisfy claims, resulting in untimely tuition refunds. As shown in Table 2 ( page 6),
Approximately 20 baccalaureate or hgher- degree institutions, the largest of which include the
University of Phoenix and DeVry Institute, are exempt from fund participation on the premise that
these institutions stand a remote chance of closing. The approximately 32,000 students who attend
these schools are also exempted from STRF eligibility. Additionally, approximately 20 other schools
were not assessed fees because they had no new students or were in their first year of operation.
numerous school closures in recent years have resulted in claims that far surpass fund
revenues. Less than one- third of the STRF claims received over the past four- and- one- half
years have been satisfied, leaving an estimated $ 900,000 in outstanding claims with a
current fund balance of only $ 33,400. As a result, many students will now have to wait
a minimum of five to six years for their tuition refunds. However, this waiting period
could be reduced to about three years by recent legislation establishing a federal loan
forgveness program. Although the program has not been formally implemented, some
Anzona students will be eligible, and the Board has already begun submitting names for
loan forgiveness. The Board anticipates that the STRF backlog could be reduced by 50
percent through this program. In addition, new legslation requiring SIT@ assessment from
cosmetology and professional driving schools will assist even further in reducing the
backlog, providing no additional schools close during this peri0d. a
TABLE 2
Comparison of STRF Revenues To
Claims Received, Paid, and Outstanding
Fiscal Years 1989- 90 through 1993- 94
( as of December 31, 1993)
Claims
Fiscal Fee Claims Claims Outstanding
Year Revenues Received ( a) - Paid Balance
1989- 90 $ 0 $ 124,243 $ 0 $ 124,243
1990- 91 103,137 227,404 99,346 252,301
1991- 92 106,872 157,246 100,829 308,718
1992- 93 97,933 798,058 88,267 1,018,509
1993- 94 157,330 0 ( b) 129,911 ( c) $ 888,598
Total Laa2 $ 1,306,951 $ 428.353
( a) Claims received from students for a particular school are identified in the fiscal year that the school
closed. Students have one year, from the date of school closure, to file a claim.
( b) As of December 31, 1993, no schools have closed during fiscal year 1993- 94 which would result in STRF
claims.
( c) Total claims paid as of December 31, 1993.
Source: Board for Private Postsecondary Education STRF claims, accounting files, and reports
for fiscal years 1989- 90 through 1993- 94 ( to date).
Effective July 1, 1994, all cosmetology schools are required to pay into the Student Tuition Recovery
Fund. Currently, there are approximately 1,500 cosmetology students attending 32 schools. These
students would then be eligible for a tuition refund should a cosmetology school close. Likewise,
the legislation allows professional driving schools ( there are four schools currently licensed), if they
so choose, to participate in the STRF.
The impact of tlus three- to six- year wait for tuition refunds will be most severely felt by
displaced students. Many students, have taken out federal loans to pursue an education,
and wlll be required to pay back these loans without the benefit of finishing their
educations. If students are unable to pay on their loans while awaiting refunds, their
credit could be damaged and they may become ineligible for additional federal financial
aid.
Several Options
Should Be Considered
To ensure students are adequately protected, the Board and Legislature should consider
several options. First, the Board should consider ways to address the current backlog of
STRF claims. Additionally, to provide greater fmancial protection in the future and place
more of the fmancial responsibility on schools, the Board should strengthen its bonding
requirements.
Options for reducing STRF back lo^ - The Le~ slature and the Board should consider
raising STRF fees, at least temporarily, to reduce the current backlog in claims. As
required by statute, each nonexempt licensed school pays two- tenths of 1 percent of the
total tuition for each new student Individual program tuition costs range from $ 105 to
$ 15,750, averaging approximately $ 5,100. However, the statute limits assessments to not
more than $ 10 per- student Therefore, schools with tuition costs over $ 5,000 pay less than
the two- tenths of 1 percent Total assessments, by individual school, range from as little
as $ 2 to more than $ 20,000.
Removing this statutory limit would generate sigruficant additional revenue for the fund.
If the $ 10 per- student limit were removed, the current fee of two- tenths of 1 percent of
tuition would raise $ 236,000 in revenue annually, a $ 79,000 increase over the current
amount If the fee was raised to three- tenths of 1 percent, $ 347,000 in annual revenues
could be generated. This represents $ 190,000 in additional revenues that could be raised.
While all participating schools would be impacted by such fee increases, one school could
be assessed as much as an additional $ 50,000 in fees.
A majority of the Board members have also expressed an interest in broadening
participation in the fund by assessing fees from currently exempted schools ( i. e.
baccalaureate or higher- degree institutions). However, it is unclear how these schools'
tuition would be assessed, as their students enroll on a semester basis as opposed to a
one- time enrollment into a specific program.
In addition, to further reduce the backlog in claims, the Board should consider providing
partial rather than full tuition refunds. Currently, the Board maintains a policy of
reimbursing students at 100 percent of the tuition paid to a closed school, regardless of
the amount of training received by the student prior to closure. By contrast, several of the
states we contacted offer alternatives to full refunds.(') For example, Connecticut and
Oklahoma prorate tuition refunds based on the amount of training the student has already
completed, and Florida and Ohio base refund payments on the availability of a " teach
out"
The rationale behind a partial refund is that training, whether partially or fully completed,
has value and students should not be reimbursed for that portion of training already
completed. At least one Board member agrees with this rationale. Another Board member
explained that tuition refunds should be prorated because the fund can go further and
students would be reimbursed faster.
Bonding requirements should be revised - In addition to addressing the current STRF
backlog, the Board should consider requiring all schools to post bonds. This would shift
more of the financial responsibility to those schools which create the financial harm and
strengthen the financial protection offered to students. Currently, by relying almost entirely
on the recovery fund, the " good" schools must pay for the failures of insolvent schools.
Utilizing both the recovery fund and bonds would ease the pressure on the recovery fund
when a sigruficant dollar amount of claims are submitted against it, protecting both the
students and the other schools. According to SHEEO, employing the use of recovery funds
or surety bonding separately may not be sufficient protection for students. SHEEO
recommends that recovery funds serve as the. primary vehicle for repaying students who
are financially harmed by the sudden closure of a school, but that bonds serve as a
backup for the recovery fund in the event of a rash of sudden closures.
Arizona has experienced just such a rash of school closures in recent years. During the
past five years, more than one- third ( 71) of Arizona's private postsecondary schools have
closed, resulting in more than $ 1.3 million in total claims against the recovery fund. In this
unstable environment, the state should maintain a dual system in which the recovery fund
is supplemented by bonding requirements.
To strengthen its bonding program, the Board should consider requiring all schools to post
a performance bond. Contrary to other states, accredited schools in Arizona are not
required to post bonds and over one- half of the schools in the state are accredited.
Anzona requires the remaining nonaccredited schools to post a $ 15,000 bond or the cash
equivalent and then only during the first two years of operation. Based on tlus policy,
only 17 of the 120 licensed schools currently have bonds in place. However, it has been
the accredited schools that have caused the most financial harm. All the claims filed
against the STRF in the past two years have resulted from accredited school closures.
In addition, the Board should require schools to post bonds in an amount that reflects the
financial and operational risk associated with the school. ( If the Board obtains additional
financial information from schools as recommended on page 14, it may be better able to
assess financial risk and determine an appropriate bond amount) Five of the states we
--
( I) Seven of the ten states contacted currently operate a tuition recovery fund.
8
contacted assess risk and require bonds based on tuition or unearned tuition revenues)')
Schools with larger tuition or unearned tuition revenues post higher bonds, which reflect
the risk to the student and the state if the school were to close. The average bond
required in these s t a b is between $ 20,000 and $ 50,000, amounts considerably higher than
what is required by Arizona. While the cost of a bond varies depending on a school's
fmancial condition and the level of risk the bonding company is willing to assume, a
school in good financial standing might expect to pay an annual fee of 1 to 5 percent of
the bond's face value. For a $ 50,000 bond, this annual fee would range from $ 500 to
$ 2,500.
Some Board members agree that strengthening bond requirements would alleviate some
of the pressure on the recovery fund, as well as providing assurances regarding a school's
abihty to operate. One Board member commented that bond requirements for large
schools would be particularly important, while two Board members indicated that schools
displaying a questionable financial position should also be required to post higher bonds.
In fact, in two specific instances, schools posted larger bonds or the cash equivalent as a
condition of licensure. In one of these cases, a $ 200,000 bond was posted, well in excess
of the $ 15,000 requirement
RECOMMENDATIONS
1. To address the current backlog of claims, the Legislature should consider amending
A. R. S. $ 32- 3072( C) to allow the Board to raise STRF fees and remove the $ 10 per-student
h i t
2. The Board should consider revising its recovery fund tuition reimbursement policy to
allow for partial refunds.
3. To shift more of the financial responsibihty to those schools which create financial
harm, the Board should consider requiring all schools to post a bond in an amount
commensurate with the level of financial and operational risk associated with each
school.
( I' Unearned tuition revenue represents tuition prepaid by students for classes or training they have
not yet received.
( This Page Intentionally Left Blank)
FINDING
ADDITIONAL RESOURCES WOULD ENABLE THE
BOARD TO IMPROVE ENFORCEMENT
Inadequate resources have limited the Board's effectiveness. Because it has only one
professional staff person to oversee over 100 schools statewide, the Board is unable to
gather and review the necessary information to investigate schools and take timely
enforcement actions. An additional professional staff member would enhance Board
oversight by allowing more school investigations, improving the complaint- handhg
process, and expanding license application reviews.
The Board can play a useful oversight role by talung timely, intermediate action to protect
students when problems at schools are identified. Intermediate actions should be taken
as soon as problems surface, well before conditions deteriorate and schools must close.
These actions include: prohibiting enrollment of new students, requiring schools to not@
current and prospective students of problems, or requiring schools to post surety bonds.
For example, these actions can be taken when schools display fiscal or operational
problems, or when the Board learns of pending actions against schools by other regulatory
agencies, such as the U. S. Department of Education ( USDOE) and accrediting bodies.
Intermediate actions protect students against a possible disruption in their training or
fmancial loss if the school cannot correct its problems.
The Board
Lacks Resources
The Board lacks adequate staff resources to gather and review information about schools
it regulates. As a result, the Board often lacks the information it needs to take effective
and timely intermediate regulatory action. Insufficient Board resources also restrict
thorough complaint investigations.
Limited staff resources - While the Board employs three staff, there is only one
professional staff member, the executive director. Thus, one person reviews license
applications and financial statements for approximately 120 Board- regulated schools,
handles complaint investigations, and conducts special investigations of schools with
problems, including site visits. However, according to SHEEO, in addition to an executive
director and support staff, investigative/ field staff, accounting/ financial staff, education
and training specialists, and legal staff are all needed for effective regulation.
Arizona's Board is sigruficantly understaffed compared to some other states. For example,
Indiana, which regulates the same number of schools as Arizona, has a sI& of ten; three
of whom are dedicated to License renewals, complaints, and site visits, and one individual
who is dedicated to the review of fmancial information.(') Ohio, whch regulates slightly
over twice the number of schools, has 8 full- time and 6 part- time staff. Ohio maintains
an investigative unit of three staff to investigate complaints, school closures, and
nonregistered schools, and to conduct site visits. One Ohio employee is also solely
dedicated to reviewing financial information submitted by schools.
Lack of resources hinders Board action - As a result of inadequate resources, the Board
often lacks the necessary information to take timely enforcement actions. Our review of
Board meeting minutes for January 1991 through September 1993 shows the Board
postponed action in 36 of 175 cases it reviewed. Most of the 175 cases involved routine
license renewal actions. However, for 24 of the 36 cases that involved schools experiencing
problems, Board action was postponed because it needed additional information. The
average length of each postponement was approximately two months, with the longest
postponement lasting five months. We also conducted an in- depth review of three
individual cases where the Board was unable to prevent or reduce harm to hundreds of
students through effective intermediate action. In these cases, the Board had to repeatedly
postpone action while waiting for staff to conduct investigations, for the school to submit
additional mformation, or to obtain the results of other regulatory agency investigations.
Postponing Board action yielded the following results:
1 After the Board became aware of problems at two schools that cokd lead to student
harm, a total of 228 students enrolled, unaware of these problems. These two schools
subsequently closed within 5 months after these students enrolled. The closure of these
two schools displaced 800 students and resulted in STRF claims totaling approximately
$ 600,000.
In another instance, the Board required a school to develop an enrollment addendum
nohfying prospective students of pending federal action against the school. However,
the addendum was not approved by the Board until two separate classes of students
enrolled, unaware of the addendum and the pending federal action.
As these cases indicate, by the time the Board has sufficient information to act, it is often
" too little, too late." Either schools close, displacing hundreds of students, or many
students enroll unaware of the school's problems and potential for closing.
Limited resources affect complaint investi~ ations- Inadequate Board resources also restrict
thorough complaint investigations and may lead to undetected violations. Currently, the
Board limits complaint investigations by requiring a student to " exhaust all available
gnevance procedures established by the institution" before filing a complaint with the
Board. As a result, the Board does not investigate over a tlurd of the complaints received
(') Indiana's Commission on Proprietary Education is supported by the state's General Fund. In fiscal
year 1991- 92 it spent over $ 300,000 for Personal Services alone.
annually. When the Board does investigate a complaint, it usually only reviews the .
documents submitted by the complainant and the school. The executive director reviews
th~ sd ocumentation and reports any findings to the Board. There are not enough staff
available to regularly conduct further investigative work such as on- site visits, record
reviews, and interviews of school staff and students, which may independently venfy
information submitted by either party.
We found several states, however, that conduct more comprehensive investigations of all
complaints. Seven of the ten states we contacted initially review all written complaints
received. Six of the ten states contacted include site visits as part of the complaint
investigation process.
Additional Staff Resources Will
Improve Board's Oversight Role
Adding a professional staff member could improve the Board's ability to regulate schools
in three ways. the Board could conduct more timely and thorough investigations of
schools experiencing problems. Second, the Board could improve its complaint- handhg
process, libally, increased staff resources may help prevent future problems by allowing
for expanded license application reviews.
Imroved school investigations - If the Board had an additional professional position, it
could more easily investigate schools that are subject to possible action. As mentioned
earlier, the Board often needs more information before they are able to take action. One
way to obtain this information is through site visits of schools. During site visits, the
Board can insped a school's programs, facilities, and equipment, and interview staff and
students. In addition to site visits, staff can also obtain information by reviewing other
regulatory agency investigative reports, such as USDOE reviews.
Other states, with greater staff resources, are able to conduct more in- depth investigations
of schools experiencing problems. For example, in Oklahoma, staff conduct site visits of
schools. During visits, investigators interview 5 to 10 percent of the student population,
review student refunds to ensure students actually received the money, and spot- check
10 percent of student files. Indiana assigns schools to specific field investigators, to better
ensure that schools are appropriately monitored. These investigators handle all complaint
investigations, site visits, and license renewals for their assigned schools.
Improved complaint- handlinz process - With an additional staff person the Board could
improve its complaint- handhg process. The Board would be able to more thoroughly
investigate complaints by verifying information provided by the complainant and the
school, and by independently gathering additional information. The Board could follow
other states' examples and include site visits as part of complaint investigations.
More thorough complaint investigations and tracking of complaints could help the Board
idenbfy problems before they reach the crisis stage. Currently, the Board logs only
complaints filed by student and accepted by the Board. Rejected complaints and
complaints made by nonstudents are not logged.(') As a result, the Board is limited in its
abdity to know if any school in particular exhibits, through the number and type of
complaints, any patterns of abuse or other problems. SHEEO found that many states act
on complaints on a case- bycase basis, possibly failing to detect long- term or repeated
problems associated with a particular institution. SHEEO recommends that states maintain
and update records about the frequency and nature of complaints filed against specific
institutions.
M m thorough license reviews - Finally, an additional staff position would enable the
Board to conduct more thorough license reviews. Currently, staff licensing reviews do not
include background checks of owners or an in- depth review of financial information. With
an additional staff position, the Board could collect and review more complefe and reliable
financial information as part of the licensing process. A more thorough review of each
school's financial position could reduce risks to students and the need for subsequent
enforcement actions.
To improve its financial reviews, the Board needs to increase its financial reporting
requirements and develop review criteria. Currently, the Board requires submission of
compiled financial statements which yield limited information. By contrast, several other
states ( Indiana, Texas and Oklahoma) require submission of reviewed or audited fmancial
statements. Unlike compiled statements, these statements provide independent verification
and testing of financial information. Although increased financial reporting will increase
costs to some schools, the Board could adjust the requirement according to circumstances.
For example, a smaller school might be allowed to submit reviewed statements whch are
less expensive than audited statements.
To analyze the increased fmancial information, evaluative guidelines are also needed. For
example, several states demand at least a 1: l ratio of current assets to current liabilities
to ensure that all current obligations can be met Other guidelines might address
sufficiency of assets, level of profit, and any sigruficant changes in enrollment or other
factors which affect a school's fmancial condition. The Board could develop a questionnaire
addressing these guidehes which could be completed by the schools' auditors.
Additional staff could also help ensure licensing files are complete. A review of license
renewal files for schools which closed in the last two years revealed that half did not
contain all the necessary information for licensure. For example, the files contained
outdated financial information or were missing required financial statements.
Fee increase - Adding a staff position, however, wdl require an increase in fees. Even
though the Board proposal to increase its fees was not heard during the 1994 legislative
session, this increase only provided enough revenue to maintain its current level of
operation. Future proposals to increase fees should be expanded to include an additional
Including rejected complaints, seventy- two of the 120 licensees ( 60 percent) received at least one
complaint over ' the two- year time period for a total of 153 complaints.
professional staff position at a cost of approximately $ 30,000 to $ 40,000 annually, covering
salary, employee- relatied expenses and other expenses such as travel. To provide the
revenues for the additional staff position and to maintain operations, current license
renewal fees would need to increase by approximately 30 percent Fees currently range
from $ 250 to $ 1,800 and are based on a school's tuition revenue.
RECOMMENDATIONS
1. The Legislature should consider revising A. R. S. 532- 3027 which would allow the Board
to raise fees to add another professional position. This should enable the Board to
enhance many of its regulatory activities, such as investigating problem schools and
complaints.
2. The Board should track all complaints in order to iden* any patterns or trends that
may develop among schools. Schools identified through the complaint- tracking process
could then be subject to further review by the Board.
3. The Board should impose stricter financial reporting requirements on schools. Also, the
Board should establish evaluative criteria to review the financial status of schools.
Improved financial reviews will allow the Board to identdy schools with potential
problems and to take appropriate action.
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CONSUMER
FINDING
EDUCATION CAN ENHANCE
THE BOARD'S EFFECTIVENESS
The Board can better protect students through consumer education. Consumer education
offers a proactive, economical method to provide consumers the necessary information to
make informed educational choices. According to SHEEO,
" One of the most ejj2ctiue ways in which states can improve the education standards in
private career schools is through policies that promote injbrmed choice among students."
A SHEEO official further explained that private postsecondary schools are much more
hkey to close or file for bankruptcy than their public counterparts, and that the training
provided may not lead to the hgh- paying jobs expected. Therefore, students need to be
aware of these issues and the fact that some schools may misrepresent, manipulate, or
hide critical information.
Consumer education tools - The Board could develop consumer education tools used in
other states to effectively inform consumers and assist them in their educational choices:
PAMPHLET- S T he Indiana Commission on Proprietary Education distributes pamphlets
with the intent of increasing consumer awareness of its many functions, as well as
factors students should consider when selecting a school. In addition, Brooklyn Legal
Services in New York indicated that it receives numerous complaints regarding private
postsecondary schools, prompting it to distribute a pamphlet detailing items to
consider when choosing a school. Finally, USDOE distributes a pamphlet providing
information on choosing a career, finding the right school, and obtaining financial aid.
These pamphlets are distributed to high schools, private postsecondary schools,
consumer groups, libraries, and the Better Business Bureau.
TOLGFREE NUMBER - One state even established a toll- free 800 telephone number to
fachtate consumer inquiries to its Commission. In response to a Sunset review, the
Indiana Commission on Proprietary Education established an 800 number to become
more visible to consumers. Proprietary schools in the state are required to publish this
number in their school catalogs and the number is also found in Commission
brochures, directories, and annual reports. According to the Commission's 1992 annual
report, th~ sh as allowed it to provide assistance regarding the many facets of private
postsecondary education to school personnel, other state agencies, current and
prospective students, business and industry, and the general public.
Minimal cost - The cost for any one of these consumer education options would be
minimal. According to the Department of Administration's print shop, it would cost less
than $ 500 to print 5,000 pamphlets.
To produce and distribute these informational materials, the Board could solicit assistance
from various schools and other state agencies. For instance, the Board could seek
assistance from licensed schools to help design and develop pamphlets. The Board might
also consider a joint effort with the Arizona State Commission on Postsecondary Education
to develop these materials. The Commission currently produces a directory listing
educational opportunities in the state and may be able to assist the Board in developing
and distributing informational materials. ( See Other Pertinent Information, page 19, for
additional information on the Commission.) Finally, an additional consideration might
involve the redistribution of informational materials already in use by other states and the
USDOE.
RECOMMENDATIONS
1. The Board should expand its consumer education efforts by providing informational
materials, such as a pamphlet detahg factors to consider when selecting a school, the
Board's role in regulating schools, and its available data for comparing schools.
2. Facilitate consumer inquiries to the Board and increase its public visibility by:
Prominently displaying the Board's telephone number in literature or writLen
information provided to students by the Board or licensed schools, and
Having schools post the Board's telephone number in common areas of the school
frequented by students.
OTHER PERTINENT INFORMATION
During our audit we reviewed the federal government's requirement for state review of
postsecondary schools participating in federal financial aid programs.
State Program
Review Entity
The federal government has recently slufted to states the primary review of schools
receiving federal financial aid. Each state must designate an agency as its State
Postsecondary Review Entity ( SPRE). The SPRE's role and activities may impact the
Board's activities, as both will review many of the same schools.
Res~ onsibilitva iven to states - The federal government's 1992 Reauthorization of the Higher
Education Act, Part H, designates, " one State postsecondary rev& entity in each state to be
responsible far the umduct w the coordination of the reuiew... of institutions of higher education."
This act responded to concerns that USDOE could not effectively conduct institutional
program reviews. Congress believes states are better able to review the schools operating
within their state.
The act also provides federal funds for standards development and SPRE operational
costs. Anzona will be reimbursed up to $ 81,000 for planning activities and $ 400,000 a year
to operate the SPRE. States not establishg an entity will not receive this money, and
more importantly, institutions in these states cannot participate in federal student aid
programs.
The SPRE in each state will develop standards for continued participation in financial aid
programs. M. mimum standards covering the following general areas must be established:
Consumer protection
Consumer information
Fiscal and administrative responsibihties
Compliance with federal and state laws
Due process and review procedures
Performance standards
Information sharing
The SPRE will review schools experiencing problems such as high student default rates,
a failure to meet financial responsibility standards, or a pattern of student complaints. The
SPRE will recommend financial aid program termination for schools not meeting its
standards.
The SPRE in Arizona - The Arizona State Commission for Postsecondary Education has
been designated as Arizona's SPRE, with all Arizona postsecondary schools participating
in federal student aid programs subject to its oversight Prior to th~ sd esignation, the
Commission acted as an advisory council to the Governor and operated w i h the Board
of Regents. As the SPRE, the Commission wdl be a separate agency and its membership
reconstituted, to eliminate the affiliation with public postsecondary education and allow
for objective school reviews.@ T) he Commission includes representatives from public and
private universities, community colleges, private career colleges, vocational and
cosmetology schools, and private business.
Imact of the SPRE - The SPRE's role and activities will impad Board activities in several
ways:
BOARD MEMBER INVOLVEMENT - Some Board members will be directly involved, either
by serving on the SPRE Advisory Committee, charged with developing the SPRE's
standards, or as actual Commission members.
ADDITIONAL INFORMATION MADE AVAILABLE - Information obtained dun'ng SPRE
reviews of schools also under the Board's jurisdiction can be shared with the Board
to enhance its decision- making efforts.
BOARD MAY NEED TO REVISE STANDARDS - According to a SHEEO official, the Board
may eventually have to develop more rigorous standards to ensure consistency in
reviews of all schools.
BOARD MAY NEED TO RESPOND TO ADDlTIONAL SCHOOL CLOSURES - The increased
scrutiny from an additional agency providing oversight could ultimately lead to more
school closures.
Board activities still important - While the Board and SPRE will have some activities in
common, the SPRE's primary responsibility is to protect the federal government's fmancial
aid investment The Board's role, however, extends beyond the SPRE's in that its overall
purpose is to protect consumers. h this capacity, the Board must continue to oversee all
schools ( regardless of whether they participate in federal financial aid programs), operate
the STRF to reduce student financial losses, and arrange teach- outs and obtain student
records to assist students impacted by school closures.
I ' Approximately 70 schools under the Board's jurisdiction participate in federal financial aid programs
and will be subject to SPRE review.
20
SUNSET FACTORS
In accordance with A. RS. 541- 2954, the Legislature should consider the following 12
factors in determining whether the Board for Private Postsecondary Education should be
continued or terminated.
1. The objective and purpose in establishing the Board
In 1984, the Board for Private Postsecondary Education was established, replacing its
predecessor agency, the Board of Private Technical and Business Schools. Due to the
sigruficant growth in the industry and subsequent abuses, it was determined that
increased regulation was needed. As a result, the Board was provided expanded
regulatory authority over private vocational schools and was mandated to license all
private degree- granting institutions.
The intent in establishmg the Board was to provide consumer protection and to
standardize private postsecondary educational practices by setting minimum
standards of operation and principles of good practice. The Board does this by:
Establishing licensure requirements,
Considering and approving license applications,
Assessing institutional compliance with federal and state regulations,
Investigating and acting upon complaints,
Administering a recovery fund for students suffering loss from a school closure,
and
Maintaining student educational records from closed schools.
2. The effectiveness with which the Board has met its objectives and purpose and the
efficiency with which it has operated
Whde the Board is generally effective in licensing private postsecondary institutions,
we found that it could do more to further prevent and protect students from
fmancial harm:
First, to provide more equitable and timely financial assistance to students
impacted by school closures, the Board should address the backlog in the Student
Tuition Recovery Fund. ( See Finding I, page 5.)
Second, to provide greater protection in the future, the Board could place more
of a burden on the schools themselves by requiring bonding of all schools in
amounts that would adequately reflect the financial and operational risk
associated with the school. ( See Finding I, pages 5 through 9.)
Thud, the Board could play a more useful role in overseeing and monitoring
schools by taking more timely, intermediate action against schools that could
potentially harm students. ( See Finding II, pages 11 through 15.)
Fourth, the Board should strengthen its complaint- handling process to assist it in
identdying problems and taking actions before harm to students occurs. ( See
Finding II, page 12.)
Finally, the Board should assist prospective students in making informed choices.
( See Finding III, page 17.)
The Board feels it is adversely impacted in carrying out its functions due to a limited
budget and staff size. Additionally, numerous school closures in recent years have
negatively impacted its efficiency, not only due to the administrative work that
results from a school closure, but also the depletion of the recovery fund, which
impacts its ability to issue student refunds in a timely manner. -
The d e n t to which the agency has operated within the public intmest
Whde the Board has generally operated within the public hterest through its
licensing and regulatory activities, the Leeslature might want to review the Board's
composition. Currently, five of the seven Board members represent schools licensed
by the Board. In contrast, we found other states relied less on industry
representatives for Board membership. In fact, of the eight states we talked to
regarding Board representation, Anzona has one of the highest numbers of industry
representatives on its Board.
SHEEO recommends a more independent representation on postsecondary school
governing bodies. Representatives from industries hiring private postsecondary school
graduates, vocational education and training specialists, state agency representatives,
and members of the general public may be more appropriate for postsecondary
regulatory Board service. Furthermore, people with expertise in such areas as
accounting, financial aid administration, and state and federal law may be beneficial
to a Board.
4. The extent to which rules and regulations promulgated by the Board are consistent
with the legislative mandate
According to the Board, all required rules have been promulgated. However, as part
of its five- year rule review process, the Board is currently amending rules.
5. The dent to which the Board has encouraged input fiom the public before
promulgating its rules and regulations and the extent to which it has informed the
public as to its actions and their expected impact on the public
In addition to required public notice of rules, the Board notifies licensees and
industry associations of proposed rules by mail and/ or verbal communication.
6. The extent to which the Board has been able to investtgate and resolve complaints
that are within its jurisdiction
The Board believes that, given its resources, it adequately responds to student and
consumer complaints. However, we found the Board's complaint- handling process
could be strengthened, thereby providing greater protection to students by identdying
problem schools and taking action before harm occurs. ( See Finding 11, pages 11
through 15.)
7. The extent to which the Attorney General or any other applicable agency of state
government has the authority to prosecute actions under enabling legislahahon
The Attorney General's Office or applicable City or County Attorney can prosecute
actions under the Board's statutes. Since the Board has limited authority to enforce
its actions, it must rely on the Attorney General's Office. However, the Board has
had little success in pursuing further action through the Attorney General's Office.
In the last three years, the Board has referred three cases ( subsequent to each
school's closure) for prosecution of school owners for fraud and other criminal and
civil offenses. Combined, the actions of the school owners and the subsequent school
closures impacted over 1,000 students and resulted in a financial loss to students of
at least $ 250,000. To date, the Attorney General's Office has declined to prosecute due
to budgetary constraints and resource limitations.
8. The adent to which the Board has addressed defiiencies in the enabling statutes
which prevent it fiom fulfilling its sta& tory mandate
Although not initiated by the Board, it supported legislation establishing the Student
Tuition Recovery Fund in 1989. Tlus was seen as a big step in providing greater
protection against financial harm to students.
The Board proposed legislation during the 1994 legislative session that would have
increased license renewal fees, enabhg it to maintain its current level of operation,
however, the legislation was not heard.
Additionally, the Board is considering the following issues that may require revisions
to current laws and rules:
Collection, processing, and maintenance of closed school student records
Fund sources for the Student Tuition Recovery Fund and student refund policies
and,
Agency staffing and the possible addition of another FI'E.
9. The extent to which changes are necessary in the laws of the Board to adequately
comply with the factors listed in the subsection
In addition to what the Board is already considering, there may be other statutory
changes needed. For example, while the Board is already considering increasing
license renewal fees to maintain its current level of operation, it may need to
reconsider the fee amounts based on the recommendations made in this report,
10. The extent to which the termination of the Board would signzjicantly harm the
public health, safe, and welfare
While the Board has sole responsibihty for licensing and consumer protection, there
are several other entities that maintain an interest in the financial and academic
operations of private postsecondary schools. First, USDOE monitors schools to ensure
they are administratively and financially capable of handling federal funds. This
function has recently been delegated to states with the establishment of State
Program Review Entities, charged with reviewing schools receiving federal financial
aid. In addition, national accrediting bodies, concerned with both the academic and
financial operation of schools, regularly monitor them. Finally, the Veteran's
Administration has dedicated resources to iden* and approve schools toward
whch veterans may apply their educational benefits.
Despite the involvement of other agencies, termination of the Board could
sigruficantly harm the public health, safety, and welfare as it could lead to more
abuse within the industry and less consumer protection. In addition, schools must
be licensed in order to maintain eliabihty for federal financial aid. Finally, the Board
feels that deregulation of private postsecondary institutions could negatively impact
student access to alternative educational opportunities and federal student loan and
grant programs by eliminating the state's role in eligibility determination.
11. The extent to which the level of regulaiion exercised by the Boatd is appropriate
and whether less or more stringent levek of regulation would be appropriate
The Board feels that its current level of regulation is appropriate. However, we feel
that more stringent financial requirements should be placed on schools to further
prevent and protect students from fmancial harm. ( See Finding I, page 5.)
12. The extent to which the agency has used private contractors in the performance of
its duties and how effective use of contractors could be accomp1ish; ed
The Board currently utilizes private sector consultants and individuals to perform
specific tasks on a case- bycase basis. For instance, it occasionally employs temporary
clerical help, process servers, and experts such as financial aid consultants,
educational program consultants, and professional investigators. In addition, on an
annual basis, the Board utibzes hearing officers under contract and a Student Tuition
Recovery Fund consultant
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0Agency Response
ARIZONA STATE BOARD
FOR
PRIVATE POSTSECONDARY EDUCATION
1624 West Adams, Room 110
Phoenix, Arizona 85007
602- 542- 5709
May 26, 1994
Douglas R. Norton
Auditor General
Arizona State Office of
the Auditor General
2910 North 44th Street, Suite 410
Phoenix, Arizona 85018
RE: Agency Response to 1994 Performance Audit and Sunset Review
Dear Mr. Norton:
Enclosed is the Arizona State Board for Private Postsecondary
Education's response to the performance audit and sunset review
conducted by you office.
Dona Mar e Mark e
DMM/ dmm
enclosure
AGENCY REBPONBE
PERFORMAUCE AUDIT AND SUNSET REVIEW
1994
ARIZONA STATE BOARD FOR PRIVATE POSTBECONDARY EDUCATION
1624 WEBT A D M , ROOM 110
PHOENIX, ARIZONA 85007
602- 542- 5709
TABLE OF CONTENTS
Pacre
INTRODUCTION . . . . . . . . . . 1
REBPONBE TO FINDING I: MORE CAN
BE DONE TO PROTECT STUDENT8
FROM FINANCIAL HARM . . . . . . 2
Comments . . . . . . . . . . . . . . . . . 2
Recommendations . . . . . . . . . . . . . . 3
REBPONBE TO FINDING 11: ADDITIONAL
RESOURCES WOULD BNABLE TEE
BOARD TO IMPROVE ENFORCEMENT . . . . . 4
comments . . . . . . . . . . . . . . . . . 4
Recommendations . . . . . . . . . . . . . . 5
REBPONBE TO FINDING 111: CONBUMER
EDUCATION CAM ENEANCE THE
BOARD'S EFFECTIVmEBB . . . . . 6
Comments . . . . . . . . . . . . . . . . . 6
Recommendations . . . . . . . . . . . . . . 7
INTRODUCTION
Within the State of Arizona over 100,000 students annually attend
private postsecondary schools, colleges, and universities.
The Arizona State Board for private Postsecondary ducati ion is one
of several State Agencies with jurisdiction over private
postsecondary education. The Board is a 90/ 10 state agency
responsible for the licensure and regulation of 115 private
postsecondary educational institutions not otherwise regulated in
the State of Arizona. These institutions include trade schools,
career colleges, and degree- granting universities. The Board is
also responsible for the administration of the Arizona State
Student Tuition Recovery Fund, which is a pool of monies collected
from designated institutions which is used to provide financial
restitution to students injured by the closure of a private
postsecondary educational institution.
It is the mission of the Board to protect the public and to provide
adequate private postsecondary educational opportunities within the
state. The Board strives to:
a Protect the public health, safety and welfare and assist those
injured by private postsecondary institutions.
a Standardize private postsecondary education offerings, create
reliable standards of good practice and foster quality
education, in order to provide a consistent and usable
educational training base.
a Ensure public access to alternative higher educational
opportunities and employment training opportunities, in order
to meet the needs of a diverse population seeking self
fulfillment, academic improvement, career advancement, and
employment.
The Board recognizes that its primary purpose is to protect
students and ensure their receipt of an acceptable level of
postsecondary education. To this end the Board is responsible for
several consumer protection activities. These include administering
the State Student Tuition Recovery Fund, obtaining student records
from closed schools, making student records available to students,
and accepting and investigating student complaints.
It should be noted that the Board has also devoted considerable
resources to other consumer protection and consumer assistance
measures such as exploring alternate sources of student assistance
such as federal loan forgiveness, assisting students in seeking
these alternative funds, and assisting students in dealing with
creditors. In addition, the State Board's retrieval of student
records from closed schools and processing of student records
requests is a major and costly consumer protection activity that
is not separately funded and is financed through the State Board's
limited operating budget.
COMMENTS :
In reviewing the Board's consumer protection initiatives, the Audit
Team has concluded that the Student Tuition Recovery Fund provides
inadequate financial assistance to injured students and that the
Board has not adequately acted to protect students financially
injured when a licensed private institution closes. The Audit
Team's recommendations are to ( 1) increase the STRF assessments
paid by institutions; ( 2) provide students with pro- rata STRF
refunds rather than full STRF refunds; and ( 3) require individual
licensees to have secured funds capable of providing refunds ( in
addition to the STRF funds) to students should they close.
Institutional STRF Assessments:
The Board agrees that the financial protection of students injured
by closed institutions is of paramount importance and deserves
continuous review and revision to ensure that adequate assistance
is available. To this end, the Board has twice supported
legislation to increase STRF fee assessments; has supported
legislation to expand the scope of the STRF to include protection
for students attending institutions otherwise regulated in Arizona,
and has assisted students in securing federal financial restitution
as well as State restitution. The Board continues to investigate
methods of improving the level of student protection available ,
through the STRF and continues to support changes that will
increase the funds available for student restitution.
Student Refunds throuah the STRF:
The Board does not agree with the Audit Team's recommendation to
provide pro- rata refunds rather than full refunds to all students
seeking financial assistance through the STRF. The Board has the
authority to determine the refund amount appropriate in each
student case. Although on occasion the Board has determined that
a pro- rata refund was warranted, the Board generally supports full
refunds of all cash payments and loan indebtedness. It is the
Board's position that full refunds provide maximum student
protection by significantly reducing student loan debt and by
enhancing the students ability to utilize additional financial aid
for continuing education purposes.
While issuing pro- rata refunds would result in a greater number of
refunds being issued in a shorter period of time, pro- rata refunds
would neither eliminate the student's loan debt nor enhance the
student's ability to utilize additional financial aid for
continuing education purposes. Partial refunds create a loan
balance due that the student may not be able to repay and that may
lead to a defaulted student loan. A defaulted student loan would
irreversibly destroy a student's credit history and would make the
student ineligible for additional financial aid. For the majority
of students, the unavailability of financial aid would preclude the
continuation of the student's educational training. Such an outcome
would negate the consumer protection purpose of the STRF.
Institutional Bondina Reauirements:
The Board supports increasing institutional financial reporting
requirements and the use of surety bonds to offset reliance upon
the STRF for student restitution. The Board does not agree that all
institutions should have bonds, but rather that an institution's
history, operational status and financial position should dictate
if a bond is required and if so the amount of the bond.
RECOMMENDATIONS:
1. Support legislation to increase STRF assessment fees by
raising ceiling from $ 10.00 to $ 15.00.
2. Support legislation to allow the State Board to accept
donations, financial contributions, genera1 funds into the
STRF fund.
3. Support legislation to broaden institutional participation in
the STRF
4. Support legislation to allow the Board to require surety bonds
for certain types of schools or under certain conditions.
RESPONSE TO FINDING I1
ADDITIONAL RESOURCES WOULD ENABLE THE BOARD TO IMPROVE BNFORCEMEWT
The Board, as currently organized, funded, and staffed, plays a
useful oversight role. The Board has always acted within its
statutory framework to protect current and prospective students
from injury and to enforce regulatory laws governing private
postsecondary institutions. The Board has consistentlytaken timely
enforcement actions designed to reduce harm to the public. The
Board's insistence that correct and timely information be used in
its deliberations and its insistence on acting within its legal
authority are positive factors in considering the Board's
enforcement role, rather than negative factors. The Board agrees
with the Audit Team, however, that the Board's oversight
capabilities could be enhanced by increased resources and funding.
COMMENTS :
In reviewing the Board's resources and enforcement actions, the
Audit Team has concluded that inadequate Board resources have
limited the Board's effectiveness. The Audit Team's recommendations
are to ( 1) raise licensure fees and add another professional
position; ( 2) track student complaints to identify patterns of non-compliance;
and ( 3) impose stricter financial reporting
requirements on institutions.
Licensure Fees/ Professional Position:
The Audit Team has stated that an additional professional position
funded through a licensee fee increase is imperative to correct
Board inadequacies. Although the Board agrees that additional
resources could enhance enforcement, it does not believe that it
has failed to adequately protect the public. The Board has always
acted to move prudently and to minimize the damage resulting from
institutional closures and acts of institutional noncompliance. The
Board has policies in place to require that students are informed
of problems faced by licensed institutions and to limit or prohibit
new enrollment in institutions under serious review. In addition,
the fate of institutions is often the result of external factors,
such as United States Department of Education actions, which the
Board can neither impact nor control.
Since 1986, there has been a significant decline ( 20%) in the
number of private institutions licensed by the Board and a
corresponding decline in Board revenues. To offset declining
revenues and maintain its current level of operation, the Board
must take timely action to increase its revenues by raising
licensure fees by 20%. A 20% increase in licensure fees should
increase Board revenues from approximately $ 105,000 ( actual FY94)
to $ 120,000.
The Board agrees that the addition of another full- time
professional position could increase Board efficiency and improve
enforcement. However, the required $ 40,000 funding for the position
would require an additional 33% increase in licensure fees
($ 120,000 to $ 160,000). This would represent a total fee increase
of 50% ($ 105,000 to $ 160,000). Although the additional position
could benefit the public by decreasing processing time and
improving investigatory activities, the Board believes that the
corresponding fee increase could represent an undue financial
burden on licensees. Therefore, the Board believes that the
addition of a full- time professional position should be considered
only after re- examining the agency's organizational structure and
staff responsibilities, conducting a cost- benefit analysis, and
exploring alternative funding sources.
Student Com~ laints and Patterns of Non- Com~ liance:
Regarding student and consumer complaints, the Board does track
complaints to identify patterns and trends of abuse or fraud. The
Board reviews and considers all student complaints through a three-step
process involving Staff review, Complaint Committee review,
and full Board review. The Board reviews and considers non- student
complaints through a two- step process involving Staff review and
Board review.
Financial Re~ ortina Reauirements:
The Board supports increasing institutional financial reporting
requirements and the use of surety bonds to ensure the financial
responsibility of licensees. The Board is currently developing
financial evaluation criteria to be used in reviewing financial
statements and in determining financial responsibility.
RECOMMENDATIONS:
1. Support legislation to increase licensing fees.
2. Support the addition of a full- time Assistant Director to deal
primarily with consumer issues such as STRF, Student
Complaints, Student Records, and School Closure coordination,
as funds become available.
3. Support imposing stricter financial reporting requirements
through new legislation, rule revisions, or changes in
internal Board policy.
RESPONSE TO FINDING I11
CONSUMER EDUCATION CA# ENHANCE THE BOARD'S E F F E C T I ~ S S
The Board believes that consumer information tools can increase
consumer awareness and assist individuals with educational choices.
Given the Board's limited resources, however, the Board has chosen
to commit resources to more immediate consumer protection issues,
such as student records and the STRF fund. The Board would be happy
to provide consumer education information if mandated by statute
and if funding were available.
In reviewing the Board's consumer education efforts, the Audit Team
has concluded that the Board can better protect students through
consumer education. The Audit Team1 s recommendations are to ( 1)
have the Board provide informational materials to students,
including comparative information and ( 2) require private
institutions to display and post the Boards address and telephone.
Consumer Information Materials:
An effective consumer awareness program, involving published
literature regarding higher educational alternatives and financial
assistance programs, would cost considerably more than $ 500 in
production and mailing costs. Mailing alone would be in excess of
$ 1000 per year. The Board could neither solicit nor rely on
licensee donations or resources to produce documents, as such
activities would be illegal in the State of Arizona. In addition,
since the Board annually responds to over 1000 telephone calls and
written inquiries for information on schools and school selection,
it appears that much of the information is already being provided
to the public.
It should also be noted that comparative institutional data for
Arizona does not exist and would be costly to develop and
distribute. The State of Arizona has previously attempted to
compile this data, but the project did not succeed due to cost,
time, and resource factors.
Public ~ i s ~ l aofv Board Address and Tele~ honeN umber:
Requiring the Board address and telephone number on all licensee
information would require a statutory change. since the Board
annually receives over 3000 telephone calls and written inquiries
- 6-
for information on schools, school selection, STRF, student
records, and financial aid practices, it appears that public
visibility is not a problem. The Board would support, however, the
inclusion of the Board's address and telephone number on Board
generated documents such as license certificates. In addition, the
Board would support a state- wide consumer hot- line for student
financial aid questions.
1. To support working with the Commission for Pastsecondary
Education to develop state- wide public information regarding
higher educational opportunities.
2. To support development or revision of Board generated
documents to display the Board's address and telephone number.
SUMBET FACTORS
The Board has reviewed the Audit Team's sunset factor responses.
The State Board agrees with the information provided for factors
1,4,5,7,8,9,10,11, and 12.
Regarding factor 2, the Board believes that it is effective in
meeting its objectives and purpose. As the Board's response to the
Audit Team's performance audit identifies, the Board's
effectiveness could be increased if the Board:
Had increased revenues and increased staff
Strengthened licensee financial reporting requirements
Required institutional bonds in certain cases
Increased the funds available through the STRF
Regrading factor 3, the Board believes that it has operated within
the public interest. The Board disagrees that the composition of
the Board limits or hinders the Board's ability to act in the
public interest. The composition of the Board, with 5 sector
specific members and 2 public members is representative of the
State of Arizona's approach to the composition of State Regulatory
Boards. In reviewing the membership composition of 12 State
Regulatory Boards ( State Agencies whose authority is assigned to
Boards), all of the Boards had a majority of sector specific
members. Boards with 5 members were found to have 3 or 4 sector
specific representatives; boards with 7 members were found to have
5 sector specific members; and boards with 9 members were found to
have 6 sector specific members. The State of Arizona's commitment
to Boards that include sector representatives is a cornerstone of
the State's regulatory framework.
Regarding factor 6, the Board believes that it adequately responds
to student and consumer complaints.