Switcheroo Algorithms

Washington -- Last Tuesday at a public hearing at the Maryland statehouse in Annapolis, legislators were taken aback to learn that the scholarships they award to their financially needy student constituents may actually leave the students no better off when paying for college. And they were surprised to find out that it's the same way with private scholarships awarded by organizations such as the Baltimore Foundation and Central Scholarship.

It seems the colleges and universities back out their own grant aid in a like amount and then redistribute it to other, more favored students, or use it for other purposes. This is known as scholarship displacement. Actually, it's been going on for a long time, and not just in Maryland. It happens everywhere. But in Maryland, several state senators and delegates have now introduced legislation to stop the practice.

Opponents of the bills -- Maryland colleges and universities -- threw up smokescreens at the hearing to blame federal regulations for their actions, or to say they don't do scholarship displacement, or to say if they do it, it is because they know better than the donors who needs aid. They were especially opposed to any new law requiring disclosure of the practice, saying that if the practice were disclosed, who would donate to scholarship funds?

It was a shameful performance by the opponents. There are no federal regulations requiring scholarship displacement as it is practiced. It is a rare instance where a student would have so much grant aid that loans and work-study could not be reduced to comply with any federal regulations against grant overaward situations. Of course donors would stop giving if these displacement practices were widely known, so why not change the practices rather than jeopardize scholarship giving? It is as if colleges want to see everyone possible burdened with loans.

One opponent conceded that the scholarship displacement practice is widespread and gave a reason why colleges do it. Colleges must send students financial aid packages in time for students to make a decision as to whether they can afford to enroll. Often the packages include institutional grant aid that the colleges plan on withdrawing if the student later brings scholarship awards to help pay the bills. The colleges are therefore taking a risk with their own money to get a student to enroll. In exchange for taking this risk on behalf of students, the colleges feel entitled to pull their institutional funds back whenever they can. But to manage the risk that students won't be bringing in a local civic club or a charitable foundation scholarship, colleges develop complicated algorithms to predict how much money they can recover through their now-you-see-it-now-you-don't displacement practices. (Before anyone is tempted to conclude that the colleges should be entitled to a risk premium for their actions, they should consider that these risks are also typically covered by the same shell-game used to displace federal student grant funds, especially Pell grants, which research has shown are also vulnerable to displacement.)

Moreover, these algorithms are typically part and parcel of elaborate enrollment management plans to improve the prestige rankings of the institutions, which often are a much higher priority than holding down student debt. The plans use techniques such as "aid-gapping" less desirable students to discourage them from enrolling, shifting institutional aid to "merit" awards to enroll more desirable non-needy students, and the latest technique, "drowning the bunnies," one college president's description of his effort to get weaker students to drop out before they can be counted in retention rate statistics favored by those who award coveted prestige. Dare we ask how much these switcheroo algorithms are contributing to growing socioeconomic and racial inequalities that are identified by researchers as being linked to student debt?

Solutions are available. One is to pass the Maryland legislation. Another is for Maryland legislators to provide more state money for need-based student aid, so colleges do not have to rob Peter to pay Paul under the table. Another is for the federal government to re-balance more of its student aid spending toward SEOG and other matching programs, so that colleges that do not displace scholarships but use their institutional aid to reduce student debt would be rewarded with more funding. Yet another is for the Secretary of Education to require colleges to disclose their financial aid distribution practices under the Student Right to Know Act. Making the colleges honest would be doing right by all scholarship donors who only want to help relieve needy students of debt, a most worthy cause.






Recalling an Old Budget Controversy

Lincoln -- My last two posts have dealt with current issues in postsecondary education finance at both the national and state levels. While writing them I remembered a couple of old budgeting and finance issues that have been dormant for many years, but which deserve a final visit for the historical record. Discussing them may also shed light on current issues and conflicts in Nebraska.

In 1995, Professor Robert Knoll of the University of Nebraska-Lincoln's English department wrote a history of the university, appropriately titled Prairie University. It's a wonderful book, full of facts and overflowing with engaging people. Best of all, Professor Knoll does not shy away from making judgments; he praises and he punishes. From what I know based on my own fairly close association with the university over many decades, and having dealt personally with many of those in university leadership positions, Robert Knoll almost always gets it right.

There is one episode, however, that needs elaboration if not outright correction. It deals with the contretemps between NU President Woody Varner, State Senator Richard Marvel, and Governor Jim Exon in the mid-1970s.

Varner did not like Marvel's legislated earmarks that tied the university's hands on how it spent appropriated funds. Varner convinced the Board of Regents to take the matter to court to give the university more expenditure flexibility. But procedurally, the university could not sue the legislature, so the Regents sued Governor Exon and those in his administration who administered the budget earmarks. Varner told Exon personally that the suit was not against him, it was just that he had to be named in the suit to get the issue before the courts. Exon, for his part, did not like the earmarks either. He was of the philosophy that appropriated funds should be made available to the university in a lump sum.

Meanwhile, the university budget proposals that Varner submitted to the governor and legislature were full of their own problems. For example, the university would underestimate enrollment and tuition revenue in any one year so as to make a case for more state tax support. After the legislature appropriated the tax support (general funds) and tuition support (cash funds) based on the university's tuition estimates, the university would come back to the legislature later, in mid-academic year, for a supplemental appropriation to spend the additional tuition revenue based on higher enrollment than projected. Varner would say with a straight face that the additional cash fund monies must be immediately appropriated by the legislature, conveniently forgetting that less than a year before he had leveraged additional state tax support for the university by low-balling the original estimates of cash funds available.

Exon pointed this out through his own budget proposals. Marvel was not pleased that his Appropriations Committee seemed to be played for fools and chastised Varner publicly at committee hearings, albeit on somewhat different grounds than Exon. (Marvel and Exon were not close, Marvel having run for governor himself in 1974 against Exon, who defeated him easily.)

Knoll records part of this in a chapter on Woody Varner. Knoll writes,

When the governor presented his budget, he and his fiscal officers used data about cash balances which University officials thought inaccurate. "I don't know the origin of his figures," Varner told...the Lincoln Journal.... "I wouldn't argue that such figures could be found, but the conclusions he reaches are simply wrong. It is a bad use of data." Exon reacted angrily. (p. 171)

Woody Varner resigned not long afterward, to become president of the NU Foundation, taking everyone by surprise. As his reason for resigning, he cited bad relations with the statehouse. In 1977, the Nebraska Supreme Court ruled in favor of the Regents, technically against Exon but essentially against the legislature. The controversy over the cash funds was addressed in a concurring opinion by Justice Harry Spencer, who summed it all up nicely in one sentence, slapping down both Marvel's earmarking and Varner's now-you-see-it-now-you-don't treatment of cash funds:

I concur with the majority opinion herein, with the understanding that the opinion holds that the Legislature cannot control the use of cash funds generated by University activities, but that it can consider them in the making of appropriations.

Robert Knoll can be forgiven for not telling the whole story, which he may not have known. Or perhaps he did not want to put Woody Varner in a bad light, being the "D.B. and Paula Varner Professor of English." Before publishing, Knoll ran his book by State Senator Jerome Warner, Marvel's successor as chairman of the appropriations committee. Warner, a man with his own agenda, likely was only too happy to leave the last word with Varner's version of events.

I rather liked Woody Varner and do not disagree with Robert Knoll's placement of him as among the best NU leaders of all time. Varner was a prodigious fund-raiser. He was the man behind the Lied Center in Lincoln. He made many friends for the university and for the whole state. He had his faults. He would try to come between people to create rifts, which he would then try to exploit. His reorganization of the university, making himself president of all the campuses under a central administration, would later backfire. Creation of a separate UNL and UNMC eventually, in 2011, cost UNL membership in the prestigious Association of American Universities, a huge blow which he could not have forseen. But I'll wager Woody could have kept UNL in the AAU had he still been around; he would have have charmed AAU presidents to no end and come away with UNL membership in AAU intact.

The moral of this story, if it has one, is that when it comes to budget and finance, it's better to be transparent in the first place and not to engage in flim-flam. In the end, it really doesn't pay off. That was true in the 1970s (it brought down an excellent university president) and it should be even more apparent today, if anybody's paying attention.

Postscript: I know this history because I was an eyewitness to it as well as an active participant. When President Varner and Governor Exon met to discuss these and other budget matters, I was customarily present. I was intimately familiar with the Governor's budget numbers and knew the care with which they had been worked up and reviewed. When Senator Marvel went after President Varner in open hearing, I was in the hearing room and felt the tension. Marvel himself was still miffed about his loss in the previous gubernatorial race. He had tried to position himself with voters as a friend of the university through his earmarked appropriations, only to lose the election and then have the university object to his way of writing appropriations bills. It was salt in the wound. When the university prevailed in its lawsuit, unfortunately it was not only Marvel's appropriations bills that were found to be unconstitutional, but several longstanding statutory provisions dealing with procurement and personnel as well. In a sense, the university became a law unto itself. This is an unfortunate legacy of the ambition and overreach of Richard Marvel.



More Transparency Needed in Higher Education Finance, Again

Lincoln -- The question reverberating around the State of Nebraska this morning, surely, is why the Omaha World-Herald, owned by Warren Buffet, is calling into question the business practices of fellow Omaha civic leader Walter Scott, Jr. The articles at issue -- fine ones at that -- are by Kate Howard and prominently featured in the newspaper.

Some of us had nearly given up on reading any real news in Nebraska papers, unless we were looking for stories about Nebraska football, which are legion. By the way, can it be that my fellow Nebraskans are really that interested in this continual football prattle? Can't we at least save it for the football season, so we can read real news the rest of the year?

The OWH news articles, which show that investigative reporting still has at least a pulse in Nebraska, point out how many Scott foundation charitable contributions come with strings attached and how University of Nebraska officials are only too eager to keep the details hidden when the donations are to one or more of the NU campuses. Much action seems to take place within various facade entities featuring interlocking and overlapping directorships. Whether all of this is legal depends on whom you ask. Former Attorney General Robert Spire didn't think so, but he left office many years ago.

It might well be that the Scott foundation is doing such wonderful things that the Scott family should be enshrined in a new civic temple created especially for them by grateful Nebraskans. Based on what I know, I'm inclined to think so, or at least to give them the benefit of the doubt.

Not so with others, whose jobs are to protect us from bad things going on behind closed doors. Here are some concerns:

1. Where are the auditors? I've written before on how the behavior of university officials anywhere can be distorted based on what is or is not auditable public information. Such officials can be tempted to act improperly in situations where they think their actions will never come to light. Auditors should be careful to report dealings between public and private entities in sufficient detail to allow the public to know how tax dollars are being used, and if they are being used in conjunction with private dollars to permit kickbacks and circumvent open records. Auditors themselves are sometimes drawn into this trap. In a Kansas State case, about which I have previously written, Grant Thornton auditors should not have agreed to a confidential audit, good as it was.* The Kansas state auditor should have required appropriate public audits in the first place. Good for the press association in Kansas to have forced the Kansas Regents to release the Grant Thornton audit exposing money-juggling to cover up a kickback scheme. Auditors are too often beholden to those paying the bills for their services, and left too unsupervised by officials elected to oversee them. Where does the Nebraska state auditor stand on such matters? Two years ago I wrote this:

The need for greater transparency in higher education auditing has never been greater, inasmuch as state cutbacks in tax support for many institutions have left them more dependent on proprietary entities and foundations, to include large corporate donors eager to move in on, and to control subtly or otherwise, university research and outreach. Agreements of dubious legality, conflicts of interest, attached strings, and ethically challenged behavior that strike at the heart of universities' integrity are correspondingly on the rise.

2. Where is tax law enforcement? If you or I give a charitable contribution to a public television station and get a mug and tote bag in return, we get a tax statement noting that the tax deduction value of the contribution is net of the premiums we received. Are contributions to a university that involve a premium back to the contributor, in the form of a no-bid contract, treated similarly? According to the OWH, the no-bid premiums were explicit; in one case they were even delivered before the contribution was made. Perhaps there is a small army of accountants at work in the facade entities calculating and reporting the premiums involved. If not, I will still reduce my tax deduction by the value of the mug and tote bag, but I won't feel as good about it.

3. What about conflicts of interest? I can't help but note the OWH's mention of the Tetrad company, headed by a Scott family member, and how it was chosen without public input to develop the Innovation Campus in Lincoln. This is the same Tetrad company that is building a large anhydrous ammonia plant in Geneva, Nebraska. Had the Innovation Campus selection process been open to the public, perhaps someone would have asked how friendly Tetrad would be to prospective innovators on the Lincoln campus who want to decrease reliance on chemical agriculture to supply our food. There is a growing movement in the country to bring back cover crops to cut back on products like anhydrous ammonia. This could be seen as a threat to Tetrad. Likewise, Tetrad owns large livestock operations. Would it be open to innovators who see grass-fed beef as the future? Perhaps Tetrad could have defended itself against conflict of interest charges, but the point is that when these decisions are made behind closed doors, no one has a chance to point out potential conflicts of interest and to deal with them.

I have had a career in public budgeting and finance. Many years ago, I was the director of administrative services in the state capitol in Lincoln. DAS was charged statutorily with making certain that distributions of state funds were legal before my name and that of the state treasurer were attached to state warrants of payment. If we in DAS had a question as to the legality of a distribution, we would ask the attorney general. This applied to all state payments, including those on behalf of constitutional bodies such as the state board of education and the state board of regents. Certainly payments for no-bid contracts would have attracted our attention. Maybe we would have been advised to approve them. In any case, all state entities knew that someone was watching out for the state fisc, which deterred tomfoolery with state funds. Why do I get the feeling that no one's been minding the store for many years? Perhaps we are all supposed to be reading those stories about Nebraska football, rather than paying attention to what's going on behind closed doors.

* From the Grant Thornton audit of KSU:

The Foundation, the Alumni Association,.. and the Athletics Department view themselves, and are viewed by others, as part of or associated with the institution of KSU. However, they are all separate legal entities apart from the University. They all have as a common goal the advancement of KSU and have at times entered into transactions with one another in support of that goal. However, as separate legal entities, any transactions among them should be appropriately disclosed, approved and documented allowing for transparency of intent and substance. The failure to do so raises the question of the legitimacy of the transaction. Our report details numerous instances where transactions between the various entities did not meet this standard.

An Enforcement Office to Combat College Fraud, At Last

Washington -- "Long overdue..." "Better late than never..." Those are my sentiments exactly upon learning that the U.S. Department of Education is finally going to estblish an office to crack down on college fraud. What took so long?

Some of us have been making suggestions along these lines for a long time, especially with regard to for-profit schools. I've previously written to ask the Secretary to use his program review teams to look at fraud, waste, and abuse at any and all institutions -- regardless of ownership -- that misuse "enrollment management" techniques to subvert the purposes of student aid programs under Title IV of the Higher Education Act. If the program review teams find evidence of intentional financial aid "gapping" of low-income students to discourage their enrollment, or intentional displacement of federal student grant funds to fund other institutional priorities, or any number of similar gimmicks that have become a cancer on enrollment management and cost taxpayers billions of dollars, he should use his statutory powers to give institutions notice to change their ways or be dropped from Title IV participation.

Federal funds must be used at colleges for the statutory purposes for which they are appropriated. It is also axiomatic that colleges cannot do indirectly what they cannot do directly with federal funds. College manipulation of federal funds amounts to misappropriation. The Secretary has clear statutory authority under his Limitation, Suspension, and Termination powers to send signals to institutions to cease misappropriation practices.

A question arises about where in the Department of Education the new office should be located. If it is located at the office of Federal Student Aid (FSA), there must be safeguards to protect against a conflict of interest, inasmuch as FSA has organizational lines of authority reflecting orientation toward so-called partnerships with institutions at the expense of enforcement. Unfortunately, FSA has given its blessing (or looked the other way) more than once to practices that are wasteful and even fraudulent. I know from first-hand experience; I have witnessed suppression and misuse of program review team findings on more than one occasion within FSA.

It is noteworthy that Congress has seen fit to keep the research and evaluation function (such as it is at the Institute for Education Sciences, where I used to work) separate from both FSA and from the Office of Postsecondary Education. Researchers and evaluators must be independent, of course, to be credible. Why not the new enforcement office as well? Should it not be somewhere outside of FSA?