WASHINGTON — Proposals to require colleges and universities to meet standards in areas such as graduation rates and students' abilities to repay loans in order to issue tax-exempt bonds drew concerns from municipal bond and higher education professionals, who warned of increased reporting requirements for the schools.
A report this month from The Education Trust said that the federal government should require four-year colleges to meet minimum standards for the percentage of full-time freshmen that are eligible for Pell Grants, the six-year graduation rate for full-time students, and the student loan repayment rate. Colleges that don't meet all of these standards and don't improve in a timely fashion could be subject to losing benefits including tax-exempt bonds.
In testimony before the Senate Finance Committee Tuesday, Dean Zerbe, former committee senior counsel and tax counsel, suggested that the panel could consider establishing that higher education institutions be eligible for certain tax benefits like tax-exempt bonds only as long as they meet standards such as keeping tuition growth at or below inflation, meeting benchmarks for six-year graduation rates and having their students stay below a certain default rate on their loans.
Chuck Samuels, an attorney at Mintz Levin and counsel to the National Association of Health and Educational Facilities Finance Authorities, said it "doesn't make any sense" to control tuition costs by putting restrictions on higher-education bonds and making infrastructure investments more expensive. In fact, doing so could actually increase the cost of higher education for students, he said.
If the criteria Zerbe suggested were implemented, universities would have to report more information to the federal government before and after bonds are issued. Smaller private colleges with smaller endowments would be disproportionately affected by the proposals because they wouldn't be as well-equipped to deal with increased federal bureaucracy, Samuels said.
Matt Hamill, senior vice president at the National Association of College and University Business Officers, said higher-education institutions currently have to comply with many federal and state regulations.
"I think [universities] already meet extensive criteria in order to utilize tax-exempt financing," he said.
Bill Daly, director of governmental affairs for the National Association of Bond Lawyers, noted that there are other areas where organizations have to meet criteria in order to be eligible to finance projects on a tax-exempt basis. President Obama's health care reform law established new requirements that charitable hospitals have to meet in order to be considered 501(c)(3) organizations. 501(c)(3)s can be conduit borrowers of tax-exempt bond financings.
If the standards for colleges were implemented, everyone involved in a higher-education bond transaction a would have to increase their due diligence before issuance. "It could add to the complexity, it could add to the expense," he said. But whether the standards are beneficial depends on whether the strengths of them outweigh the costs, he added.
Zerbe, who is now national managing director of the specialty tax services provider alliantgroup, also recommended that the Finance Committee conduct a review of the tax benefits colleges receive and seek information about what institutions are receiving the benefits. The committee then will be able to make informed decisions about whether there should be changes to tax policy.
There may be "unintended consequences" to issuing tax-exempt bonds, such as that keeping tuition prices low could hurt colleges' ability to get good credit ratings from rating agencies, Zerbe said. But Hamill said that rating agencies don't just look at universities' tuition revenues, and both colleges with higher and lower tuition levels "can have strong balance sheets and cash flows."
Zerbe suggested in his written testimony that the Finance Committee may want to see if "more limited and targeted tax-credit bonds might potentially do a great deal more to further public policy goals than current law." He told The Bond Buyer that investor-credit bonds could be a supplement or substitute to tax-exempts.
Mike Nicholas, chief executive officer of the Bond Dealers of America, warned against eliminating higher education institutions' capability to finance projects with tax-exempt debt.
"It is important to focus on ways to increase access to and reduce the cost of higher education — but it would be short-sighted to formulate a solution that strips colleges and universities of the ability to issue tax-exempt debt," he said. "Public and private universities that issue tax-exempt bonds do so because it affords them lower-cost access to a broader investor community which injects competition into the marketplace and lowers interest rates on that debt, which in turn, may help keep tuition increases smaller."
