Officials developing a federal bond insurance plan for historically black colleges and universities made progress this week, but a major sticking point involving default protection remains unresolved.
At a meeting in Washington, D.C., on Tuesday, Department of Education officials and an advisory board to Education Secretary Richard W. Riley agreed on several changes, including credit criteria that will be used to determine eligibility for the program's guarantee. However, the participants were unable to find common ground on the structure of an escrow account that would serve as a debt service fund in the event of a default.
Resolution of the issue is central to the implementation of the insurance program because the structure of the escrow account affects many other aspects of the program. Altering the escrow account would entail making other major structural changes and it raises budgetary concerns as well, officials familiar with the developments said.
On April 4, the advisory board met with department officials and raised objections to several parts of the department's plan, most notably the structure of the escrow account. Under the department's original plan, schools given loans through the program would make down payments that would be pooled and placed in a single escrow account equaling 10% of the amount of the outstanding bonds.
Members of Riley's advisory board objected to the idea of a single escrow because keeping the account at 10% of outstanding issuance would make it difficult to reimburse schools that paid off their loans early.
Responding to the advisory board's request for a legal opinion on the matter, Judith Winston, the education department's general counsel, said the statute on Historically Black College and University Capital Financing Program "does not address how earnings on the escrow account should be used," but is clear that there should only be one escrow account.
However, Winston said at this week's meeting that the department would assist the advisory board in drafting legislation that would "engage in a process to change the legislation to include the use of escrow accounts that would be most beneficial to historically black colleges and universities."
Sources in Washington say an amendment has already been drafted that seeks to comply with the intent of a letter signed by a bipartisan group of members of Congress.
"We are writing to express our serious concern with respect to the Department's ... interpretation of the escrow account provisions contained in the Historically Black College and University (BHCU) Capital Financing Program," the letter, sent to Riley on April 25, said. "We intended, and we would support, a reading of the statute that established separate escrow accounts for each bond issue. This is consistent with the statutory language..."
The letter was signed by Sens. Edward M. Kennedy, D-Mass., and Claiborne Pell, D-R.I., and Reps. William Clay, D-Mo., William D. Ford, D-Mich., William F. Goodling, R-Pa., and Thomas E. Petri, R-Wis.
While the nature of the escrow account is being finalized, the education department is proceeding with a solicitation letter to select a designated bonding authority for the program.
The for-profit entity will issue the federally guaranteed bonds and then use the proceeds to provide loans to historically black colleges and universities. Because of the U.S. government's guarantee, bonds issued through the program will be taxable.
The authority will be responsible for investing the funds in the escrow account and will be empowered to charge the schools up to 2% above the interest rates on the bonds in exchange for providing loans.
Preliminary returns indicate that nearly every minority-owned firm and several major Wall Street concerns have expressed interest in being the program's designated bonding authority.
While the escrow account issue remains unresolved, the advisory board did settle on five credit criteria that will be used to determine eligibility for the program's guarantee:
* Institutions must be accredited by the appropriate regional accrediting body that has been approved by the secretary.
* Schools borrowing under the program must meet the department's "financial responsibility standards" under Section 498(c) of Title IV of the Higher Education Act.
* Generally, institutions should have less than 90% of revenues generated from tuition and fees.
* There should be evidence of stable enrollment trends over the past five years.
* The institution cannot be in default on any loan to the department or any other federal agency.
The advisory board also said another aspect of the department's revised credit criteria -- that institutions have revenues sufficient to cover debt service at least one time -- will be incorporated into the credit criteria.
Other credit criteria originally submitted by the department were also authorized by the board. However, instead of being used to determine eligibility for the program as originally intended, these criteria will be employed by the designated bonding authority to determined the size of a loan granted to an institution.
In addition, the advisory board set $10 million as a target for the maximum size of single issues sold through the program, and decided that the office of the White House Initiative on Historically Black Colleges and Universities will be used to market the program to institutions it is intended to serve.
Legislation for the program, included in the Higher Education Act of 1992, commits the federal government to guarantee up to $375 million in outstanding principal and interest, with a $357 million cap on principal.