    Capital Financing: Department Management Improvements Could
    Enhance Education's Loan Program for Historically Black Colleges
    and Universities (18-OCT-06, GAO-07-64).

    Historically Black Colleges and Universities (HBCU), which number
    around 100, undertake capital projects to provide appropriate
    settings for learning, but many face challenges in doing so. In
    1992, Congress created the HBCU Capital Financing Program to help
    HBCUs fund capital projects by offering loans with interest rates
    near the government's cost of borrowing. We reviewed the program
    by considering (1) HBCU capital project needs and program
    utilization, (2) program advantages compared to other sources of
    funds and schools' views on loan terms, (3) the Department of
    Education's (Education) program management, and (4) certain
    schools' perspectives on and Education's plan to implement loan
    provisions specifically authorized by Congress in June 2006 to
    assist in hurricane recovery efforts. To conduct our work, we
    reviewed applicable laws and program materials and interviewed
    officials from federal agencies and 34 HBCUs.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-07-64
        ACCNO:   A62305
      TITLE:     Capital Financing: Department Management Improvements
    Could Enhance Education's Loan Program for Historically Black
    Colleges and Universities
         DATE:   10/18/2006
      SUBJECT:   Aid for education
    	     Black colleges
    	     Education program evaluation
    	     Federal funds
    	     Higher education
    	     Internal controls
    	     Loans
    	     Program evaluation
    	     Program management
    	     Capital improvements
    	     Executive agency oversight
    	     Dept. of Education HBCU Capital
    	     Financing Program

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    GAO-07-64

         * [1]Results in Brief
         * [2]Background

              * [3]Program Description
              * [4]Federal Credit Reform Act of 1990
              * [5]2005 Gulf Coast Hurricanes and Disaster Assistance
              * [6]Disaster Assistance Agencies

         * [7]HBCUs Reported Substantial Capital Project Needs, but Only A

              * [8]HBCUs Reported Having Substantial Capital Project Needs, alt
              * [9]Approximately 14 Percent of HBCUs Have Borrowed Just Over Ha
              * [10]Education Has Taken Limited Steps to Determine Schools' Fina

         * [11]The Program Provides Needed Access to Low-Cost Capital Finan

              * [12]The Program Provides Low-Cost Financing and Certain Flexibil
              * [13]The Escrow Arrangement, among Other Terms and Conditions, Wa

         * [14]Education Has Taken Some Steps to Improve the Program, but W

              * [15]Education Has Recently Introduced Some Program Improvements,
              * [16]Weaknesses in Management Control Exist

                   * [17]Communication with HBCUs
                   * [18]Compliance with Program and Budget Laws and Federal
                     Financia
                   * [19]Monitoring the Performance of the DBA

         * [20]HBCUs Affected by Hurricanes Expressed Satisfaction with Spe

              * [21]Gulf Area HBCUs Experienced Significant Hurricane Damage, an
              * [22]Schools Found Select Terms for Emergency Loans Favorable, bu
              * [23]Education Is Preparing to Take Steps to Ensure It Can Provid

         * [24]Conclusions
         * [25]Recommendations for Executive Action
         * [26]Agency Comments
         * [27]GAO Contacts
         * [28]Staff Acknowledgments
         * [29]GAO's Mission
         * [30]Obtaining Copies of GAO Reports and Testimony

              * [31]Order by Mail or Phone

         * [32]To Report Fraud, Waste, and Abuse in Federal Programs
         * [33]Congressional Relations
         * [34]Public Affairs

    Report to Congressional Requesters

    United States Government Accountability Office

    GAO

    October 2006

    CAPITAL FINANCING

    Department Management Improvements Could Enhance Education's Loan Program
    for Historically Black Colleges and Universities

    GAO-07-64

    Contents

    Letter 1

    Results in Brief 3
    Background 6
    HBCUs Reported Substantial Capital Project Needs, but Only About Half of
    Available Program Funds Have Been Borrowed 10
    The Program Provides Needed Access to Low-Cost Capital Financing, but
    Certain Loan Terms and Conditions Discourage Participation 16
    Education Has Taken Some Steps to Improve the Program, but Weaknesses in
    Management Control Exist 21
    HBCUs Affected by Hurricanes Expressed Satisfaction with Special Loan
    Provisions and Concerns with Application Deadline, while Education
    Officials Said They Would Evaluate Loan Processes 28
    Conclusions 34
    Recommendations for Executive Action 35
    Agency Comments 37
    Appendix I List of Historically Black Colleges and Universities GAO
    Interviewed 39
    Appendix II Number of HBCUs Eligible to Participate in Capital Financing
    Program by State (as of August 31, 2006) 40
    Appendix III HBCUs Located in Geographic Area Affected by Hurricane
    Katrina in 2005 41
    Appendix IV Comments from the Department of Education 42
    Appendix V GAO Contact and Staff Acknowledgments 45

    Tables

    Table 1: Key Terms and Conditions for HBCU Capital Financing Loans 8
    Table 2: History of Loan Activity of the HBCU Capital Financing Program 14
    Table 3: Education's Indicators Measuring Program Utilization 15
    Table 4: Designated Bonding Authority's Attendance and Scope of Activities
    at Conferences since 2002 23

    Figures

    Figure 1: The Renovated Kellogg Conference Center at Tuskegee University
    13
    Figure 2: Xavier University Science Building Auditorium Before and After
    Restoration from Flood Damage 30
    Figure 3: Exterior of Southern University's Library with Waterline
    Indicating the Extent of Flooding 31
    Figure 4: Removed Asbestos from Dillard University Library Awaiting
    Disposal 32

    Abbreviations

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. It may be reproduced and distributed in
    its entirety without further permission from GAO. However, because this
    work may contain copyrighted images or other material, permission from the
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    separately.

    APPA Association of Higher Education Facilities Officers
    DBA designated bonding authority
    FCRA Federal Credit Reform Act
    FEMA Federal Emergency Management Agency
    FFB Federal Financing Bank
    HBCU Historically Black Colleges and Universities
    HEA Higher Education Act
    NACUBO National Association of College and University Business Officers
    NAFEO National Association for Equal Opportunity in Higher Education
    NASULGC National Association of State Universities and Land Grant Colleges
    OMB Office of Management and Budget
    SACS Southern Association of Colleges and Schools
    SBA Small Business Administration
    UNCF United Negro College Fund

    United States Government Accountability Office
    Washington, DC 20548

    October 18, 2006

    The Honorable Dale E. Kildee Ranking Minority Member Subcommittee on 21st
    Century Competitiveness Committee on Education and the Workforce House of
    Representatives

    The Honorable Major R. Owens House of Representatives

    The nation's Historically Black Colleges and Universities (HBCU), like
    many of the approximately 6,500 other institutions of higher education in
    the country,^1 undertake capital improvements, including renovating
    existing or constructing new instructional facilities, to provide their
    students appropriate settings for learning and social development. Many
    HBCUs, which number around 100 schools, face numerous challenges in
    funding capital projects because they have relatively small enrollments,
    limited endowments, and face other financial constraints. Despite these
    challenges, HBCUs have distinguished themselves by granting a substantial
    portion of the degrees earned by African-Americans. For example, in school
    year 2003-2004, HBCUs granted about 13.5 percent of all degrees earned by
    African-Americans while constituting only 1.5 percent of the nation's
    postsecondary institutions.

    To help these schools fund capital projects, Congress created the HBCU
    Capital Financing Program in 1992 under the Higher Education Act of 1965
    (HEA) to provide eligible HBCUs with access to low-cost financing. The
    Department of Education (Education) is responsible for overall program
    management and is expected to regularly consult with the HBCU Capital
    Financing Advisory Board (Advisory Board). The Advisory Board is composed
    of the Secretary of Education, or the Secretary's designee, presidents of
    private and public HBCUs, and other experts on HBCUs. Operation of the
    program is contracted to a designated bonding authority (DBA) that, among
    other lending functions, raises funds by issuing bonds for purchase by the
    Federal Financing Bank (FFB)--a government corporation under the
    supervision and direction of the Department of Treasury (Treasury) that
    assists federal agencies in financing agency-issued or agency-guaranteed
    securities. Funds raised are subsequently lent to eligible HBCUs at an
    interest rate slightly above the government's cost of borrowing to finance
    qualified capital projects. As part of its responsibilities in managing a
    federal credit program subject to the Federal Credit Reform Act of 1990
    (FCRA), Education is required to determine the net cost to the government
    of extending credit over the life of a loan--the subsidy cost--in the year
    the loan is made. Congress must provide Education with budget authority to
    cover these costs before loans are provided to HBCUs. Since the program
    was first funded, appropriations legislation has, in general, limited the
    subsidy costs of the HBCU capital financing to no greater than zero.

    ^1 These are institutions recognized by the Department of Education as
    accredited institutions eligible for participation in federal student
    financial aid programs.

    In August of 2005, the campuses of some HBCUs in the Gulf Coast were
    severely damaged by Hurricane Katrina or Rita. To assist these HBCUs in
    their recovery efforts, in June 2006, Congress, in the Emergency
    Supplemental Appropriations Act for Defense, the Global War on Terror, and
    Hurricane Recovery, 2006 (Emergency Act), amended certain statutory
    provisions for institutions affected by the Gulf Coast hurricane disasters
    and granted the Secretary of Education the authority to waive or modify
    any statutory or regulatory provisions of the program in connection with a
    Gulf Coast hurricane disaster. In addition, the Emergency Act provides
    that the authority to enter into, waive, or modify the terms of a loan
    agreement expires 1 year after the legislation's enactment.

    In light of the upcoming reauthorization of the Higher Education Act, you
    had questions about the utilization of the program and Education's
    management of the program. To address your interests, we reviewed the
    program by considering (1) the capital project needs of the nation's HBCUs
    and the extent to which HBCUs have used the program; (2) the relative
    advantages of the program, if any, compared with other sources of funding,
    and schools' perspectives on the loan terms and conditions; (3) whether
    Education's administration and management of the program ensures program
    effectiveness; and (4) schools' perspectives on the emergency loan
    provisions of the Emergency Act and Education's plans for implementing
    them.

    To conduct our work, we reviewed and analyzed applicable laws and
    regulations as well as program data and documents pertaining to program
    participation, program policies, and agreements among Education, the DBA,
    the FFB, and participating schools. We also reviewed the methods and
    procedures--management controls--Education had in place or was planning to
    implement to manage the program. To provide some context for understanding
    HBCUs' capital project needs, we analyzed available national studies
    concerning such needs of postsecondary institutions and HBCUs in
    particular. In addition, we reviewed alternative capital funding sources,
    including private sector financing and federal grants available to HBCUs
    and asked schools how these sources or funding options compare to the
    program. We interviewed officials representing Education, its DBA, the
    Advisory Board, the FFB, the Office of Management and Budget (OMB), the
    Small Business Administration (SBA), associations knowledgeable about
    HBCUs, and the Bond Market Association. We conducted semistructured
    interviews with 34 HBCUs. (See app. I.) We interviewed all 13 program
    participants that originated loans prior to 2006, and a purposive sample
    of 21 nonparticipants. We selected nonparticipating schools based on (1)
    location, (2) type (2-year and 4-year, public and private), and (3)
    enrollment size. Our selection of nonparticipating schools was made to
    obtain a variety of institutional perspectives and was not intended to be
    representative. During the course of our review, we conducted site visits
    to 5 schools,^2 3 of which were institutions affected by the hurricanes in
    2005,^3 and the other 2 institutions were program participants. Our
    interviews with program participants also included another institution
    affected by the 2005 hurricanes. We conducted our work from May 2005 to
    August 2006 in accordance with generally accepted government auditing
    standards.

    Results in Brief

    HBCU officials we interviewed reported extensive and diverse capital
    project needs, including construction and renovation of facilities and
    addressing deferred maintenance, yet just over half of the available HBCU
    Capital Financing Program loan capital has been borrowed. While capital
    project needs have not been well documented by national studies, the
    schools have individually identified and documented them. Despite reported
    needs, only 14 schools became borrowers--borrowing about $200 million,
    well below the $375 million limit Congress established. Education has
    collected and reported limited information on the program's utilization
    and has not established performance measures or goals to gauge program
    effectiveness, though Education officials noted that they are currently
    working on developing such measures and goals.

    ^2 Schools we visited included Barber-Scotia College, Dillard University,
    Southern University at New Orleans, Tuskegee University, and Xavier
    University.

    ^3 A total of 8 HBCUs were affected by the 2005 hurricanes.

    The program provides access to low-cost capital financing and
    flexibilities not always available elsewhere, but some loan terms and
    conditions could discourage participation, though school officials said
    they remain interested in the program. Participants and nonparticipants
    alike looked favorably on low interest rates and long repayment periods
    (up to 30 years) offered by the program and noted that these may not be
    available in the private market for some borrowers. Further, while HBCUs
    may qualify for a variety of federal grants for capital projects, school
    officials said that the program makes funds available for a broader range
    of needs. However, school officials found that certain provisions of the
    program have discouraged participation. In particular, many officials
    remarked that the requirement that they place in a pooled escrow account 5
    percent of loan proceeds was a disincentive to participate in the program.
    The escrow funds, which reduce the federal budget cost of the program by
    offsetting the estimated costs of any program borrower's loan delinquency
    or default, are returned to program participants if no such losses occur.
    The recent default of one borrower, however, has heightened awareness
    among participants of the financial risk for them inherent in the pooled
    escrow arrangement. Though not as prevalent a concern, Education's
    requirement for monthly loan repayments was viewed by some as an undue
    burden, given that the DBA remits these payments to the FFB semiannually.
    Although the range of capital projects permissible under the program is
    wider than that offered through some federal grant programs we reviewed,
    many school officials would like to see additional projects funded, such
    as multipurpose community centers and campus beautification projects.
    While concerns were noted, many schools expressed an interest in
    participating again or for the first time, provided that certain program
    improvements were made.

    While Education has taken some steps to improve the program, we found
    significant weaknesses in its management controls that compromise the
    extent to which Education can ensure program objectives are being achieved
    effectively and efficiently. Specifically, with respect to program
    improvements, Education has recently provided schools the choice of fixed
    or variable interest rates, allowed for larger loan amounts, and afforded
    more opportunity for schools to negotiate loan terms that appealed to
    schools. In addition, Education has increased marketing of the program.
    However, Education has not established effective management control in
    several areas, including

               o Communication with HBCUs: Several HBCU officials reported that
               they lacked clear, timely, and useful information from Education
               and the DBA. For example, several officials said they did not
               receive updates about the status of their loans. For some schools,
               the process of getting the loan took more than a year. As a result
               of the lengthy process, capital project costs for some schools
               increased. School officials told us that the process could have
               been expedited had Education and the DBA made use of previous
               borrowers' experiences to apprise them of problems that could
               affect their own applications.

               o Compliance with laws and regulations: Despite a statutory
               requirement that the Advisory Board meet with and advise the
               Secretary of Education at least twice each year, the Advisory
               Board has met only three times in the last 12 years. In addition,
               Education has not complied with requirements of the Federal Credit
               Reform Act of 1990. In particular, Education has not properly
               accounted for the costs of the program because it has excluded
               certain fees paid by borrowers to the government from its cost
               estimates, thereby overestimating program costs. Moreover,
               Education has allowed the DBA to collect and hold in trust fees
               paid, but has not established policies or procedures for the DBA
               concerning how it is to remit these funds to the government.

               o Monitoring the program contractor: Although the DBA has been
               under contract with Education for over 5 years, it has not been
               formally assessed for performance. Also, Education has not
               monitored the marketing activities of its DBA to ensure that loans
               are being fairly allocated among as many eligible institutions as
               possible. Because the DBA's compensation is determined as a
               percentage of the amount borrowed, and the costs it incurs may not
               vary significantly from loan to loan, it is important to monitor
               its activities to ensure it is not making loans exclusively to
               schools that are likely to borrow larger amounts and for which its
               potential for profit is highest. Additionally, we found several
               instances of poor record keeping by the DBA, including missing key
               loan documentation, and until our review, Education was unaware
               that such documents were missing.

    HBCU officials whose campuses were affected by the hurricanes expressed
    satisfaction with the special loan provisions but had concerns about the
    time allowed to take advantage of them, while Education officials told us
    they are taking steps to evaluate the department's loan processes. School
    officials from the 4 schools we spoke with noted that their institutions
    had incurred extensive physical damages caused by water, wind, and, for
    one school, fire. Many of these officials said that they have not been
    able to fully assess all hurricane-related costs, such as replacing
    property, repairing plumbing systems, landscaping, and replacing
    sidewalks, and that the assessment process was lengthy because of the time
    required to prioritize campus restoration needs, undertake complex
    assessments of historic properties, follow state assessment processes, and
    other factors. They noted that the difficulties they face in making their
    assessments may make it challenging for them to apply prior to the
    expiration of the specially authorized provisions. School officials
    appreciated the reduced interest rate and cost of issuance (both set at 1
    percent or less) and that the Secretary of Education was provided
    authority to waive or modify statutory or regulatory provisions for
    affected institutions to better assist them with their recovery. Although
    Education officials told us that they have not yet determined the extent
    to which the department would make use of its authority to waive or modify
    program provisions, including statutory loan limits, the department would
    be prepared to provide loans to hurricane-affected HBCUs. They noted that
    the department has already notified eligible institutions of the
    availability of funds and would hold additional meetings with schools to
    gain an understanding of their capital improvement and restoration needs.

    In this report we are making several recommendations to the Secretary of
    Education to ensure that the department is complying with provisions of
    the Higher Education Act of 1965 and the Federal Credit Reform Act of
    1990. Furthermore, Education should also implement a number of program
    improvements, such as revising the repayment frequency for HBCUs and
    increasing monitoring of the DBA to ensure program effectiveness and
    efficiency.

    In written comments on a draft of this report, Education agreed with our
    findings and all but one of our recommendations. Education's written
    comments appear in appendix IV. Education also provided technical
    comments, which we incorporated where appropriate.

    Background

    Congress established the HBCU Capital Financing Program in 1992 under
    Title III, Part D, of the Higher Education Act of 1965, as amended, to
    provide HBCUs^4 with access to low-cost capital to help them to continue
    and expand upon their educational missions. (See app. II for locations of
    HBCUs eligible to participate in the program.) Program funds, raised
    through bonds issued by the DBA and purchased by the FFB, are lent to
    eligible schools with qualified capital projects.^5 Loan proceeds may be
    used for--among other things--repairing, renovating, or in exceptional
    circumstances, constructing and acquiring new instructional or residential
    facilities, equipment, or research instrumentation. Additionally, schools
    are able to refinance prior capital loans. Education guarantees loan
    repayment.

    ^4 For purposes of this program, the Higher Education Act of 1965, as
    amended, generally defines an HBCU as a college or university that was
    established before 1964, whose principal mission was and is the education
    of Black Americans, and is accredited or making reasonable progress toward
    accreditation by an accrediting agency or association recognized by
    Education.

    Program Description

    Although Education administers the program, the DBA is responsible for
    many of the program's operations and is subject to departmental
    oversight.^6 Specifically, the DBA works with prospective borrowers to
    develop loan applications and monitors and enforces loan agreements. The
    loan process consists of multiple steps. HBCUs interested in obtaining
    funds through the program must first complete a preliminary application
    that includes information such as enrollment, some financial
    data--including a description of existing debt--and proposed capital
    projects. On the basis of this information, the DBA determines whether the
    school should formally complete an application, which includes more
    detailed financial information, such as audited financial statements and
    various campus plans and assessments. To be approved for the loan, an HBCU
    must satisfy certain credit criteria and have qualified projects. Once the
    DBA determines a school's eligibility status, a memorandum is sent to
    Education for final approval. When approved, the loan goes through a
    closing process during which certain terms and conditions may be
    negotiated. Table 1 describes key loan terms and conditions to which
    schools are subject.

    ^5 Funds can also be raised through the private market. However, to date,
    Education has used only the FFB to finance the loans.

    ^6 Education has had two DBAs. The current DBA, Commerce Capital Access
    Program Corporation, was selected by Education in 2001. The first DBA,
    selected in 1994 and terminated in 2000, was Educational Direct Loan
    Mortgage Company and Pryor, McClendon, Counts and Company.

    Table 1: Key Terms and Conditions for HBCU Capital Financing Loans

    Loan term      Description
    Life of loan   Loan maturity can be for 30 years or less.
    Interest rates Schools may choose either variable or fixed interest rates
                      for loans. Interest rates are generally based on the
                      government's cost of borrowing. The FFB adds a surcharge of
                      1/8^th of 1 percent per year to cover federal
                      administrative expenses. While the FFB levies the
                      surcharge, Education is responsible for collecting it.
    Escrow         By law, schools are required to place 5 percent of the
                      outstanding loan balance in an escrow account to cover
                      risks against delinquency and default. Funds held in escrow
                      are pooled and available to cover the costs of any program
                      borrower's delinquent or defaulted loan.
    Other fees     By law, the cost of bond issuance is limited to no more
                      than 2 percent of the loan (including the DBA's origination
                      fee--currently set at 1.25 percent).
    Collateral     Schools must provide collateral to obtain loan funds.
    Disbursement   Loan disbursements are made incrementally as projects
                      progress.
    Repayment      Borrowers repay their loans monthly to the DBA, which in
                      turn remits loan repayments to the FFB semiannually. The
                      law requires that borrowers make payments to the DBA at
                      least 60 days prior to the date for which payment on the
                      bonds is expected to be needed.
    Other          Each year, schools are required to submit financial
                      statements for the DBA's review.

    Source: GAO analysis.

    Federal Credit Reform Act of 1990

    The Federal Credit Reform Act of 1990, along with guidance issued by OMB
    and accounting standards, provides the framework agencies are to use in
    calculating the federal budget costs of federal credit programs, such as
    the HBCU Capital Financing Program. The two principles of credit reform
    are defining subsidy cost and requiring that budget authority to cover
    these costs be provided in advance before new loan obligations are
    incurred. OMB is responsible for coordinating the estimation of subsidy
    costs. Subsidy costs are determined by calculating the net present value^7
    of estimated cash flows to and from the government that result from
    providing loans and loan guarantees to borrowers. (Guaranteed loans that
    are financed by the FFB are treated as direct loans for budgetary
    purposes, in accordance with FCRA.) Cash flows for direct loans include,
    for example, loan disbursements to borrowers and borrower repayments of
    principal and payments of interest to the government. Estimated cash flows
    are adjusted to reflect the risks associated with potential borrower
    delinquencies and defaults, and estimates of amounts collected on
    defaulted loans. Subsidy costs can be positive or negative. If the net
    present value of cash outflows exceeds the net present value of cash
    inflows, the government incurs a positive subsidy cost. On the other hand,
    the government realizes a gain in revenue if there is a negative subsidy.
    Since the program was established, appropriations legislation has, in
    general, limited the subsidy costs of the program to be no greater than
    zero. In addition, the legislation authorizing the program established a
    credit authority limit of $375 million; of this amount, private HBCUs are
    collectively limited to borrowing $250 million, and public HBCUs are
    collectively limited to borrowing $125 million.

    ^7 "Present value" is the worth of future streams of returns or costs for
    a program in terms of money paid immediately. In calculating present
    value, future amounts are converted into their "money now" equivalents
    using a discount rate. The discount rate is determined by OMB and is
    generally the average annual interest rate for marketable zero-coupon U.S.
    Treasury securities with the same maturity from the date of disbursement
    as the cash flow being discounted.

    2005 Gulf Coast Hurricanes and Disaster Assistance

    Over a period of 2 months in 2005, three hurricanes struck the Gulf Coast
    region of the United States, resulting in more than $118 billion in
    estimated property damages.^8 Two of these hurricanes, Katrina and Rita,
    struck New Orleans and surrounding areas within a month of each other,
    resulting in significant damages to several institutions of higher
    education in the region and including the campuses of several HBCUs,^9
    including Dillard University, Southern University at New Orleans, and
    Xavier University, in Louisiana, and Tougaloo College, in Mississippi.
    (See app. III for locations of the 8 hurricane affected HBCUs.)

    In June 2006, Congress passed the Emergency Act which, among other things,
    amends the HBCU Capital Financing Program to assist hurricane-affected
    HBCUs in their recovery efforts. To be eligible, a school must be located
    in an area affected by a Gulf Coast hurricane disaster and demonstrate
    that it (1) incurred physical damage resulting from Hurricane Katrina or
    Rita; (2) has pursued other sources of compensation from insurance,
    Federal Emergency Management Agency (FEMA), or the Small Business
    Administration, as appropriate; and (3) has not been able to fully reopen
    in existing facilities or to the levels that existed before the hurricanes
    because of physical damage to the institution. Key provisions include a
    lowered interest rate and cost of issuance (both set at 1 percent or
    less), elimination of the escrow, and deferment of principal and interest
    payments from program participants for a 3-year period. The Emergency Act
    also provides the Secretary of Education with authority to waive or modify
    any statutory or regulatory provisions related to the program in
    connection with a Gulf Coast hurricane disaster.

    ^8 That is, Hurricanes Katrina, Rita, and Wilma, which have been
    collectively referred to as the Gulf Coast hurricanes.

    ^9 Four HBCUs in Mississippi and Alabama (Jackson State University, Alcorn
    State University, Bishop State Community College, and Hinds Community
    College-Utica Campus) also reported damages to property totaling $4.5
    million.

    Disaster Assistance Agencies

    FEMA assists states and local governments with the costs associated with
    disaster response and recovery efforts that exceed a state or locale's
    capabilities. Grants are also provided to eligible postsecondary
    educational institutions to help them recover from the disaster. Some
    institutions of higher education are subsequently provided with referrals
    to SBA when seeking assistance from FEMA. For private, nonprofit
    institutions, SBA's disaster loans are designed to be a primary form of
    federal assistance. Unlike their public counterparts, private colleges
    must apply for low-interest, long-term disaster loans prior to seeking
    assistance from FEMA. Schools may apply for SBA loans, and the aggregate
    loan amount cannot exceed $1.5 million. In general, the loan terms for
    each loan include a maximum of 30 years for repayment with interest rates
    of at least 4 percent.

    HBCUs Reported Substantial Capital Project Needs, but Only About Half of
    Available Program Funds Have Been Borrowed

    HBCU officials we interviewed reported extensive and diverse capital
    project needs, including construction and renovation of facilities and
    addressing deferred maintenance, yet just over half of the available
    program loan capital has been borrowed. While HBCU capital project needs
    are not well documented by national studies, the schools themselves have
    individually identified and documented them. Despite reported needs, only
    about a quarter of HBCUs have taken steps to participate in the program,
    and about half of these HBCUs became borrowers. Education has collected
    and reported limited information on the program's utilization and has not
    established performance measures or goals to gauge program effectiveness,
    though Education officials noted that they are currently working on
    developing such measures and goals.

    HBCUs Reported Having Substantial Capital Project Needs, although Such Needs Are
    Not Well Documented in National Studies

    There are few national studies that document the capital project needs of
    HBCUs, and they do not provide a current and comprehensive national
    picture. The four that we identified and reviewed are more than several
    years old, narrowly scoped, or had limited participation.^10 Specifically,
    the studies are between 6 and 17 years old, and two studies focused only
    on specific types of need--renovation of historic properties and campus
    wiring for computer networks.^11 One study that addressed a broader range
    of needs and was among the most recent had a low response rate-- 37
    percent.

    Despite the lack of national studies, schools that we interviewed reported
    extensive, diverse, and ongoing capital project needs. School officials
    reported that they routinely conduct facility assessments^12 as part of
    their ongoing strategic planning and that these assessments help determine
    the institutions' short- and long-term capital needs. They said that
    capital projects, including the construction of new dormitories,
    renovation of aging or historic facilities, repair of infrastructure, and
    addressing long-standing deferred maintenance are needed for a variety of
    reasons. New facilities such as dormitories and student centers are often
    needed as a result of enrollment growth, for example, while modernization
    of existing facilities is needed to accommodate technological advances.
    For example, Tuskegee University renovated an existing facility to house
    its hospitality management program, creating modern meeting facilities
    along with a full-service hotel, which provides students with a real-world
    laboratory in which they gain immediate hands-on experiences (see fig. 1).
    In addition, many of the school officials who we interviewed reported that
    their schools had particularly old facilities, many of which are listed in
    the National Register of Historic Places.^13 Some school officials cited
    their need to repair or replace campus infrastructure. For example, some
    schools reported needing to replace leaking underground water pipes, while
    others reported the need to replace 100-year-old water and gas pipes. Many
    of the school officials we interviewed reported having deferred
    maintenance projects, some for over 15 years, and officials from 3 schools
    estimated their schools' deferred maintenance to be over $50 million. For
    some schools, the deferred maintenance is substantial in light of existing
    resources, according to HBCU officials. These types of capital projects
    are essential to ensuring student safety and preserving assets that
    directly affect their ability to attract, educate, and retain students.

    ^10 (1) The Association of Higher Education Facilities Officers
    (APPA)/National Association of College and University Business Officers
    (NACUBO), The Decaying American Campus: A Ticking Time Bomb 1989, (2)
    APPA/NACUBO and Sallie Mae, A Foundation to Uphold, 1996, (3) U.S.
    Department of Commerce/National Association For Equal Opportunity In
    Higher Education (NAFEO), Historically Black Colleges and Universities: An
    Assessment of Networking and Connectivity, 2000, and (4) GAO, Historic
    Preservation: Cost to Restore Historic Properties at Historically Black
    Colleges and Universities, [35]GAO/RCED-98-51 , (Washington, D.C.: Feb. 6,
    1998).

    ^11 In 1998, HBCUs reported that an estimated $755 million was needed to
    restore 712 historic properties. See [36]GAO/RCED-98-51 .

    ^12 About 29 percent of HBCUs we contacted reported that their own staff
    conducted their needs assessment, and the remaining schools reported that
    they relied on either an architectural or an engineering firm to perform
    such assessments.

    ^13 Authorized under the National Historic Preservation Act of 1966, the
    National Register is part of a national program to coordinate and support
    public and private efforts to identify, evaluate, and protect our historic
    and archeological resources. Properties listed in the register are
    significant to American history, architecture, archeology, engineering,
    and culture.

    Figure 1: The Renovated Kellogg Conference Center at Tuskegee University

    Note: The University relied in part on the HBCU Capital Financing Program
    to renovate and expand this facility. In particular, a program loan was
    used to finance the upgrades of the heating and ventilation system.

    Approximately 14 Percent of HBCUs Have Borrowed Just Over Half of the Available
    Program Funds

    Over the life of the program, approximately 14 percent of HBCUs have
    borrowed just over half of the available funds despite the substantial
    needs reported by schools. Specifically, 23 HBCUs, according to Education,
    have taken steps to participate in the program, and 14 became borrowers,
    with loans totaling just over $200 million--below the program's $375
    million total limit. About 20 percent of the eligible private institutions
    have borrowed a little more than half of the $250 million allotted for
    private schools, and less than 8 percent of public institutions have
    borrowed less than two-thirds of the $125 million allotted for public
    schools. To date, loan participants have all been 4-year institutions.
    Taking into account loan repayments, the total amount of outstanding loans
    was about $168 million as of August 2006, leaving about $207 million
    available for loans (about $66 million for public schools and about $141
    million for private schools). Table 2 shows the participants and the
    amounts of their loans. Regarding other schools that took steps to
    participate in the program but did not become borrowers, 6 schools were
    reported to have withdrawn their applications, and 6 others had
    applications pending. To date, only one school has been denied a loan.

    Table 2: History of Loan Activity of the HBCU Capital Financing Program

    Institution                       Institution type Amount borrowed
    Barber-Scotia College              Private, 4-year      $7,000,000
    Miles College                      Private, 4-year      $7,835,000
    Tougaloo College                   Private, 4-year      $8,200,000
    Virginia Union University          Private, 4-year      $8,218,000
    Bennett College                    Private, 4-year      $8,700,000
    Livingstone College                Private, 4-year     $13,000,000
    Shaw University                    Private, 4-year     $10,015,000
    Bethune-Cookman College            Private, 4-year     $20,295,000
    Clark Atlanta University           Private, 4-year     $23,905,000
    Tuskegee University                Private, 4-year     $35,931,000
    Subtotal for private institutions                     $143,099,000
    West Virginia State University      Public, 4-year      $3,500,000
    Lincoln University                  Public, 4-year     $13,850,000
    Harris Stowe State University       Public, 4-year     $15,264,000
    South Carolina State University     Public, 4-year     $42,000,000
    Subtotal for public institutions                       $74,614,000
    Total                                                 $217,713,000

    Source: GAO analysis of Education data.

    Note: Some schools have more than one loan; amount borrowed reflects total
    for all loans.

    Education Has Taken Limited Steps to Determine Schools' Financing Needs and
    Collect Information and Report on Program Utilization and Effectiveness

    Education has collected and reported limited information concerning HBCUs'
    capital financing needs and the schools' utilization of the program.
    Education officials said that, beginning in 2005, to understand schools'
    financing needs and whether the program could assist schools, the DBA
    engaged in an outreach effort through which it identified 15 schools that
    might be candidates for the program. Over the history of the program,
    Education has collected some information to track program utilization,
    including the number of inquiries and applications received and the loan
    volume requested, approved, and awarded. However, Education has not widely
    reported such data. Education has provided certain elements of its program
    utilization data to Congress' appropriations committees via its annual
    justifications of budget estimates documents. Table 3 shows the data
    collected by Education to track program utilization.

    Table 3: Education's Indicators Measuring Program Utilization

    Dollars in
    millions
                      1996  1997  1998  1999   2000  2001  2002  2003  2004  2005  2006   Total
    Inquiries           --    --    25    30     --    --    11    22    36    23     8     155
    Pre-applications
    received            --    --    --    --      1     2     2     8     7     5     1      26
    Applications
    received             4     4     3     3      1     2     2     3     2     1     1      26
    Loan volume
    requested        $20.5 $21.8 $12.3 $37.6   $100 $20.7 $32.1 $34.9 $29.5 $57.5   $18 $384.90
    Loans approved       4     1     2     3      1     2     2     3     4     1     1      24
    Loan volume
    approved         $20.5    --  $8.3 $37.6 $13.85 $20.7 $32.1 $24.9 $51.8   $42 $15.5 $267.25
    Loans awarded        1     1     0     3      1     2     2     2     3     1     1      17
    Volume awarded    $3.5  $4.8    $0 $37.6     $7 $20.7 $32.1 $24.9 $29.8   $42 $15.3 $217.70

    Source: Education and GAO analysis of budget justification documents.

    Note: (--) indicates that Education was unable to provide information for
    the indicator in that particular year.

    Education officials noted that while the data they collect are useful to
    indicate the extent to which the schools have used or accessed the
    program, they are inadequate to address questions concerning whether the
    program is under- or overutilized or to demonstrate program effectiveness.
    These officials noted that they believe program performance measures would
    be useful but that developing such measures is particularly challenging
    for a credit program like the HBCU Capital Financing Program. This is so
    in part because participation in a loan program is dependent on complex
    factors, such as schools' funding needs, the availability of other sources
    of financing, and schools' desire and capacity to assume debt. Program
    officials cautioned against setting firm program participation goals, for
    example, because they would not want Education to be perceived as
    "pushing" debt onto schools that either do not want to, or should not,
    assume loan obligations before their circumstances warrant doing so.
    Another complicating factor program officials cited was the small number
    of potential program beneficiaries. One Education official noted that
    Education has established performance goals and measures for its student
    grant and loan aid programs, which are based on sophisticated survey
    mechanisms designed to measure customer (students, parents, and schools)
    satisfaction with the department's aid application, receipt, and
    accounting processes. Because the scope of the student aid programs is
    large, encompassing millions of students and parents and thousands of
    schools, it is reasonable to develop and use such measures, the official
    noted. In contrast, such measures may not be meaningful given the small
    number of HBCUs and the frequency with which loans are made under the
    Capital Financing Program. Nevertheless, these officials told us that they
    believe program performance measures would be useful to gauge program
    effectiveness. They have established a working group to develop
    performance measures for the program and were consulting with OMB and
    other federal officials with expertise on federal credit programs to guide
    their efforts. The officials noted that they do not have any firm schedule
    with respect to completing their development of program performance
    measures.

    The Program Provides Needed Access to Low-Cost Capital Financing, but Certain
    Loan Terms and Conditions Discourage Participation

    The HBCU loan program provides access to low-cost capital financing and
    flexibilities not always available elsewhere, but some loan terms and
    conditions discourage participation, though school officials said they
    remain interested in the program. The low interest rate and long repayment
    period were regarded favorably by participants and nonparticipants alike,
    and the program makes funds available for a broader range of needs than
    some federal grant programs. However, the pooled escrow arrangement,
    monthly repayment terms, and the extent to which some loans have been
    collateralized could discourage participation.

    The Program Provides Low-Cost Financing and Certain Flexibilities in Comparison
    to Other Capital Funding Sources

    The HBCU Capital Financing Program provides lower-cost financing and
    longer loan maturities and may be used for a broader range of capital
    projects by a greater number of schools than other funding sources,
    according to HBCU officials. Some officials noted that the program offers
    loans with lower interest rates than traditional bank loans. Moreover, the
    program's interest rates are typically less than the interest rates
    schools would be required to pay investors if they issued their own bonds
    to raise funds. According to school officials and bond industry experts,
    some HBCUs could obtain, and some have obtained, lower interest rates than
    those offered under the program by issuing their own tax-exempt bonds.^14
    However, this is predicated on a school's ability to obtain a strong
    credit rating from a credit rating agency.^15 Schools with weaker or
    noninvestment grade credit ratings would likely have to pay investors
    higher interest rates. In addition, schools issuing taxable bonds would
    likely pay higher interest rates to investors, compared to the program's
    interest rates, regardless of the schools' credit ratings. While schools
    can lower interest rates paid to bond investors by purchasing bond
    insurance, the cost to do so may be prohibitive.^16 For these reasons,
    officials at Education and HBCUs, as well as bond industry experts, told
    us that the HBCU Capital Financing Program may be ideally suited for
    schools that have or would receive a noninvestment grade rating.
    Participation in the program may also benefit schools by enhancing their
    ability to issue their own bonds in the future. An official at one HBCU,
    for example, told us that obtaining and repaying a loan under the program
    had allowed the school to demonstrate its fiscal stability and to
    subsequently issue its own bond with a lower interest rate than was then
    being offered under the program.

    In addition to citing lower interest rates, a large majority of the HBCU
    officials we spoke to said that the program's 30-year loan repayment
    period was attractive, and some noted that private funding sources would
    likely offer 20 years or less. Some school officials noted that the longer
    repayment period allowed schools to borrow more or reduce the amount of
    monthly payments. Borrowing larger amounts, officials reported, allowed
    them to finance larger or more capital projects. Another school we spoke
    with that once considered using the program said that even though it was
    able to issue a tax-exempt bond and obtain a more favorable interest rate,
    it could only obtain a 20-year maturity period for the bond.

    ^14 Under the Internal Revenue Code, qualified education facilities, such
    as HBCUs, are permitted to issue tax-exempt bonds. In contrast to taxable
    bonds, tax-exempt bonds produce interest income that is exempt from
    federal taxation and may also be exempt from state and local taxation,
    especially if the owners live in the state in which the bond is issued.
    Because these investors do not pay taxes on their interest earnings, they
    are willing to accept a lower pretax rate of return on their investment,
    which lowers the financing costs for schools that issue such bonds.

    ^15 Schools that issue bonds pay credit agencies, such as Standard &
    Poor's, or Moody's Investors' Service, to assess their potential risk of
    default. Credit agencies assign ratings for bonds reflecting a spectrum of
    highest to lowest credit quality to help investors determine the risk
    associated with investments. Ratings can generally be grouped into two
    larger categories--investment and noninvestment grades.

    ^16 Bond insurance guarantees the payment of principal and interest on a
    bond issue if the issuer defaults. Credit rating agencies assign a bond
    rating based on the insurer's ability to pay claims against defaults,
    rather than on the underlying credit of the issuer.

    Some HBCU officials told us they preferred grants to loans but noted that,
    in general, compared to other federal grant programs, more HBCUs are
    eligible for the HBCU loan program, and that it also funds a wider variety
    of projects. Grants are available for most HBCUs under the Higher
    Education Act's strengthening institutions programs, also administered by
    Education, which fund capital projects as well as other activities, such
    as faculty and academic program development. However, fewer HBCUs are
    eligible for other federal grant programs that provide funding for capital
    projects. For example, the Department of Agriculture's 1890 Facilities
    Grant Program is only for those 18 HBCUs that are land grant institutions.
    Similarly, the Department of Health and Human Services' facilities
    improvement program provides only for those HBCUs with a biomedical and
    behavioral research program. While there are a variety of other assistance
    programs offered by charitable foundations, and state and local
    governments, available funding is limited.

    The Escrow Arrangement, among Other Terms and Conditions, Was Cited as a
    Disincentive to Participating in the Program

    HBCU officials we spoke with--participants and nonparticipants
    alike--reported that a disincentive to participation in the program was
    the pooled escrow; additionally, other terms and conditions, such as the
    monthly repayment schedule and the extent to which loans are
    collateralized, were also viewed by some as deterrents. Over half of HBCU
    respondents we spoke with--both participants and nonparticipants--agreed
    that the pooled escrow was a drawback, and over one-fifth said that it
    actually deters participation. The escrow funds, which reduce the federal
    budget cost of the program by offsetting the estimated costs associated
    with delinquent loan repayments and borrower defaults, net of collections,
    are returned to program participants if no such losses occur. However, a
    recent default by one borrower--the first to occur in the program's
    history--has heightened awareness among program participants of the
    financial risk for them inherent in the pooled escrow arrangement.^17
    Since the default, Education has withdrawn funds from participating
    schools' escrow accounts twice and will continue doing so until the
    default is resolved, leaving other schools uncertain as to how much of
    their own escrow accounts will remain or be replenished.^18 The pooled
    escrow feature also presents a problem for state institutions because they
    are prohibited from assuming the liability of another institution. One
    program official said that this issue was common for state schools because
    state law prohibits the lending of public funds to nonstate
    entities--considered to be the case when state funds in escrow are used to
    hedge against the delinquency of another institution. One participating
    public HBCU reported that it had to resolve this problem by accounting for
    its escrow payments as a fee that would not be returned to the school
    rather than a sum that could be recovered, as the program intends. Because
    the escrow feature is mandated by law, any changes to this arrangement
    would require congressional authorization. Additionally, in order to
    maintain the federal subsidy cost of the program at or below zero, other
    alternatives--such as assessing additional fees on borrowers, or requiring
    contributions to an alternative form of a contingency reserve--would be
    necessary in the absence of the pooled escrow arrangement.

    ^17 Barber-Scotia College defaulted on its loan payments in September
    2005. The outstanding balance of the defaulted loan is about $7 million.
    Funds to cover the school's delinquent payments were withdrawn from the
    school's escrow account. When the school's escrow account was depleted,
    the funds required to cover the school's subsequent payments were drawn
    upon a pro rata basis from each program participant's escrow
    account--schools with larger outstanding loan balances will have more
    money withdrawn from their escrow accounts than schools with smaller
    outstanding loan balances.

    While frequency of payments is not as prevalent a concern as the pooled
    escrow, some schools objected to the program's requirement that repayments
    be made monthly as opposed to semiannually, as is common in the private
    market. Schools participating in the HBCU Program have been required by
    the DBA to make payments monthly, although FFB lending policy is to
    require repayments only on a semiannual basis. Despite the fact that
    participants have met the terms of an extensive credit evaluation process,
    DBA officials expressed the view that the monthly repayment requirement
    promotes good financial stewardship on the part of the schools. However,
    some HBCU officials said that they incur opportunity costs in making
    payments on a monthly versus a semiannual basis. They also noted that it
    would be more practical if payments were to coincide with the beginning of
    their semesters, when their cash flows are typically more robust.

    ^18 According to Education, escrow account funds are sufficient to make
    loan repayments on behalf of the defaulted borrower for up to 12 years,
    provided no additional borrowers default on their loans. Education
    officials said they are attempting to maintain close contact with the
    defaulting school and offering to work with it to resolve the default.
    Since the school pledged its entire campus as collateral for the loan,
    Education could ultimately foreclose and sell it to recover loan proceeds.

    Additionally, almost half of the participating schools expressed concern
    about the amount of collateral they had to pledge in order to obtain a
    loan. In most cases, program participants have pledged certain real
    property as collateral, though endowment funds and anticipated tuition
    revenue are also allowed as collateral. Some HBCU officials said their
    loans were overcollateralized in that the value of the real estate pledged
    as security exceeded the value of the loan. They noted that such
    circumstances can present a problem for those schools trying to obtain
    additional capital financing without sufficient assets remaining available
    as collateral. One nonparticipant cited the collateral required of other
    institutions as a reason for its decision not to participate. When asked
    about the amount of collateral required, Education and DBA officials
    reported that the extent and amount of collateral required to obtain a
    loan under the program varies depending on the individual circumstances of
    an institution. The amount of collateral required may be less for
    institutions that have maintained relatively large endowments and stable
    tuition revenue and more for institutions that have few or no physical
    properties to use as collateral, for example. Education officials further
    noted that requiring the value of collateral to be greater than the value
    of the loan was not an uncommon business practice.

    Overall, more than two-thirds of the participant schools and more than a
    third of the nonparticipants said they are interested in using the program
    but some said that their continued or future interest in the program would
    depend on its being modified. Several schools suggested the types of
    projects eligible for funding could be broadened, which might allow them
    to undertake capital projects that would, in turn, assist them in
    attracting and retaining additional students. Campus beautification
    projects and multipurpose community centers were cited as examples. In
    addition, they regarded new construction--for which program loans are
    available only under exceptional circumstances--as particularly important
    because new construction attracts more students and because renovations
    often incur unexpected costs. Nevertheless, many public HBCU school
    officials we spoke with said that in view of their states' continuing
    fiscal constraints, they expect to consider the loan program as a future
    funding resource.

    Education Has Taken Some Steps to Improve the Program, but Weaknesses in
    Management Control Exist

    While Education has taken limited steps to improve the program, we found
    significant weaknesses in management controls that compromise the extent
    to which Education can ensure program objectives are being achieved
    effectively and efficiently. Education has recently provided schools the
    choice of fixed or variable interest rates, allowed for larger loan
    amounts, and afforded more opportunity for schools to negotiate loan
    terms, which appealed to schools. In addition, Education has attempted to
    increase awareness of the program among HBCU officials through increased
    marketing of the program by the DBA. While Education has taken steps to
    improve the program, we found significant weaknesses in its management
    control with respect to its communications with HBCUs, compliance with
    program and financial reporting laws and guidance, and monitoring of its
    DBA.

    Education Has Recently Introduced Some Program Improvements, Including Flexible
    Loan Terms

    Since 2001, Education has taken some steps to improve the program-- in
    some cases by allowing greater negotiation of certain loan terms and
    conditions. Department officials said that changes to the program were
    necessary to remain competitive with other programs and the private
    market. These flexible terms included a variable interest rate option and
    the opportunity to negotiate the amount of additional debt that a school
    can subsequently assume through other financing arrangements. In fact,
    since 2003, 4 of the 7 schools that have received loans have taken
    advantage of the variable interest rate. Regarding the department's
    monitoring of their debt, officials at another school said that they were
    able to negotiate with the DBA the amount of additional debt they could
    assume--from $500,000 to $1 million--before they would have to notify the
    department. School officials said this change was important because it not
    only reduced their administrative burden but it also gave them additional
    leeway to pursue other capital financing. The program made greater use of
    loans for the sole purpose of refinancing existing debt since 2003.^19 Two
    participants reported an estimated savings of at least $3.7 million by
    refinancing under the program. According to department officials,
    Education has also made greater use of the Secretary's authority to
    originate loans exceeding $10 million and to make multiple loans to an
    institution, providing schools with more purchasing power. Program
    officials said that while the limit on the amount and number of loans that
    could be made was to prevent disproportionate use of the loan fund by
    larger and more affluent schools, it no longer reflected the reality of
    current costs for construction and renovation or the budgetary constraints
    facing many states.

    ^19 Previously, refinancing was always coupled with a requirement that
    most proceeds be used for construction or renovation purposes, according
    to department officials.

    Additionally, program officials we spoke with said they had enhanced
    program marketing. For example, the DBA has developed a Web site
    describing the program and offering answers to frequently asked questions.
    In addition, officials reported attending the national and regional
    conferences for college executives shown in table 4, completing over 60
    campus site visits and contacting other school officials by telephone.
    Program officials also reported that most schools received written
    correspondence or an e-mail to inform them of the program. By these
    efforts, all HBCUs have been contacted in 2005, according to DBA
    officials. They also said they timed these outreach efforts to correspond
    with schools' annual budgetary and enrollment processes in order to prompt
    schools to think about potential capital projects that could fit the
    program. DBA officials said that their marketing approach for fiscal year
    2006 would be the same as in the previous year.

    Table 4: Designated Bonding Authority's Attendance and Scope of Activities
    at Conferences since 2002

                            Years attended^a
                                                HBCUs in
    Conference name     2002 2003 2004 2005  membership^b      DBA's activity
    Southern             o    o    o    o    77 HBCUs in 11    Breakfast and
    Association of                           states            luncheon
    Colleges and                                               sponsorships,
    Schools (SACS)                                             exhibit space,
    regional meetings                                          receptions, and
                                                                  dinners
    National                  o    o    o    ^c                Exhibit space,
    Association of                                             client dinners
    College and
    University Business
    Officers (NACUBO)
    national or
    regional
    conferences
    United Negro              o    o    o    39 private 4-year Event
    College Fund's                           colleges          sponsorships,
    annual events                                              contact with
                                                                  meeting
                                                                  participants
    National             o                   18 land grant     Contact with
    Association of                           HBCUs/other       meeting
    State Universities                       members           participants
    and Land Grant
    Colleges (NASULGC)
    Annual Meeting
    Thurgood Marshall         o              School executives Contact with
    President's and                          at 47 HBCUs       meeting
    Member Schools'                                            participants
    Professional
    Conference
    National             o    o    o    o    All HBCU          Exhibit space,
    Association for                          executives/other  evening
    Equal Opportunity                        members           receptions
    in Higher
    Education's annual
    conference
    White House          o    o    o    o    All HBCU          Direct contact
    Initiative on HBCUs                      executives        with meeting
    National HBCU Week                                         participants,
    Conference                                                 client dinners

    Source: GAO analysis.

    aGAO did not confirm conference attendance with host
    association/organization

    ^bInformation on HBCUs included in membership based on most recent data
    available.

    ^cNo description of HBCU membership was available.

    Weaknesses in Management Control Exist

    While Education has taken some steps to improve the HBCU loan program, we
    found significant weaknesses in its management control of the program with
    respect to its (1) communications with HBCUs, (2) compliance with program
    and financial reporting laws and guidance, and (3) monitoring of its DBA,
    as described below.

      Communication with HBCUs

    Many HBCU officials we interviewed reported a lack of clear, timely, and
    useful information from Education and the DBA at various stages of the
    loan process, and said the need to pursue such information themselves had
    sometimes led to delays. While program materials represent the loan
    application as a 2- to 3-month process, about two-thirds of the loans made
    since January 2001 were not closed until 7 to 18 months after application.
    Officials from one school said that it had taken 6 to 7 months for the DBA
    to relay from Education a clarification as to whether its proposed project
    was eligible. Other schools reported that Education had not provided
    timely or clear information about the status of their loans. In some
    cases, schools reported that the lengthy loan process resulted in project
    delays and cost increases over the intervening time period. An official
    from one school told us that it remained unclear to him why his school was
    denied a loan.

    Education officials acknowledged that the loan process was lengthy for
    some borrowers and said its DBA had attempted to work with these borrowers
    to address problems with applications. School officials told us that in
    some cases the loan process could have been expedited had Education and
    the DBA made use of previous borrowers' experiences to apprise them of
    problems that could affect their own applications--such as the fact that
    title searches can be especially time consuming and problematic for
    private HBCUs, some of which did not receive all property deeds from their
    founders when they were established in the 1800s. With regard to making
    loan payments, several officials we interviewed said that DBA officials
    had not provided information that was in sufficient detail. In one
    situation, officials from one school reported that school auditors had
    questioned the accuracy of the loan payment amount for which the school
    was billed by the DBA because the billing statements omitted information
    concerning the extent to which the amount billed included escrow payments.
    Other officials noted that they had not received written notification from
    the DBA concerning the full amount of their potential liability after
    funds had been withdrawn from the schools' escrow accounts to cover
    payments on behalf of another borrower that had recently defaulted on a
    loan.

      Compliance with Program and Budget Laws and Federal Financial Accounting
      Standards

    Education has not complied with certain statutory requirements relating to
    the program's operations and how federal agencies are to account for the
    government's cost of federal loan programs. In creating the program,
    Congress established within the Department of Education an HBCU Capital
    Financing Advisory Board composed of the (1) Secretary of Education or the
    Secretary's designee, (2) three members who are presidents of private
    HBCUs, (3) two members who are presidents of public HBCUs, (4) the
    President of the United Negro College Fund or his/her designee, (5) the
    President of the National Association for Equal Opportunity in Higher
    Education or his/her designee, and (6) the Executive Director of the White
    House Initiative on HBCUs. By law, the Advisory Board is to provide advice
    and counsel to the Secretary of Education and the DBA concerning the
    capital financing needs of HBCUs, how these needs can be met through the
    program, and what additional steps might be taken to improve the program.
    To carry out its mission, the law requires that the board meet with the
    Secretary of Education at least twice each year. Despite this requirement,
    the board has met only three times in the past 12 years, the most recent
    meeting occurring in May 2005. According to Education officials, the
    Advisory Board did not routinely meet because of turnover among Education
    staff as well as HBCU presidents designated to serve on the board.
    Education officials told us that there could have been other reasons why
    the Advisory Board did not meet in earlier years, but none that they had
    knowledge of. Although Education officials told us that they had believed
    another Advisory Board meeting would be convened soon after the May 2005
    meeting, no such meeting has yet been scheduled.

    We also found that Education has not fully complied with requirements of
    the Federal Credit Reform Act of 1990, which, along with guidance issued
    by OMB and accounting standards, provide the framework that Education is
    to use in calculating the federal budget costs of the program. In
    particular, Education has excluded certain fees paid by HBCUs from its
    calculations of program costs. The interest payments made by HBCUs on
    program loans includes a surcharge of 1/8^th of 1 percent assessed by FFB
    in accordance with its policy and as permitted by statutory provisions
    governing its transactions.^20 Under the Federal Credit Reform Act of
    1990, these fees--i.e., the surcharge--are to be recognized as cash flows
    to the government and included in agencies' estimated costs of the credit
    programs they administer.^21 In addition, these fees are to be credited to
    the program's financing account.^22 OMB officials responsible for
    coordinating agencies' subsidy cost estimates acknowledged that Education
    should include the fees in its budgetary cost estimates and noted that
    other agencies with similar programs do so. Further, the written agreement
    among Education, the FFB, and the DBA that governs the issuance of bonds
    by the DBA for purchase by the FFB for the purpose of funding loans under
    the program also stipulates that these fees are to be credited to
    Education. Despite these provisions, Education has not included the fees
    in its calculations of the federal cost of the program, thereby
    overestimating the program's costs; nor has Education accounted for the
    fees on its financial statements.^23 Instead, the DBA has collected and
    held these fees in trust.^24 Although the contract between Education and
    the DBA generally describes how the DBA is to manage the proceeds from and
    the payment of bonds issued to fund loans made to HBCUs, it does not
    specifically address how the DBA is to manage the payments that reflect
    the 1/8th of 1 percent paid by borrowers. In general, the DBA collects
    borrower repayments and remits the proceeds to the FFB to pay amounts due
    on the program's outstanding bonds. However, the amounts paid to the FFB
    do not include the fees paid by borrowers. As a result, it is unclear how
    these funds, retained by the DBA, are to be eventually returned to the
    federal government. Moreover, Education has not monitored the DBA's
    handling of these funds and is unaware of the accumulated balance.

    ^20 12 U.S.C. S 2285(c).

    ^21 2 U.S.C. S 661d(c).

    ^22 A financing account records all of the cash flows resulting from
    direct loans or loan guarantees. It disburses loans, collects repayments
    and fees, makes claim payments, holds balances, borrows from the
    Department of the Treasury, earns or pays interest, and receives the
    subsidy cost payment from the credit program account. The credit program
    account receives and obligates appropriations to cover the subsidy cost of
    a direct loan or loan guarantee and disburses the subsidy cost to the
    financing account.

      Monitoring the Performance of the DBA

    Although the current DBA has been under contract with Education for over 5
    years, Education has not yet assessed its performance with respect to key
    program activities and contractual obligations, although Education
    officials said that they have been pleased with the DBA's performance. One
    of these major activities is "marketing" the capital financing program
    among HBCUs in order to raise awareness and help ensure that the program
    is fully utilized. Although the DBA is required by its contract with
    Education to submit annual reports and audited financial statements to
    Education, it has not done so. While DBA officials told us the department
    has offered some informal assessments, Education officials have not guided
    their marketing efforts. Still, we found indications that the DBA's
    marketing strategy has likely suffered from a lack of guidance and
    monitoring by Education. Officials we spoke with at 4 schools did not know
    of the program, and another eight told us they had learned about it from
    peers or advocacy organizations. Others were aware of the DBA's marketing
    activities, but offered a number of suggestions for improvement, citing a
    need for more specific information as to the extent to which collateral
    would be needed, how the program meets the needs of both private and
    public schools, or examples and testimonials about funded projects.
    Several school officials said DBA outreach through conferences was not
    necessarily well targeted--either because the selected conferences covered
    a full range of topics for a variety of schools and not only HBCUs, or
    because they focused on issues relating to either public or private HBCUs,
    or because they drew school officials not involved in facilities planning.
    Additionally, the DBA has reserved its direct contact marketing largely
    for 4-year schools. DBA officials justified this decision on grounds that
    smaller schools tended to have more difficulty borrowing and that they had
    targeted larger schools that they believed would be most likely to benefit
    from the program. However, as prescribed by law, loans are to be fairly
    allocated among as many eligible institutions as possible. Because the
    DBA's compensation is determined as a percentage of the amount borrowed,
    and the costs it incurs may not vary significantly from loan to loan, it
    is important to monitor its activities to ensure it is not making loans
    exclusively to schools that are likely to borrow larger amounts and for
    which its potential for profit is highest.

    ^23 According to 31 U.S.C. S 3515, federal agencies are required to
    prepare and submit to OMB audited financial statements covering their
    operations.

    ^24 The DBA has collected this fee from all but one borrower--West
    Virginia State University, which received a loan in 1996 prior to the
    requirement that Education collect the fee.

    With regard to the DBA's basic responsibility for keeping records, we
    found several cases in which critical documents were missing from loan
    agreement files. Moreover, the DBA was unable to provide us with entirely
    complete files for any of the 14 institutions that had participated or
    were participating in the program. For example, documents that included
    loan applications, decision memoranda, financial statements, and real
    property titles were missing for several schools. In our file review, we
    found that files for 9 schools did not include the original application.
    Files for 8 schools did not include the required financial statements for
    demonstrating long-term financial stability, and 5 lacked DBA memoranda
    pertaining to the decision to make the loan. Moreover, until our review,
    key Education officials were unaware that such documents were missing.^25

    ^25 Several of the files had been compiled by a prior bonding authority.
    Nevertheless, the DBA is required under its contract with Education to
    maintain files on participants for the life of the program and a minimum
    of 6 years thereafter.

    HBCUs Affected by Hurricanes Expressed Satisfaction with Special Loan Provisions
    and Concerns with Application Deadline, while Education Officials Said They
    Would Evaluate Loan Processes

    Officials from four HBCUs in the Gulf Region we spoke with (Dillard
    University, Southern University at New Orleans, Xavier University, and
    Tougaloo College) told us that, in light of the extensive hurricane damage
    to their campuses, they were pleased with the emergency loan provisions
    but concerned that the 1-year authorization would not provide sufficient
    time for them to take advantage of the special program features. School
    officials from each of the four schools noted that their institutions had
    incurred physical damages caused by water, wind, and, in the case of one
    institution, fire, and that the actual financial impact of the hurricanes
    may remain unknown for years. Although Education officials told us that
    they have not yet determined the extent to which the department would make
    use of its authority to waive or modify program provisions for
    hurricane-affected institutions, the department would be prepared to
    provide loans to hurricane-affected HBCUs.

    Gulf Area HBCUs Experienced Significant Hurricane Damage, and the Full Financial
    Impact May Remain Unknown for Years

    Officials from the three HBCUs we visited reported extensive damage to
    their campuses as a result of the 2005 hurricanes and noted that it may
    take another few years to determine the full financial impact. School
    officials told us that they have not been able to fully assess all
    hurricane-related costs, such as replacing property, repairing plumbing
    systems, landscaping, and replacing sidewalks, and as result, current
    estimates are only preliminary. School officials noted that the assessment
    process was lengthy because of, among other things, the time required to
    prioritize campus restoration needs, undertake complex assessments of
    historic properties, follow state assessment processes, and negotiate
    insurance settlements. Each of the four schools we contacted incurred
    physical damages caused by water and wind; one school also incurred damage
    by fire. For example, the campuses of all three schools in New Orleans
    were submerged in 2 to 11 feet of water for about a month after the
    hurricanes, damaging the first floors of many buildings as well as their
    contents. As a result, schools required removal of debris and hazardous
    waste (e.g., mold and asbestos), repair and renovation, and the taking of
    actions recommended by FEMA to mitigate future risks. Xavier University
    officials, who preliminarily estimated $40 million to $50 million in
    damage to their school, said that they faced the need to undertake several
    capital projects, including replacing elevators, repairing roofs, and
    rehabilitating the campus auditorium and replacing its contents. According
    to officials from Southern University at New Orleans, state officials have
    estimated damages at about $17 million; at the time of our visit 10 months
    after the hurricanes, state insurance assessors were beginning their work
    on the campus library, where mold reached all three floors, covering
    books, art collections, card catalogues, and computers. Officials at
    Dillard University also reported extensive damage, preliminarily estimated
    as high as $207 million.^26 According to officials, five buildings--which
    were used for academic support services and residential facilities--had to
    be demolished because of extensive damage; three of these buildings were
    destroyed by fire. Further, they also reported that the international
    studies building, built adjacent to a canal levee in 2003, will have to be
    raised at least 18 feet to make it insurable. Officials at Tougaloo
    College, in Mississippi, reported wind and water damage to the roofs of
    some historic properties, which along with other damages, they
    preliminarily estimated at $2 million. Figures 2-4 show some of the
    damages and restoration under way at the three schools we visited.

    ^26 Officials also noted that the school had incurred additional costs,
    such as renting temporary space, architectural and legal services, and
    lost revenues, which collectively amounted to about $130 million.

    Figure 2: Xavier University Science Building Auditorium Before and After
    Restoration from Flood Damage

    Figure 3: Exterior of Southern University's Library with Waterline
    Indicating the Extent of Flooding

    Figure 4: Removed Asbestos from Dillard University Library Awaiting
    Disposal

    Note: All of the affected HBCUs have resumed operations but are still in
    the process of restoring their campuses to varying degrees. In the case of
    Southern University, it has created a new campus nearby consisting of more
    than 400 trailers constructed by the U.S. Army Corps of Engineers while
    damage assessments are being made. By contrast, Dillard University had
    moved its operations--classes, student services, administration--and
    students to a local hotel and other buildings as it undertook the
    restoration of its campus. Officials were scheduled to reopen that campus
    in September 2006. Xavier University had resumed operations on its campus
    in January 2006 while it continued to restore its facilities.

    Schools Found Select Terms for Emergency Loans Favorable, but Said They Would Be
    Challenged to Make Application in the Time Allotted

    The school officials we spoke with found certain emergency provisions of
    the loan program favorable, but they expressed reservations about the time
    frame within which they are required to make application for the special
    loans. Most school officials appreciated the reduced interest rate and
    cost of issuance (both set at 1 percent or less) and that the Secretary of
    Education was provided discretion to waive or modify statutory or
    regulatory provisions, such as credit criteria, to better assist them with
    their recovery. They said the normal sources of information for credit
    evaluation--such as audited financial records from the last 5 years--would
    be difficult to produce. Other conditions of the emergency loan provisions
    some officials found favorable were the likelihood that loans would be
    awarded sooner--providing a timely infusion of funds--with more
    flexibility compared to other programs. Officials at both Dillard and
    Xavier Universities said that because their institutions had already spent
    a significant amount of their available resources, the emergency loans
    could be used to bridge any emerging financial difficulties they
    experience as they continue to pursue insurance settlements and assistance
    from other federal agencies, including FEMA and SBA. Additionally, some
    school officials said that the program may allow for greater flexibility
    compared to FEMA and SBA aid. For example, some officials told us that in
    addressing damages caused by the hurricanes they would like to improve
    upon their facilities to mitigate potential environmental damages in the
    future and, at one school, upgrade an obsolete science laboratory with
    state-of-the-art equipment. They said, however, that in some cases FEMA
    aid is limited to restoring campus facilities to their prestorm conditions
    and in other cases desired improvements might not be consistent with
    requirements for historic preservation.

    While most school officials we spoke with found select provisions
    favorable, they expressed concerns with stipulations that limit the
    extension of the special provisions to 1 year, primarily because all of
    the costs associated with damage from the hurricanes have not been fully
    identified. Further, officials at Southern University at New Orleans--a
    public institution--said that they are subject to an established capital
    improvement approval process involving both its board of directors and
    state government officials that alone normally requires a year to
    complete. Additionally, some of the schools are concerned that they may
    not be able to restore damaged and lost records needed to apply to the
    program. Officials reported that a time frame of at least 2 to 3 years
    would allow them to better assess the costs of the damages. Other concerns
    cited included eligibility requirements for the deferment provision, and
    officials from one institution expressed disappointment that the emergency
    provisions did not include some form of loan forgiveness.

    Education Is Preparing to Take Steps to Ensure It Can Provide Loans from
    Available Funds to Help Hurricane-Affected HBCUs Restore Their Campuses

    According to Education officials, they are preparing to take the steps
    necessary to ensure that the department is prepared to provide loans to
    hurricane-affected HBCUs. Education officials noted that in light of the
    statutory limit on the total amount of loans it can make under the program
    and the balance of loans outstanding as of August 2006, about $141 million
    in funding is available for private, and $66 million for public,
    HBCUs--both those affected by the hurricanes and others. The officials
    noted that the department had not yet determined to what extent the
    Secretary would use her discretion to waive or modify program
    requirements, including the statutory loan limits. They told us that some
    of their next steps included determining how the program's application
    processes could be changed to ensure that funds can be provided to
    hurricane-affected schools in a timely manner. They said the department
    would need to consider to what extent it would apply credit criteria to
    hurricane-affected institutions in light of the fact that these
    institutions would likely be experiencing fiscal stresses as they seek to
    rebuild their campuses and attempt to return to their prior levels of
    enrollment. They noted that they would talk with school officials to gain
    a better understanding of which program criteria remain applicable, but
    anticipate using fewer credit criteria in their determinations. Education
    officials also noted that they will likely have to decide on the
    appropriate level of flexibility to exercise with respect to
    collateralizing loans for hurricane-affected HBCUs because some
    institutions may lack the collateral they had prior to the hurricanes.
    Moreover, these officials stated that the department would need to
    consider establishing limits on the types of projects for which it would
    provide funding to ensure that loans are not provided for capital projects
    for which other federal aid is available, such as that provided by FEMA.
    For example, program officials recognized that a significant cost of
    recovery for the schools in the Gulf Coast region is debris removal, but
    believe FEMA is likely to provide funding for such costs. Even with these
    challenges and outstanding questions, program officials said that they are
    confident the department will be able to lend funds to hurricane-affected
    institutions prior to expiration of the special legislative provisions
    applicable to hurricane-affected HBCUs. They noted that the department has
    already notified eligible institutions of the availability of funds and
    would hold additional meetings with schools to gain an understanding of
    their capital improvement and restoration needs.

    Conclusions

    HBCUs play an important role in fulfilling the educational aspirations of
    African-Americans and others and in helping the nation attain equal
    opportunity in higher education. In establishing the Capital Financing
    Program, Congress sought to help HBCUs continue and expand their
    educational mission. The program has in fact assisted some HBCUs in
    financing their capital projects. Factors, however, including awareness of
    the program; clear, timely, and useful information concerning the status
    of loan applications and approvals; and certain loan terms and conditions,
    may be discouraging other schools from participating in the program. Some
    HBCUs have accessed even more attractive financing outside of the program,
    while yet others may face financial challenges that make it unwise to
    borrow through the program--factors that affect program utilization and
    make the development of program performance goals and measures
    challenging. Despite the challenge, Education is attempting to design
    performance goals and measures--a positive step that if successfully
    completed could be useful in informing Congress and others about the
    extent to which the program is meeting Congress' vision in establishing
    it.

    HBCU officials had a number of suggestions, such as changing the frequency
    of schools' loan repayments from a monthly to a semiannual basis, that
    they believed could improve the program and positively influence program
    utilization. By soliciting and considering such feedback from HBCU
    officials, Education could ensure that the program is optimally designed
    to achieve its objectives effectively and efficiently. However, Education
    has not made consistent use of the mechanism--the HBCU Capital Financing
    Advisory Board--Congress provided to help ensure Education received input
    from critical program stakeholders. Receiving feedback from schools would
    also allow the department to better inform Congress about the progress
    made under the program.

    Effective management control is essential to ensuring that programs
    achieve results and depends on, among other things, effective
    communication. Agencies must promote relevant, reliable, and timely
    communication to achieve their objectives and for program managers to
    ensure the effective and efficient use of resources. Effective management
    control also entails ensuring that an agency complies with applicable laws
    and regulations and that ongoing monitoring occurs during the normal
    course of an agency's operations. In failing to follow the requirements of
    the Federal Credit Reform Act, Education has overstated the budgetary cost
    of the program. Accurately accounting for the cost of federal programs is
    all the more important in light of the fiscal challenges facing the
    nation. Moreover, failing to adequately monitor the DBA's performance with
    respect to critical program responsibilities--record keeping, marketing,
    accounting, and safeguarding the federal funds it has been collecting from
    program borrowers--increases the program's exposure to potential fraud,
    waste, abuse, and mismanagement.

    Recommendations for Executive Action

    To better ensure that the HBCU Capital Financing Program can assist these
    schools to continue and expand their educational missions, GAO is making
    the following five recommendations for Executive Action. To ensure that it
    obtains the relevant, reliable, and timely communication that could help
    ensure that program objectives are being met efficiently and effectively,
    and to meet statutory requirements, we recommend that the Secretary of
    Education regularly convene and consult with the HBCU Advisory Board.
    Among other things, the Advisory Board could assist Education in its
    efforts to develop program performance goals and measures, thereby
    enabling the department and the board to advise Congress on the program's
    progress. Additionally, Education and the Advisory Board could consider
    whether alternatives to the escrow arrangement are feasible that both
    address schools' concerns and the need to keep federal costs at a minimum.
    If Education determines that statutory changes are needed to implement
    more effective alternatives, it should seek such changes from Congress.

    To ensure program effectiveness and efficiency, we recommend that the
    Secretary of Education enhance communication with HBCU program
    participants by (1) developing guidance for HBCUs, based on other schools'
    experiences with the program, on steps that applicants can take to
    expedite loan processing and receipt of loan proceeds, and (2) regularly
    informing program applicants of the status of their loan applications and
    department decisions.

    In light of the program's existing credit requirements for borrowers and
    the funds placed in escrow by borrowers to protect against loan
    delinquency and default, we recommend that the Secretary of Education
    change its requirement that borrowers make monthly payments to a
    semiannual payment requirement consistent with the DBA's requirement to
    make semiannual payments to the FFB.

    To improve its estimates of the budgetary costs of the program, and to
    comply with the requirements of the Federal Credit Reform Act, we
    recommend that the Secretary of Education ensure that the program subsidy
    cost estimation process include as a cash flow to the government the
    surcharge assessed by the FFB and paid by HBCU borrowers and pay such
    amount to the program's financing account. Additionally, we recommend that
    the Secretary of Education audit the funds held by the DBA generated by
    this surcharge and ensure the funds are returned to the Department of the
    Treasury and paid to the program's financing account.

    To ensure adequate management control and efficient program operations, we
    recommend that the Secretary of Education increase its monitoring of the
    DBA to ensure its compliance with contractual requirements, including
    record keeping, and that the DBA is properly marketing the program to all
    potentially eligible HBCUs.

    Agency Comments

    In written comments on a draft of this report, Education agreed with our
    findings and all but one of our recommendations and noted that our report
    would help it enhance the program and better serve the nation's HBCUs.
    Education agreed with our recommendation to regularly convene and consult
    with the HBCU Advisory Board and noted that the department would leverage
    the board's knowledge and expertise to improve program operations and that
    the department had scheduled a board meeting for October 27, 2006.
    Education also agreed with our recommendation to improve communications
    with HBCUs, noting that it would take steps including developing guidance
    based on lessons learned to expedite loan processing and receipt of
    proceeds, and regularly informing applicants of their loan status and
    department decisions. Moreover, Education agreed with our recommendation
    to improve its budget estimates for the program, indicating that it would
    work with OMB and Treasury to do so. Further, with regard to our
    recommendation that the department increase its monitoring of its DBA, the
    department stated that it would require the DBA to submit quarterly
    reports on program participation and financing, identify and locate
    missing loan documentation, and maintain these efforts for each subsequent
    loan disbursal. Additionally, the department said that it was planning to
    conduct an audit of the DBA's handling of loan funds and associated fees,
    as we recommended.

    With respect to our recommendation that would allow participating schools
    to make semiannual payments, Education said it would be imprudent to
    implement the recommendation at this time because of the potential for
    default as well as the exposure from a default by a current program
    participant. We considered these issues in the development of our
    recommendation and continue to believe that the credit evaluation
    performed by the DBA, the funds set aside by borrowers held in escrow, and
    the security pledged by borrowers provide important and sufficient
    measures to safeguard taxpayers against potential delinquencies and
    default. Further, while not noted in our draft report reviewed by the
    department, the law requires that borrowers make payments to the DBA at
    least 60 days prior to the date for which payment on the bonds is expected
    to be needed. In addition, borrowers have been required to submit, on an
    annual basis, audited financial reports and 3-year projections of income
    and expenses to the DBA. These measures provide additional safeguards as
    well as a mechanism to alert the department of potential problems. We
    added this information to our description of program terms and conditions
    in table 1.

    Education also provided technical comments that we incorporated into this
    report where appropriate.

    As agreed with your offices, unless you publicly announce its contents
    earlier, we plan no further distribution of this report until 30 days from
    its issue date. At that time, we will send copies to the Secretary of
    Education appropriate congressional committees, the Director of OMB, and
    other interested parties. We will also make copies available to others
    upon request. In addition, the report will be available at no charge on
    GAO's Web site at [37]http://www.gao.gov .

    If you or your staff have any questions about this report, please contact
    me at (202) 512-7215 or AshbyC@gao.gov. Contact points for our Office of
    Congressional Relations and Public Affairs may be found on the last page
    of this report. GAO staff that made major contributions to this report are
    listed in appendix IV.

    Cornelia M. Ashby
    Director, Education, Workforce, and Income Security
    Issues

    Appendix I: List of Historically Black Colleges and Universities GAO
    Interviewed

    1.  Alabama Agricultural and Mechanical University            Ala.
    2.  Albany State University                                   Ga.
    3.  Allen University                                          S.C.
    4.  Barber-Scotia College                                     N.C.
    5.  Bennett College                                           N.C.
    6.  Bethune-Cookman College                                   Fla.
    7.  Bowie State University                                    Md.
    8.  Central State University                                  Ohio
    9.  Cheney University of Pennsylvania                         Pa.
    10. Clark Atlanta University                                  Ga.
    11. Dillard University                                        La.
    12. Fisk University                                           Tenn.
    13. Florida Memorial College                                  Fla.
    14. Jarvis Christian College                                  Tex.
    15. Kentucky State University                                 Ky.
    16. Lincoln University                                        Pa.
    17. Livingstone College                                       N.C.
    18. Miles College                                             Ala.
    19. Norfolk State University                                  Va.
    20. North Carolina Agriculture and Technical State University N.C.
    21. Saint Philip's College                                    Tex.
    22. Shaw University                                           N.C.
    23. South Carolina State University                           S.C.
    24. Southern University at New Orleans                        La.
    25. Tennessee State University                                Tenn.
    26. Texas College                                             Tex.
    27. Tougaloo College                                          Miss.
    28. Tuskegee University                                       Ala.
    29. Philander Smith College                                   Ark.
    30. University of the District of Columbia                    D.C.
    31. University of Maryland Eastern Shore                      Md.
    32. Virginia Union University                                 Va.
    33. West Virginia State University                            W.Va.
    34. Xavier University                                         La.

    Source: GAO.

    Appendix II: Number of HBCUs Eligible to Participate in
    Capital Financing Program by State (as of August 31, 2006)

    Appendix III: HBCUs Located in Geographic Area Affected by
    Hurricane Katrina in 2005

    Appendix IV: Comments from the Department of Education

    Appendix V: GAO Contact and Staff Acknowledgments

    GAO Contacts

    Cornelia M. Ashby, Director, (202) 512-7215

    Staff Acknowledgments

    In addition to those named above the following individuals made important
    contributions to the report: Jeff Appel, Assistant Director; Tranchau
    Nguyen, Analyst-in-Charge; Carla Craddock; Holly Gerhart; Lauren Kennedy;
    Sue Bernstein; Margie Armen; Christine Bonham; Jessica Botsford; Michaela
    Brown; Richard Burkard; Carlos Diz; Kevin Jackson; Tom McCool.

    (130466)

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    contact Cornelia Ashby at (202) 512-7215 or ashbyc@gao.gov.

    Highlights of [45]GAO-07-64 , a report to congressional requesters

    October 2006

    CAPITAL FINANCING

    Department Management Improvements Could Enhance Education's Loan Program
    for Historically Black Colleges and Universities

    Historically Black Colleges and Universities (HBCU), which number around
    100, undertake capital projects to provide appropriate settings for
    learning, but many face challenges in doing so. In 1992, Congress created
    the HBCU Capital Financing Program to help HBCUs fund capital projects by
    offering loans with interest rates near the government's cost of
    borrowing. We reviewed the program by considering (1) HBCU capital project
    needs and program utilization, (2) program advantages compared to other
    sources of funds and schools' views on loan terms, (3) the Department of
    Education's (Education) program management, and (4) certain schools'
    perspectives on and Education's plan to implement loan provisions
    specifically authorized by Congress in June 2006 to assist in hurricane
    recovery efforts. To conduct our work, we reviewed applicable laws and
    program materials and interviewed officials from federal agencies and 34
    HBCUs.

    [46]What GAO Recommends

    We recommend that Education (1) comply with the law by regularly convening
    and consulting its Advisory Board, (2) improve school communications, (3)
    allow semiannual repayments, (4) properly account for costs in conformance
    with the law, and (5) formally monitor its contractor. Education agreed
    with our findings and four of the five recommendations made in this
    report. The department disagreed with our third recommendation. We
    continue to believe Education should allow semiannual repayments.

    HBCU officials we interviewed reported extensive and diverse capital
    project needs, yet just over half of available loan capital ($375 million)
    has ever been borrowed. About 23 HBCUs have taken steps to participate in
    the program, and 14 have become borrowers. Education has collected and
    reported limited data on the program's utilization and has not established
    performance measures or goals to gauge program effectiveness, though
    Education officials noted they are developing measures and goals.

    The HBCU loan program provides access to low-cost capital financing and
    flexibilities not always available elsewhere, but some loan terms and
    conditions discourage participation, though school officials said they
    remain interested in the program. The low interest rate and 30-year
    repayment period were regarded favorably by participants and
    nonparticipants alike, and the program makes funds available for a broader
    range of needs than some federal grant programs. However, the requirement
    to place in a pooled escrow 5 percent of loan proceeds--an insurance
    mechanism that reduces federal program costs due to any program borrower's
    potential delinquency or default--monthly payments versus semiannual ones
    traditionally available from private sources of loans, and the extent to
    which some loans have been collateralized could discourage participation.

    While Education has taken steps to improve the program, significant
    weaknesses in its management control could compromise the program's
    effectiveness and efficiency. Education has recently provided schools with
    both fixed and variable interest rate options, allowed for larger loans,
    and afforded more opportunities to negotiate loan terms. Also, Education
    has increased its marketing efforts for the program. However, Education
    has not established effective management control to ensure that it is (1)
    communicating with schools in a useful and timely manner, (2) complying
    with statutory requirements to meet twice each year with an advisory board
    composed of HBCU experts and properly account for the cost of the program,
    and (3) monitoring the performance of the program's contractor.

    Officials from 4 HBCUs in Louisiana and Mississippi told us that in light
    of the extensive 2005 hurricane damage to their campuses, they were
    pleased with certain emergency loan provisions but concerned that there
    would not be sufficient time to take advantage of Education's authority to
    waive or modify the program provisions. School officials from the 4
    schools noted that their institutions had incurred extensive physical
    damage that was caused by water, wind, and, in one case, fire, and that
    the full financial impact of the hurricanes may remain unknown for years.
    Although Education officials told us that they have not yet determined the
    extent to which the authority under the emergency legislation to waive or
    modify program provisions for hurricane-affected institutions would be
    used, the department would be prepared to provide loans to
    hurricane-affected HBCUs.

    References

    Visible links

      35. http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-98-51
      36. http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-98-51
      37. http://www.gao.gov/
      38. http://www.gao.gov/
      39. http://www.gao.gov/
      45. http://www.gao.gov/cgi-bin/getrpt?GAO-07-64
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