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

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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 [email protected]. 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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To view the full product, click on the link above. For more information,
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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

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  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/
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  39. http://www.gao.gov/
  45. http://www.gao.gov/cgi-bin/getrpt?GAO-07-64
*** End of document. ***