Financing College Facilities: Factors Limit Connie Lee's Ability to Help
More Schools (Letter Report, 12/08/95, GAO/HEHS-96-6).
Pursuant to a congressional request, GAO provided information on how the
College Loan Insurance Association (Connie Lee) has served the needs of
102 Historically Black Colleges and Universities (HBCU).
GAO found that: (1) Connie Lee insured 95 bonds totalling $2.6 billion
from October 1991 through September 1995, 90 of which received the
lowest investment grade rating; (2) Connie Lee offered to insure 8 HBCU
bonds, declined to insure 3 HBCU bonds it considered credit risky,
determined that 13 HBCU were rated above the category of risk they
applied for, and was undecided on whether to issue insurance for 1 HBCU
bond; (3) Connie Lee is limited to insuring low grade bonds by federal
and state laws, as well as by industry practices; (4) some HBCU may
finance the construction and renovation of HBCU facilities by issuing
bonds without insurance, obtaining bond insurance from companies other
than Connie Lee, and using loans or grants from federal and state
governments, alumni, and private foundations; and (5) officials suggest
removing federal limits and credit ratings on certain types of bonds
Connie Lee insures, guaranteeing federal loans to pay for defaulted
bonds, and providing Connie Lee with additional loans and grants for
capital.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: HEHS-96-6
TITLE: Financing College Facilities: Factors Limit Connie Lee's
Ability to Help More Schools
DATE: 12/08/95
SUBJECT: Black colleges
Educational facility construction
Higher education
Credit insurance
Minority education
Municipal bonds
Insurance companies
IDENTIFIER: Federal Family Education Loan Program
Dept. of Education HBCU Capital Financing Program
Dept. of Education Strengthening HBCU Program
United Negro College Fund
UNCF
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Cover
================================================================ COVER
Report to the Ranking Minority Member, Committee on Economic and
Educational Opportunities, House of Representatives
December 1995
FINANCING COLLEGE FACILITIES -
FACTORS LIMIT CONNIE LEE'S ABILITY
TO HELP MORE SCHOOLS
GAO/HEHS-96-6
Financing College Facilities
(104782)
Abbreviations
=============================================================== ABBREV
FFELP - Federal Family Education Loan Program
HBCU - Historically Black Colleges and Universities
Letter
=============================================================== LETTER
B-260631
December 8, 1995
The Honorable William L. Clay
Ranking Minority Member
Committee on Economic and
Educational Opportunities
House of Representatives
Dear Mr. Clay:
The College Construction Loan Insurance Association (Connie Lee), is
a for-profit bond insurance holding company that is authorized by
federal statute and owned by stockholders, including the Department
of Education. Established under the Higher Education Amendments of
1986, Connie Lee primarily insures municipal bonds issued by schools
of higher education--colleges, universities, and teaching
hospitals--that have difficulty obtaining such insurance, that is,
those schools whose bonds have relatively low credit ratings--BBB and
below.\1 Connie Lee insures bonds issued by these schools to finance
the construction and renovation of academic facilities. Like other
private municipal bond insurers, Connie Lee is regulated by the
states in which it operates and heavily influenced by industry
practice.
You asked us to provide you with information on how Connie Lee has
carried out its mission, especially for the 102 Historically Black
Colleges and Universities (HBCU) (see app. I for a listing of these
schools).\2 More specifically, in this report we describe (1) the
extent to which Connie Lee has served the needs of schools of higher
education, especially HBCUs, by insuring municipal bonds issued to
finance the construction and renovation of academic facilities; (2)
the reasons why Connie Lee has not insured bonds for more schools;
(3) HBCUs' views on alternatives to Connie Lee for financing
construction and renovation projects; and (4) Connie Lee's views on
changes to Connie Lee that might enable it to better serve HBCUs. In
addition, we agreed to describe Connie Lee's financial record and
profitability. This information, which shows Connie Lee to be in
sound financial condition, is provided in appendix II.\3
To develop information for this report, we interviewed officials at
Connie Lee, HBCUs and other schools, the Department of Education, and
representatives of the bond insurance industry. We collected data on
the colleges, universities, and teaching hospitals that were either
approved or rejected--from October 29, 1991, through September 30,
1995--by Connie Lee for bond insurance. In addition, we obtained
information on Connie Lee's financial record and profitability
through 1994. We did not independently verify the accuracy of the
information provided to us. Our work was conducted between March
1994 and October 1995 in accordance with generally accepted
government auditing standards. (See app. III for more information
on our scope and methodology.)
--------------------
\1 Bond credit ratings are based on the issuer's ability to make
interest payments and repay principal as scheduled. Bonds rated BBB
and above are considered investment grade bonds; those rated below
BBB are considered noninvestment grade bonds.
\2 HBCUs are accredited colleges and universities established before
1964 whose primary mission is educating black Americans.
\3 This assessment is based on an evaluation by Standard and Poor's
Corporation, a national credit rating firm.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
From October 1991--when Connie Lee insured its first bond--through
September 1995, Connie Lee insured 95 bonds totaling about $2.6
billion, of which 90 were rated BBB and 5 were rated A or above, and
declined to insure 406 other bonds because it considered them to be
too great a credit risk. As of September 30, 1995, 17 schools were
considering Connie Lee's offer of insurance.
During this same period, at least 23 HBCUs approached Connie Lee
about obtaining insurance for 25 bonds. For these HBCUs, as of
September 30, 1995, Connie Lee offered to insure 8 bonds; declined to
insure 3 bonds it considered a credit risk; determined that 13 were
rated above the category of risk that, at the time the schools
applied, Connie Lee was authorized to insure; and had not decided
whether to offer insurance for 1 bond. Of the eight bonds that
Connie Lee offered to insure, one was issued with Connie Lee
insurance. For the other seven bonds, two HBCUs were considering
Connie Lee's offer and five had issued the bonds without insurance or
insured with another company.
Connie Lee's ability to insure municipal bonds for a broader range of
schools is limited by federal law, which requires Connie Lee to
insure bonds generally rated BBB or below; state laws that require
Connie Lee to have 95 percent of its business in bonds rated BBB and
above; and industry practice, which discourages bond insurers from
insuring bonds rated below BBB--"noninvestment grade." In addition,
there are many schools that Connie Lee cannot serve because they have
no need for bond insurance. Furthermore, some schools, especially
small schools like many HBCUs, find that the cost of issuing a bond
and the size of the debt incurred make issuing a bond impractical.
HBCU officials said that to meet their financing needs for academic
facilities, HBCUs have alternatives to Connie Lee's bond insurance.
For example, some HBCUs may be able to (1) finance the construction
and renovation of their facilities by issuing bonds without
insurance; (2) obtain bond insurance from companies other than Connie
Lee; or (3) finance construction and renovation using means other
than bonds, such as grants or loans from federal and state
governments, bank loans, or alumni and private foundation donations.
For example, HBCUs may obtain federal loans through the Department of
Education's recently implemented HBCU Capital Financing program.
Connie Lee officials suggested federal legislative actions that would
enable Connie Lee to insure bonds for more schools, including HBCUs,
than it is now serving: (1) remove the federal limits on the types
of bonds and the credit rating of bonds that Connie Lee may insure;
(2) guarantee that, should it be needed, the federal government would
lend Connie Lee funds to pay claims on defaulted bonds; and (3)
provide Connie Lee additional capital through loans or grants. In
addition, Connie Lee suggested the need for authorization to borrow
money from the federal government to make loans to small,
low-rated--especially noninvestment grade--schools that cannot issue
bonds or that are unable to obtain bond insurance. Although each of
these actions may have its disadvantages and advantages, we did not
assess their feasibility or the need for them because that was not
within the scope of our review. We recognize, however, that they
could increase federal costs and contingent financial liability.
BACKGROUND
------------------------------------------------------------ Letter :2
The nation's 3,600 colleges, universities, and teaching hospitals
continually need to construct new facilities or renovate obsolete or
aging facilities. While it has been long recognized that replacing
or repairing facilities is a critical problem for these schools,
there are no reliable data on the extent of needed construction and
renovation. Connie Lee estimates that more than $100 billion will be
required during this decade to meet the need.
In the 1980s, federal support of academic facilities in the form of
grants and loans to schools of higher education was cut drastically.
Alternative financing means such as internal funding, fund raising
campaigns, and bank financing options generally were inadequate for
significant construction and renovation projects. Issuing municipal
bonds to finance such projects was limited mostly to schools with the
highest credit standing. To help fundamentally sound but less
creditworthy schools issue bonds to finance needed facilities
projects, in 1986 the Congress established a college construction
loan insurance corporation--
Connie Lee.
MUNICIPAL BONDS
---------------------------------------------------------- Letter :2.1
Municipal bonds are debt securities (long-term loans) that issuers
(borrowers) sell to investors (lenders) so they can finance public
projects--such as roads, airports, and public college facilities--and
certain kinds of private projects--such as private college and
hospital facilities--deemed to be serving public purposes. Municipal
bonds may also be used to refinance existing debt. For the use of
investors' money, issuers promise to pay investors interest on
specific dates and to repay the amount borrowed (principal) on a
specific date or dates. Municipal bonds are issued through state and
local government agencies. Repayment periods typically are 20 to 30
years.
Municipal bonds are typically divided into two categories: general
obligation bonds and revenue bonds. General obligation bonds usually
finance public projects and are backed by the taxing authority of the
state or local government that issues the bonds; the principal and
interest are paid from tax receipts. The principal and interest on
revenue bonds, by contrast, are generally paid from income (revenues)
produced by the project that the bonds finance. For example, the
principal and interest on a revenue bond issued to finance a college
dormitory would be paid from fees collected from residents of the
dormitory.
Some municipal bonds issued to finance public projects may not be
funded from state appropriations. In some states, for example, bonds
issued by public colleges and universities for dormitory projects do
not qualify for state backing. In these states, public schools may
issue revenue bonds to finance the construction or renovation of
dormitories.
The interest income from municipal bonds is generally exempt from
both federal income tax and state and local taxes of the state in
which the bonds are issued. Because investors receive tax-free
interest, they may be willing to purchase bonds that have a lower
interest rate than they would otherwise require. The ability to
issue tax-exempt bonds at lower interest rates may substantially
reduce the issuer's costs.
CREDIT QUALITY OF A BOND
---------------------------------------------------------- Letter :2.2
To make its bonds appealing to investors, an issuer may obtain a
credit rating for its bonds from a nationally recognized credit
rating firm. These firms independently assess issuers' ability to
make scheduled interest and principal payments when they are due.
The firms assign credit ratings to bonds as a gauge of the risk of
default--nonpayment of interest or principal.
Standard and Poor's Corporation, for example, assigns ratings ranging
from AAA, for the highest quality bonds, to D, for the lowest
quality. Standard and Poor's refers to bonds rated in its top four
categories--AAA, AA, A, and BBB--as "investment grade" bonds. They
are judged to have a high probability of on-time interest and
principal payments and little risk of default. Bonds rated in
categories BB to C, commonly called "junk bonds," are referred to by
Standard and Poor's as "noninvestment" or "speculative" grade. They
are considered to have a higher risk of default. Bonds rated D are
in default with respect to principal or interest payments. Other
credit rating firms use similar rating categories.
Credit rating firms generally consider revenue bonds to have a higher
risk of nonpayment than general obligation bonds because revenue
bonds are not backed by the taxing authority of the state or local
government and usually depend on the project funded to produce
sufficient revenues to make interest and principal payments when due.
In addition, Standard and Poor's generally considers hospitals and
private colleges and universities to be among the relatively riskier
categories of institutions that issue municipal bonds. Private
schools lack the backing of any taxing authority, and some of these
schools have limited resources. The health care industry, in
general, is viewed as having an uncertain future.
To enhance a bond's credit quality, an issuer may purchase insurance
for its bond. Through such insurance, an insurer guarantees
investors that it will pay the bond interest and principal when due
if the issuer defaults. Rating firms that rate bonds also rate bond
insurance companies on their ability to pay claims for defaulted
interest or principal payments. Consequently, insured bonds are
issued with the rating of the insurer rather than the rating of the
issuer. Enhancing the quality of a bond in this manner may persuade
investors to accept lower interest rates than they might otherwise.
The lower interest cost may more than offset the cost to the issuer
of obtaining insurance.
Rating firms use a variety of criteria to evaluate the
creditworthiness of bond insurers. They are judged on capital
adequacy, which is the amount of capital they have relative to the
amount of debt they have insured; their management experience; their
underwriting policies; their financial performance; and other
organizational factors. The key area in the assessment, however, is
capital adequacy. Since its credit rating is the commodity that the
bond insurer sells, the performance guidelines established by firms
that rate it exert a considerable influence on its business
practices.
According to Standard and Poor's, there are 10 major municipal bond
insurance companies in the United States, including Connie Lee, which
is one of the newest and smallest of the 10 companies. Nine of the
companies, including Connie Lee, are rated AAA by one or more of the
major rating firms. The one exception has a AA rating. The
municipal bond insurance market is dominated by three insurers that
have captured more than 90 percent of the bond insurance market. In
1994, insured municipal bonds totaled about $61 billion, about 37
percent of all municipal bonds that were issued. Connie Lee has
approximately a 1-percent share of the overall municipal bond
insurance market. It is the only major municipal bond insurance
company exclusively insuring schools of higher education. Over the
past 3 years, it has insured more BBB schools than any other major
municipal bond insurance company.
THE MISSION OF CONNIE LEE
---------------------------------------------------------- Letter :2.3
The Congress amended the Higher Education Act in 1986 to establish
Connie Lee. The Congress was concerned that there were many
fundamentally sound but less creditworthy schools of higher education
unable to obtain bond insurance at a reasonable cost, thereby
preventing them from issuing municipal bonds to finance needed
facilities construction and renovation projects. Connie Lee is
authorized to insure municipal bonds rated by a national rating firm
at or below the lowest investment grade category--the equivalent of
Standard and Poor's BBB and below ratings--issued by schools of
higher education; the proceeds of these bonds are to be used to
finance the construction and renovation of academic facilities. In
1992, the Congress further amended the act to allow Connie Lee to
insure a limited volume of higher rated bonds through calendar year
1997 on the condition that other municipal bond insurance companies
declined to insure the bonds.
Under the 1986 amendments, Connie Lee was incorporated in February
1987 as a bond insurance holding company. During 1987 and 1988,
Connie Lee sold stock to the Department of Education and the Student
Loan Marketing Association (Sallie Mae) and, in 1991, to a group of
private investors.\4
Currently, Education owns about 14 percent of Connie Lee's stock;
Sallie Mae owns about 36 percent; and the other stockholders own
about 50 percent. Under the act, Connie Lee is managed by an
11-member board of directors: 3 appointed by Sallie Mae, 2 appointed
by the Secretary of Education, 2 appointed by the Secretary of the
Treasury, and 4 elected by the private stockholders.
In December 1987, Connie Lee purchased an existing insurance company,
which it renamed the Connie Lee Insurance Company, to carry out its
insurance operations. It began insurance operations as a bond
reinsurer in December 1988, when it received from Standard and Poor's
a AAA rating as a bond reinsurer.\5 It began operating as a primary
insurer in October 1991 when it received from Standard and Poor's a
AAA rating as a primary insurer. The Connie Lee Insurance Company is
authorized to operate in 49 states, the District of Columbia, and
Puerto Rico.
As of October 1995, proposed legislation under consideration by the
Congress would sever Connie Lee's relationship with the federal
government, a process commonly referred to as "privatization." If
enacted, such legislation could change the way in which Connie Lee
operates and could affect the types of projects it insures.
--------------------
\4 Sallie Mae--a stockholder-owned, for-profit enterprise established
by the Congress in 1972 as a national secondary market for federally
guaranteed student loans--is authorized to make loans to schools of
higher education and to buy and sell obligations, including bonds,
issued by these schools to finance academic facilities.
\5 Reinsurance is insurance coverage purchased by an insurer from
another insurer to spread the risks incurred.
CONNIE LEE PRIMARILY INSURES
THE LOWEST INVESTMENT GRADE
BONDS
------------------------------------------------------------ Letter :3
Between October 29, 1991, the date Connie Lee sold its first primary
insurance, and September 30, 1995, Connie Lee insured 95 bonds,
totaling about $2.6 billion, for colleges, universities, and teaching
hospitals. Of these, 90 were rated BBB, the lowest investment grade
rating, and 5 were rated A or better. None was noninvestment grade
at the time it was insured; that is, none was rated below BBB,
although several have subsequently received ratings in the
noninvestment grade category. Almost all were revenue bonds.
The five bonds rated A or better were insured after the Higher
Education Amendments of 1992. According to Connie Lee officials,
each bond was refused insurance by other insurance companies before
Connie Lee agreed to insure it, in accordance with the 1992
amendments. The bonds did not exceed the limits on the amount of
A-rated business imposed on Connie Lee by the act, as amended.
In addition to the 95 bonds that Connie Lee insured, at the end of
September 1995, 17 schools were considering whether to accept Connie
Lee's offer of insurance.
As of September 30, 1995, Connie Lee had declined to insure 406 bonds
because of concerns it had about the schools' ability to repay bond
principal and make interest payments as scheduled. It had also
rejected an undetermined number of bonds for insurance because the
bonds' credit ratings were A or better. Data are not available on
those applications for insurance because Connie Lee does not maintain
such data.
CONNIE LEE INSURANCE ACTIVITY
WITH HBCUS
------------------------------------------------------------ Letter :4
Since October 1991, at least 23 HBCUs have approached Connie Lee
about obtaining bond insurance for 25 bonds. As of September 30,
1995, Connie Lee had insured only one bond for an HBCU--a BBB-rated
$2.2 million bond insured in July 1994 for a 4-year public
university. Standard and Poor's has since downgraded that bond into
the noninvestment grade category. As of September 30, 1995, this
school was continuing discussions with Connie Lee about insuring a
second bond, but Connie Lee had not decided whether to offer
insurance for the bond.
In addition to the bond it insured, Connie Lee offered to insure
seven other bonds for HBCUs. As of September 30, 1995, two HBCUs
were considering whether to accept Connie Lee's offers. The
remaining five HBCUs did not accept Connie Lee's offers. Three of
the five schools purchased insurance from other companies, whose
premiums were lower than Connie Lee's, school officials said.
Another school had no record of Connie Lee's having quoted a rate to
them; it purchased insurance from another company, the school said.
The fifth school had issued its bond without insurance and Sallie Mae
had bought the bond issue, school officials said.
Connie Lee did not insure bonds for at least 16 HBCUs that applied.
It declined to insure three bonds because of concerns about the
schools' credit status. Although data are not available, Connie Lee
estimated that it turned down at least 13 HBCUs because the schools'
A or better rating made them ineligible for insurance. At the time,
federal law limited Connie Lee to insuring bonds rated BBB or below.
At two of the three HBCUs that Connie Lee declined to insure, school
officials said the schools were denied insurance because Connie Lee
believed their student loan default rates were too high. One of the
two schools reported on its application to Connie Lee that its
default rates in fiscal years 1989, 1990, and 1991 were 27 percent,
32 percent, and 25 percent, respectively, officials of this school
said. The second school's rates, as reported to Connie Lee, were 25
percent, 32 percent, and 18 percent for the same 3 years, this school
said. The third school was unable to provide us with information
about why it was denied insurance. Those who had filed the
application were no longer at the school and no record of it could be
located, according to school officials. Connie Lee offered to insure
a second bond for this school; it is one of the two HBCUs that, as of
September 30, 1995, was considering whether to accept Connie Lee's
offer of insurance.
According to Connie Lee, a school's Federal Family Education Loan
Program (FFELP) (formerly the Guaranteed Student Loan Program)
default rate is a critical element in Connie Lee's decision whether
to insure a bond for the school. Connie Lee believes that private
schools that rely on funds provided by student loans for a
significant portion of their revenues and also have high student loan
default rates are at greater risk of defaulting on bond interest and
principal payments.
The Department of Education uses a school's student loan default rate
to determine the school's eligibility to participate in FFELP. In
1990, the Congress established a process that Education can use to
bar schools with high student loan default rates from continuing to
participate in FFELP. Each year, Education assesses a school's
eligibility, which is based on that school's three most recent
available annual loan default rates. To remain eligible, a school's
default rate must be below the statutory threshold in at least 1 of
the last 3 consecutive fiscal years. The threshold for determining a
school's eligibility was 35 percent in fiscal years 1991 and 1992 and
30 percent in 1993. Beginning in fiscal year 1994, the threshold has
been 25 percent. HBCUs are exempt from the default rate eligibility
requirements until July 1, 1998.
REASONS WHY CONNIE LEE HAS NOT
INSURED BONDS FOR MORE SCHOOLS
------------------------------------------------------------ Letter :5
There are several reasons why some colleges, universities, and
teaching hospitals have not obtained bond insurance from Connie Lee.
Federal and state law and industry practices impose limits on Connie
Lee. In addition, for many schools, bonds or bond insurance is
unnecessary or unsuitable.
FEDERAL LAW LIMITS CONNIE
LEE TO INSURING LOWER-RATED
BONDS
---------------------------------------------------------- Letter :5.1
Federal law limits Connie Lee to a defined sector of the bond market:
bonds generally rated BBB and below, issued by colleges,
universities, and teaching hospitals, to finance academic facilities.
Many schools, however, are financially strong. If they issue bonds,
their bonds most likely would be rated above BBB. In addition,
public schools' bonds that are fully or partially backed by the state
in which they are located are usually rated A or better because of
the state's A or better rating. Connie Lee generally is unable to
insure bonds rated A or better.
STATE LAW LIMITS CONNIE LEE
TO INSURING INVESTMENT GRADE
BONDS
---------------------------------------------------------- Letter :5.2
States require municipal bond insurance companies that operate in
them, including Connie Lee, to have a specified percentage of their
business in investment grade categories, that is, bonds rated BBB or
above. In effect, the highest percentage required by any state in
which a company operates sets the minimum standard for the company
for all states in which it operates. Because two states in which
Connie Lee operates require bond insurance companies to have 95
percent of their business in the investment grade categories, Connie
Lee must meet this 95-percent standard in all jurisdictions in which
it operates.
INDUSTRY PRACTICES LIMIT
CONNIE LEE TO INSURING
HIGHER- RATED BONDS
---------------------------------------------------------- Letter :5.3
As previously discussed, credit rating firms, because they determine
the rating that a bond insurance company can confer on bonds, have
influence over the business practices of bond insurers. Credit
rating firms' guidelines effectively restrict the amount of
noninvestment grade business an insurer can have and still maintain
its rating. For example, under Standard and Poor's guidelines,
Connie Lee, as well as the other bond insurance companies it rates,
should have at least 50 percent more capital for any noninvestment
grade business than for investment grade business.
ISSUING AND INSURING BONDS
UNNECESSARY OR UNSUITABLE
FOR MANY SCHOOLS
---------------------------------------------------------- Letter :5.4
Many colleges, universities, and teaching hospitals do not need to
issue bonds or obtain bond insurance. In some states, public schools
receive funds from the state for the construction and renovation of
facilities. In addition, some public and private schools receive
funds for capital projects from other sources, such as endowments.
Consequently, these schools may not have to incur debt to finance the
cost of capital projects. Furthermore, some schools are fiscally
conservative, preferring to save for projects rather than incur debt.
However, schools that consider issuing a bond must take into account
such critical factors as the size of the debt to be incurred and the
costs to issue a bond. Generally, it is not cost-effective to issue
bonds of less than $4 million, according to Connie Lee. Costs--such
as fees for financial advisers, underwriters, attorneys, credit
rating firms, brokers, and others; and insurance premiums--can add
substantially to the total cost of a bond. Many schools, especially
small schools, either (1) do not need facilities costing millions of
dollars or (2) are unwilling or unable to take on debt of that
magnitude or to commit to repayment periods of 20 to 30 years. These
schools may be able to obtain financing from sources such as bank
loans.
In addition, the credit rating of a bond may influence a school's
decision about whether to issue a bond and, if so, whether to insure
it. Schools whose bonds would be rated BBB or lower may decide not
to issue the bonds because the interest rates and insurance costs may
be too high. On the other hand, schools, regardless of their credit
ratings, may decide to issue bonds without insurance because they
believe that the bonds would sell without the enhancement of
insurance.
FINANCING HBCUS' CONSTRUCTION
AND RENOVATION PROJECTS WITHOUT
CONNIE LEE INSURANCE
------------------------------------------------------------ Letter :6
Issuing a bond insured by Connie Lee is just one way to finance the
construction and renovation costs of HBCUs' academic facilities.
Like non-HBCU schools, not all HBCUs need to, can, or want to issue
bonds, and not all HBCUs that issue bonds need to, or can, obtain
bond insurance from Connie Lee. HBCU officials described other ways
in which the schools can finance their projects.
ISSUING BONDS WITHOUT CONNIE
LEE INSURANCE
---------------------------------------------------------- Letter :6.1
Some HBCUs may issue bonds without insuring them, and some may be
able to obtain bond insurance from companies other than Connie Lee.
Public schools located in states with an A or better credit rating
may issue bonds that have the same rating as their states. Because
the 49 public HBCUs, except for one located in the District of
Columbia, are located in states with an A or better rating, they may
be able to issue bonds that are rated A or better. Financially
strong private HBCUs also may be able to issue bonds rated A or
better. However, if these schools issue bonds that are rated A or
better, they may decide to issue them without obtaining insurance.
As discussed earlier, one HBCU that Connie Lee offered to insure
issued its bond without insurance, and four obtained insurance from
other companies.
FINANCING PROJECTS WITHOUT
BONDS
---------------------------------------------------------- Letter :6.2
As discussed earlier with respect to all schools, some HBCUs,
especially small schools, either do not need multimillion-dollar
facilities or are unwilling or unable to take on the large debt to
finance them. Of the 102 HBCUs, 53 had an enrollment in 1993 of less
than 2,000 students. Some HBCUs traditionally do not issue debt
securities to finance capital projects because their managers are
fiscally conservative. Typically, these HBCUs attempt to raise
needed funds from alumni and friends rather than incur debt. Other
HBCUs use these and other means to finance their projects: Federal
and state governments, banks, and private foundations and companies
make funds available to HBCUs for various purposes, including funding
construction and renovation projects.
For example, 27 federal departments and agencies support HBCUs to
some extent. Federal programs provide funds to HBCUs for
administration; research and development; faculty development;
student tuition assistance; and the acquisition, construction,
maintenance, and renovation of facilities and equipment.
Specifically, the Department of Education provides money for HBCUs
through several grant programs.\6 For example, the Strengthening
HBCUs Program provides for a $500,000 minimum allotment for each of
its grant recipients. Through another program, the Department of the
Interior's National Park Service maintains part of the campus of
Tuskegee University, a private school, because it has been designated
a national historic site. Tuskegee recently received $14 million
from the Park Service to renovate four buildings. Tuskegee also
receives financial support from the state of Alabama; it received
about $3 million in 1994.
The United Negro College Fund, a consortium of 41 private HBCUs, is a
private foundation that provides funds to member HBCUs. Since its
inception in 1944, it has raised nearly $1 billion for its members.
The schools may use the funds for scholarships, program and faculty
development, administration, endowments, and facilities construction
and renovation. Also, Sallie Mae financed in fiscal year 1994
construction projects totaling about $343 million at colleges,
universities, and teaching hospitals, including HBCUs.
Education's HBCU Capital Financing program--authorized in 1992 to
finance the construction and renovation of educational facilities at
HBCUs--is a more appropriate vehicle than Connie Lee to serve schools
with characteristics such as small size and limited resources that
many HBCUs share, a number of those that we interviewed at HBCUs and
at Education suggested. The program is just getting under way. The
Secretary of Education has selected a private, for-profit corporation
to issue bonds, the proceeds of which will be loaned to eligible
HBCUs for construction projects. The corporation will issue
approximately $357 million in bonds in 1995, Education estimates, and
expects to make the first loans before December 31, 1995.
Eligibility for the loan program is based on criteria that Education
and the corporation developed.
--------------------
\6 These include the Strengthening HBCUs, Strengthening Historically
Black Graduate Institutions, and Endowment Challenge Grants programs
authorized by the Higher Education Act, as amended.
CONNIE LEE'S SUGGESTIONS FOR
BETTER SERVING TARGETED SCHOOLS
------------------------------------------------------------ Letter :7
Connie Lee officials suggested several federal legislative actions
that they said would help Connie Lee serve a broader range of
schools, including HBCUs, targeted by its mission. For example,
officials suggested that limits in federal law that restrict Connie
Lee to (1) serving only schools of higher education and (2) insuring
primarily bonds rated BBB and below could be removed. This would
permit Connie Lee to operate the way other bond insurance companies
operate; that is, to diversify its business by insuring bonds of
other types of issuers and to balance the lower-rated bonds it
insures by also insuring higher-rated bonds.
Giving Connie Lee authority to borrow money from the federal
government, as needed, to pay claims on defaulted bonds that it
insured is another suggestion that Connie Lee officials offered.
This could be accomplished by giving Connie Lee a direct line of
credit with the U.S. Treasury or allowing it to borrow from
Treasury's Federal Financing Bank.\7 In effect, this would be a
federal guaranty--a federal reinsurance of Connie Lee--that could be
made applicable only to bonds rated below BBB. The guaranty could be
administered by Connie Lee through a separate subsidiary company,
unrelated to the Connie Lee Insurance Company, that would not be
subject to state insurance requirements. Structuring support in this
way would preclude Connie Lee from violating state licensing
requirements for the proportion of debt it insures that must be
investment grade, Connie Lee officials suggested.
A one-time federal subsidy for Connie Lee was yet another suggestion.
Although Connie Lee currently has sufficient capital to continue
insuring only BBB-rated bonds, it would need considerably more
capital to insure bonds rated below BBB, its officials said. This is
because of Standard and Poor's high capital requirements for insuring
noninvestment grade issues. A federal subsidy might take the form of
a low-interest loan or a grant to Connie Lee, Connie Lee officials
said.
Allowing Connie Lee to make loans to schools that usually cannot
issue bonds or that are unable to obtain bond insurance because their
bonds would be relatively low rated was also suggested. Connie Lee
would borrow money from the Treasury or the Federal Financing Bank to
make loans to schools whose bonds would be rated BBB, but especially
to those that would be noninvestment grade, they said. This would be
a new line of business for Connie Lee and could be administered apart
from its bond insurance business through a separate subsidiary
company.
Connie Lee officials realized that their proposed actions would
require federal legislation. While we recognize that each of these
actions may have its disadvantages and advantages, we did not assess
their feasibility or the need for them because this was not within
the scope of our review. We recognize, however, that they could
increase federal costs and contingent financial liability.
--------------------
\7 The Federal Financing Bank was created to ensure the coordination
of federal and federally assisted borrowing from the public, and has
been the vehicle through which most federal agencies finance their
programs involving the sale or placement of credit market
instruments.
CONCLUSIONS
------------------------------------------------------------ Letter :8
Connie Lee is limited to insuring bonds issued by a narrow range of
schools. More specifically, federal law generally limits it to
insuring bonds that are relatively greater credit risks, that is,
bonds rated BBB or below. State law, however, constrains bond
insurance companies, including Connie Lee, to insuring 95 percent of
their business in bonds rated BBB and above. Industry practice
further constrains these companies. Rating firms' guidelines require
larger amounts of capital for insuring bonds rated below BBB than for
insuring bonds rated BBB and above.
Among those schools that Connie Lee is permitted to serve, some--
including some HBCUs--do not need or want to issue bonds or to insure
the bonds that they issue. For example, some bonds that public
schools issue do not need insurance because the bonds have the
states' credit ratings; these high ratings reduce or eliminate the
benefits of insurance. Some schools, both public and private, are
fundamentally strong. They do not have to incur debt to finance
their construction or renovation projects, or they can issue bonds
without insurance. Yet other schools find the cost to issue bonds or
the size of the debt incurred makes using bonds to finance a project
impractical. Finally, some schools find alternative sources of
financing available. For HBCUs, for example, the Department of
Education's recently implemented HBCU Capital Financing program is
such an alternative.
CONNIE LEE AND DEPARTMENT OF
EDUCATION COMMENTS AND OUR
EVALUATION
------------------------------------------------------------ Letter :9
Connie Lee and the Department of Education commented on a draft of
this report. Connie Lee provided us with information to update and
clarify the report, and we incorporated its comments as appropriate.
Education did not disagree with our facts. Instead, it chose to
state its support for privatizing Connie Lee. It also highlighted
programs it administers that provide HBCUs funds for constructing and
renovating academic facilities. These programs are noted in our
report. (See app. IV.)
---------------------------------------------------------- Letter :9.1
We will send copies of this report to the Chairmen and Ranking
Minority Members of the Senate Committee on Governmental Affairs, the
Senate Committee on Labor and Human Resources, the House Committee on
Economic and Educational Opportunities, and the House Committee on
Government Reform and Oversight; the Secretary of Education; the
President of Connie Lee; and other interested parties. We will make
copies available to others on request.
If you or your staff have any questions about this report, please
call me or Joseph J. Eglin, Jr., Assistant Director, at (202)
512-7014. Major contributors to this report include John T. Carney,
Sheila R. Nicholson, and Laurel H. Rabin.
Sincerely yours,
Cornelia M. Blanchette
Associate Director, Education and
Employment Issues
HISTORICALLY BLACK COLLEGES AND
UNIVERSITIES
=========================================================== Appendix I
HBCU State Institution type Enrollment 1993
----------------------------- ------------------ ------------------ ------------------
Alabama A&M University AL 4-yr., public 5,593
Alabama State University AL 4-yr., public 5,608
Bishop State Community AL 2-yr., public 4,650
College
Concordia College AL 2-yr., private 387
Fredd State Technical College AL 2-yr., public 241
J.F. Drake State Technical AL 2-yr., public 825
College
Lawson State Community AL 2-yr., public 2,307
College
Miles College AL 4-yr., private 868
Oakwood College AL 4-yr., private 1,451
Selma University AL 4-yr., private 360
Stillman College AL 4-yr., private 953
Talladega College AL 4-yr., private 1,027
Trenholm State Technical AL 2-yr., public 945
College
Tuskegee University AL 4-yr., private 3,371
Arkansas Baptist College AR 4-yr., private 315
Philander Smith College AR 4-yr., private 915
Shorter College AR 2-yr., private 209
Univ. of Arkansas at Pine AR 4-yr., public 4,075
Bluff
Howard University DC 4-yr., private 10,538
Univ. of the District of DC 4-yr., public 10,608
Columbia
Delaware State University DE 4-yr., public 3,301
Bethune-Cookman College FL 4-yr., private 2,210
Edward Waters College FL 4-yr., private 786
Florida A&M University FL 4-yr., public 9,876
Florida Memorial College FL 4-yr., private 1,579
Albany State College GA 4-yr., public 3,257
Clark Atlanta University GA 4-yr., private 5,128
Fort Valley State College GA 4-yr., public 2,743
Interdenominational GA 4-yr., private 374
Theological Center
Morehouse College GA 4-yr., private 3,005
Morehouse School of Medicine GA 4-yr., private 161
Morris Brown College GA 4-yr., private 2,126
Paine College GA 4-yr., private 723
Savannah State College GA 4-yr., public 3,197
Spelman College GA 4-yr., private 2,065
Kentucky State University KY 4-yr., public 2,485
Dillard University LA 4-yr., private 1,585
Grambling State University LA 4-yr., public 7,833
Southern University and A&M LA 4-yr., public 9,502
College at Baton Rouge
Southern University at New LA 4-yr., public 4,277
Orleans
Southern University at LA 2-yr., public 1,083
Shreveport-Bossier City
Xavier University of LA 4-yr., private 3,391
Louisiana
Bowie State University MD 4-yr., public 4,946
Coppin State College MD 4-yr., public 3,265
Morgan State University MD 4-yr., public 5,729
University of Maryland MD 4-yr., public 2,637
Eastern Shore
Lewis College of Business MI 2-yr., private 262
Harris-Stowe State College MO 4-yr., public 1,898
Lincoln University MO 4-yr., public 3,623
Alcorn State University MS 4-yr., public 2,712
Coahoma Community College MS 2-yr., public 964
Jackson State University MS 4-yr., public 6,346
Mary Holmes College MS 2-yr., private 403
Mississippi Valley State MS 4-yr., public 2,330
University
Rust College MS 4-yr., private 1,180
Tougaloo College MS 4-yr., private 1,153
Barber-Scotia College NC 4-yr., private 732
Bennett College NC 4-yr., private 664
Elizabeth City State NC 4-yr., public 2,130
University
Fayetteville State University NC 4-yr., public 4,032
Johnson C. Smith University NC 4-yr., private 1,391
Livingstone College NC 4-yr., private 704
North Carolina A&T State NC 4-yr., public 8,013
University
North Carolina Central NC 4-yr., public 5,645
University
Saint Augustine's College NC 4-yr., private 1,745
Shaw University NC 4-yr., private 2,504
Winston-Salem State NC 4-yr., public 2,909
University
Central State University OH 4-yr., public 3,068
Wilberforce University OH 4-yr., private 984
Langston University OK 4-yr., public 3,439
Cheyney State University of PA 4-yr., public 1,519
Pennsylvania
Lincoln University PA 4-yr., public 1,445
Allen University SC 4-yr., private 290
Benedict College SC 4-yr., private 1,266
Claflin College SC 4-yr., private 972
Denmark Technical College SC 2-yr., public 780
Morris College SC 4-yr., private 938
South Carolina State SC 4-yr., public 4,779
University
Voorhees College SC 4-yr., private 724
Fisk University TN 4-yr., private 856
Knoxville College TN 4-yr., private 846
Lane College TN 4-yr., private 649
LeMoyne-Owen College TN 4-yr., private 1,321
Meharry Medical College TN 4-yr., private 697
Tennessee State University TN 4-yr., public 7,851
Huston-Tillotson College TX 4-yr., private 539
Jarvis Christian College TX 4-yr., private 497
Paul Quinn College TX 4-yr., private 670
Prairie View A&M University TX 4-yr., public 5,848
Saint Phillip's College TX 2-yr., public 6,732
Southwestern Christian TX 4-yr., private 182
College
Texas College TX 4-yr., private 452
Texas Southern University TX 4-yr., public 10,641
Wiley College TX 4-yr., private 541
Hampton University VA 4-yr., private 5,759
Norfolk State University VA 4-yr., public 8,652
Saint Paul's College VA 4-yr., private 672
Virginia State University VA 4-yr., public 3,996
Virginia Union University VA 4-yr., private 1,539
University of the Virgin VI 4-yr., public 1,867
Islands, St. Thomas Campus
Bluefield State College WV 4-yr., public 2,601
West Virginia State WV 4-yr., public 4,756
University
-----------------------------------------------------------------------------------------
Source: Department of Education data.
THE COLLEGE CONSTRUCTION LOAN
INSURANCE ASSOCIATION'S FINANCIAL
RECORD AND PROFITABILITY
========================================================== Appendix II
Connie Lee's financial record is sound, according to Standard and
Poor's, which has rated Connie Lee's claims-paying ability "AAA" each
year since 1991. In reaffirming Connie Lee's rating in May 1995,
Standard and Poor's said Connie Lee's AAA rating is based on Connie
Lee's very strong ratio of capital resources to insurance in force,
stable financial performance, pragmatic strategic and business
planning, and proven underwriting practices.
In Standard and Poor's May 1995 ranking of the 10 major municipal
bond insurers, however, it most often ranked Connie Lee seventh or
below in 16 performance categories assessed. But Standard and Poor's
noted that Connie Lee's rankings, compared with the other companies,
reflect that it is (1) a new insurer and, therefore, suffers from the
disproportionately high expense base of a start-up company; (2) a
small company; and (3) an insurer restricted to the higher-education
sector of the bond market.
During 1992, the first full year that Connie Lee insured bonds, and
continuing into 1993, falling interest rates sparked an increase in
bond refinancing that caused the volume of municipal bond insurance
and profits to surge throughout the bond insurance industry.
However, as interest rates increased in 1994, the overall municipal
bond and associated insurance volume dropped, as bond refinancing
significantly decreased, causing profits to decline industrywide.
Connie Lee's net premiums written declined 36 percent in 1994, after
having increased 148 percent in 1992 and decreased 22 percent in
1993. But net premiums written fell 29 percent for municipal bond
insurers as a whole in 1994, after having increased 25 percent in
1993.
Despite this, Connie Lee's key financial indicators have shown
positive trends. As reflected in Connie Lee's audited financial
statements, as of December 31, 1994, Connie Lee's total insurance in
force was $6.6 billion, an increase of 25 percent since December 31,
1992. For the year ended December 31, 1994, Connie Lee's total
revenue was $19.7 million, an increase of 8 percent since the end of
1993. Total revenue had shown an increase of 18 percent during 1993.
Net income for 1994 was $8 million, an increase of only 9 percent
over 1993, although the increase from 1992 to 1993 was 27 percent.
Connie Lee's total assets rose 3 percent between 1993 and 1994,
totaling $225 million on December 31, 1994. Total assets had shown
an increase of 13 percent during 1993.
In 1994, Connie Lee reported its return on equity as 5.6 percent and
its return on assets as 3.6 percent. Both indicators rose slightly
in 1994, but both are below estimates of the industry averages, as
reported by industry analysts, which were 13.7 percent for return on
equity and 5.3 percent for return on assets.
At the end of 1994, Connie Lee held $1 in capital for every $57 of
exposure to loss, that is, every $57 it was obligated to pay in case
of defaults, whereas the average for the industry as a whole was $1
of capital for every $134 of exposure to loss. Since its inception,
Connie Lee has not incurred any losses from bond defaults. However,
in 1994, Connie Lee set up a loss reserve of $1.5 million to cover
potential losses due to the default of a hospital it reinsured.
According to Standard and Poor's and other industry analysts, the
amount of capital held by bond insurers is so far in excess of
minimum levels required to maintain a AAA rating that it represents a
problem for the industry--too much idle capital. Because of the
slowdown in the bond market and associated bond insurance business,
Standard and Poor's is urging municipal bond insurers to put
unutilized capital to use by opening new lines of business instead of
lowering premiums or insuring riskier projects. Among the new lines
of business that Standard and Poor's suggests are investment
management services and international insurance. But Connie Lee's
authorizing legislation restricts it from expanding into new lines of
business.
SCOPE AND METHODOLOGY
========================================================= Appendix III
To develop information for this report, we reviewed federal and state
laws applicable to the authorization and establishment of Connie Lee,
and Connie Lee's legislative history. We also reviewed literature on
Connie Lee and the bond insurance industry.
We interviewed officials at Connie Lee to determine its policies and
practices for obtaining and approving applications for bond insurance
and its suggestions that would enable it to better serve more
schools. We also collected data on the colleges, universities, and
teaching hospitals that were either approved or rejected--from
October 29, 1991, through June 30, 1995--by Connie Lee for bond
insurance. We analyzed the data on the schools Connie Lee approved
for insurance. In addition, we obtained information and collected
data on Connie Lee's financial record and profitability through
December 1994, as reported in Connie Lee's audited financial
statements. We did not assess Connie Lee's financial condition, but
instead relied on Standard and Poor's credit analysis. Nor did we
independently verify the information provided by Connie Lee or
others.
We interviewed officials in a judgmentally selected sample at HBCUs
and other schools that had applied to Connie Lee for bond insurance.
We included schools that had obtained insurance from Connie Lee and
those that had not. We also interviewed representatives of the bond
insurance industry, Standard and Poor's, and the Department of
Education.
We did not assess the extent of needed construction and renovation
among colleges, universities, and teaching hospitals. We also did
not determine the number of schools for which Connie Lee might be an
appropriate vehicle for helping to finance facilities' construction
and renovation.
(See figure in printed edition.)Appendix IV
COMMENTS FROM THE DEPARTMENT OF
EDUCATION
========================================================= Appendix III
(See figure in printed edition.)
*** End of document. ***