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DiNapoli: State Education Department Missed Red Flags of Proprietary Schools' Financial Trouble

Non-Degree Schools Offering Business, Computer or ESL Training Need Tougher Oversight to Prevent Sudden Closures That Can Leave Students High and Dry

January 22, 2021

The State Education Department’s (SED) weak enforcement of licensing requirements for non-degree proprietary schools let many continue to operate and collect tuition even though they faced financial uncertainty that put their students’ education — and tuition investments  —  at risk, an audit released today by State Comptroller DiNapoli found.

“Lax oversight allowed proprietary schools that were on dangerously thin ice to continue taking money from students,” DiNapoli said. “This could end up costing both students and taxpayers. Like other agencies, the State Education Department’s resources are stretched, but it must ensure these schools are worthy of a license and are not going to rip off vulnerable New Yorkers. I welcome SED’s willingness to implement our audit recommendations to improve necessary oversight to protect students.”

SED licenses and oversees non-degree-granting proprietary schools that provide training in a number of areas, such as business, computer/information technology and English as a second language. As of Jan. 15, 2020, there were 391 licensed proprietary schools — 357 private career schools (PCS) and 34 English as a Second Language (ESL) schools — operating in New York.

SED can refund students tuition, in some cases of school closures, through its Tuition Reimbursement Account (TRA), which is funded through assessments on schools. Without tougher oversight to identify which schools are at risk of closing, growing refund claims could deplete the TRA.

One of SED’s oversight responsibilities is to make sure the schools have financial resources to remain in operation and that students’ tuition investments are secure. Schools must submit audited financial statements, bank statements and 12-month operating statements to SED as evidence of their financial stability. In addition to reviewing these documents, SED conducts inspections at licensed schools to review records they are required to maintain on site.

When SED sees a school is having financial trouble it has the power to take action and address the risk by putting the school on probation, limiting enrollment, requiring the school to secure a performance bond, and increasing its own monitoring and inspections.

Despite SED’s responsibility and authority to address schools in dire fiscal straits, DiNapoli’s auditors found that the agency conducted little or no analysis of schools’ fiscal records prior to their licensing them. For example, in their examination of records from Jan. 1, 2016, through July 21, 2020, auditors found:

  • 47 of the 103 (46 percent) initial license applications SED approved had at least one deficiency that should have prohibited approval, including missing bank statements, balance sheets that didn’t match up, and failure to show required minimum $5,000 in available funds.

Once SED licensed schools, it did not adequately monitor them and missed warning signs of financial troubles that could lead to closures. Auditors reviewed the required financial statements filed by 381 schools for fiscal year 2018 and found 70 faced some level of fiscal distress. SED took no action to address their evident financial difficulties and missed a number of serious red flags, including:

  • Ten schools' financial statements contained warnings from the CPAs who prepared them that the schools may not be able to pay their bills within the next 12 months. One of them, an ESL school, closed less than a year later. SED estimated $400,000 would be paid from its TRA to 700 of the 1,800 students seeking refunds.
  • For nine other schools’ financial statements, the CPAs were unable to give the schools an unqualified or “clean” opinion on their financial statements. SED did not follow up to see if these warnings signaled bigger problems. One of the nine has since closed.
  • One school’s submission stated that its accrediting agency was no longer recognized by the U.S. Department of Education and that it was losing 95 percent of its income as a result.

Schools’ initial licenses last two years, while renewals are good for four years. DiNapoli’s audit found dozens of instances in which SED renewed licenses for some schools without approving their financial statements or renewed schools that did not submit financial statements as required by state law.

Another criteria SED uses to decide if a non-degree school is worthy of a license are Occupational Educational Data Surveys (OEDS), which collect data on schools’ enrollment, drop-outs, completion of their program, and job placement. This data is vital, not just for SED to measure a school’s quality but for students deciding where to enroll. The audit found SED licensed dozens of schools that did not submit their data or submitted OEDS that contained math errors. The agency also did not follow up with numerous schools that showed warning signs of declining enrollment and graduations.

DiNapoli recommended SED:

  • Develop policies and procedures to ensure that schools’ financial information statements meet requirements and that their financial viability is determined using more objective measures in accordance with the Education Law and Regulations;
  • Make sure financial statement and OEDS are submitted and approved before licensing schools; and
  • Use the authority provided by the Law, such as placing a school on probation or requiring the school to secure a performance bond, when schools in financial jeopardy risk are identified.

SED officials agreed with the report’s recommendations and indicated actions they will take to implement them. The department’s response is included in the audit.

Audit
State Education Department: Licensing and Monitoring of Proprietary Schools State Education Department


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