Higher education “reform”: more spending, less accountability

S.298 would allow unaccountable university spending, borrowing and construction, would greatly increase state spending on higher education, and would limit future tuition increases.

Despite the unaffordability of higher education in South Carolina (student loan debt is among the nation’s highest, and tuition has increased 93 percent from 2008 to 2017), the bill does not cut tuition for students  – which backs $737 million of state general obligation debt.

Instead, the bill merely limits future increases on in-state tuition and fees – so long as the state continues the higher education spending increase.

The bill also creates unaccountable mini-governments within universities to buy, borrow, build and spend – all with little to no state oversight, paving the way for even more university debt in the future.

Enterprise divisions

The bill would allow public universities to establish quasi-government entities called “enterprise divisions.” These murky organizations would be created by resolution of a university’s board of trustees, and could purchase and sell property, issue bonds, and build facilities just as a university can. However, enterprise divisions would be largely exempted from state oversight in most of these activities.

Unaccountable buying, selling, borrowing, and eminent domain

While universities are subject to some oversight through the Commission on Higher Education (CHE), the State Fiscal Accountability Authority (SFAA), the Joint Bond Review Committee (JBRC) and/or the Department of Administration as applicable, the diffused membership of the boards makes direct accountability difficult – especially for the JBRC, which is appointed by two legislative leaders.

However, enterprise divisions would only be subject to part of this basic oversight. In fact, they could buy, sell, acquire, and exercise eminent domain independent of state approval, accountable only to the specific university’s board of trustees. Construction projects would be exempted from several layers of oversight – most notably, that of the CHE, which has pushed back on university spending projects numerous times in recent years.

Finally, only two universities would be eligible to build athletics projects through their enterprise divisions – the University of South Carolina and Clemson University.

Higher education funding

The bill would establish a higher education funding formula that ties university and college appropriations to General Fund revenues. For example, if the General Fund revenues are projected to increase, lawmakers would have to increase funding to colleges and universities by that same percentage (not to exceed 5%). If revenue were to decrease, however, lawmakers could only cut higher education funding by that same percentage – although they would not be required to.

It would also create two new funds to supplement higher education funding. The first, called the “Higher Education Opportunity Trust Fund”, would be sustained via several tax streams (including internet sales taxes and college admission taxes). Once the fund reaches $125 million, universities must freeze their tuition and mandatory fees for in-state undergraduate students the following year. This freeze would only apply for one year, and subsequent tuition hikes could be no more than 2.75%. However, if lawmakers fail to sustain the fund, the tuition cap would no longer apply and tuition making would revert back to normal.

The second fund would be called the “Higher Education Facilities Repair and Renovation Fund,” created to finance repairs, maintenance, and renovation for both the public university and technical college systems. The fund would be split 75% and 25%, respectively, and the bill would require the legislature to appropriate at least $25 million to this fund annually.

The bill stipulates, however, that lawmakers cannot make excess payments to the debt service fund unless they meet the $25 million requirement to this fund.

Scholarship tradeoffs

The bill makes notable changes to the distribution of financial aid funding, favoring needs-based scholarships at the expense of merit-based scholarships. Key changes to the Palmetto Fellows, LIFE, and HOPE scholarships would include:

1. Capping funding increases at no more than 2.75% per year in the budget
2. Raising minimum GPA requirements
3. Increasing the grade level at which students may receive stipends, and decreasing the number of years they are available

Funds freed up from these changes would be diverted to needs-based scholarships.

Funding for private colleges would also be eliminated. Currently, a portion of education revenue is given to private colleges for financial assistance based on student population. Under this bill, that money would also be transferred to fund needs-based grants and the Palmetto Fellows scholarship at public institutions.

Crackdown on student debt defaulting

The bill would require the SFAA to find a vendor to administer a “Student Loan Default Aversion and Financial Literacy Program.” This vendor would need to:

• “perform various outreach efforts contacting delinquent student borrowers through telephone calls, emails, and other such communication methods”
• Educate schools and students about “financial literacy topics” – which include student loan repayment and “the potential detrimental impacts of debt”
• Identify schools at risk of disqualification from the student loan programs due to high student default rates, and help those schools with a debt default management plan

According to the U.S. Department of Education, colleges and universities which have a student loan default rate of 30% for three years in a row lose their eligibility to participate in the federal Direct Loan Program and/or the federal Pell Grant Program. If a school has a default rate of 30% for even one year, the school is required to adopt a default prevention plan. According to the Department’s latest available figures, SC State University and the University of South Carolina’s Salkehatchie campus default rates were 33.7% and 37.1% respectively. The following schools were within five percentage points of the 30% threshold:

• Horry-Georgetown Technical College (5%)
• University of South Carolina’s Beaufort campus (9%)
• Coastal Carolina University (4%)
• Lander University (27%)
• University of South Carolina’s Upstate campus (5%)
• University of South Carolina’s Union campus (1%)
• Francis Marion University (6%)
• Denmark Technical College (25.1%)

All of these numbers are from 2015, the final year in the Department’s latest report. If the trend has continued, a number of state colleges and universities may be in danger of federal sanctions. It should be noted that student debt has increased more in South Carolina than any other state over the past ten years.

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In summary, this bill increases state spending, allows universities to exercise eminent domain power with zero accountability, and does nothing to check university spending. Enterprise divisions, in particular, would be unaccountable to citizens, operate with little transparency, and have power to make multi-million dollar investments with insufficient (and in some cases no) oversight.

This bill passed the Senate Finance Committee and is currently on the Senate floor calendar.