Administration

In Purdue’s New Vision, How ‘Public’ Will Kaplan U. Be?

May 05, 2017

Joe Robbins, Getty Images
The Engineering Fountain (above) is a landmark on Purdue's West Lafayette campus. Mitch Daniels, the university's president, says he expects the Kaplan deal will produce a "very substantial revenue stream."

"Welcome to the World’s Next Public University," declares an information page on the website of Purdue University, signed by its president, Mitch Daniels. The page describes Purdue’s plans, inspired by its land-grant mission, for the new institution it expects to operate after buying the 32,000-student, for-profit Kaplan University from Graham Holdings. But as details about the deal emerge, plenty of questions remain — about just how "public" this new institution will really be, among other matters.

Here’s some of what we know so far:

Will the new institution be public?

That depends on your definition of "public." The university is being set up as a separate nonprofit benefit corporation, to be run by a six-member board. Five people on that board will be members of the Purdue Board of Trustees; one will be an independent member of the Kaplan University Board of Trustees. The university won’t receive state support, but Indiana residents will be eligible for an as-yet-undetermined in-state discount. And thanks to a provision that lawmakers quietly slipped into the state budget at Purdue’s request, the new institution will be exempt from the state’s public-records laws and several other public-accountability measures. Kaplan also retains some strong controls over the budget of the new university.

Purdue has said it expects that board meetings of the new university will be held in conjunction with its own trustee meetings, and that those proceedings will be open to the public, as Purdue’s trustee committee meetings are. Official materials that are prepared for those meetings and shared with the Purdue trustees will be available to the public. Purdue said any records relating to the new institution that are in Purdue’s hands will be subject to the state’s open-records laws.

Still, in some ways, the new institution will be even less public than a for-profit college owned by a publicly traded company, which is required to file regular documentation about its finances to the U.S. Securities and Exchange Commission. Although it is a nonprofit, the new university is not expected to seek status as a charity and so would not file a public Form 990 federal tax return, as most nonprofit colleges are required to do.

What about the employees of the new institution?

They won’t be state employees. Of the 3,000 or so Kaplan employees being transferred to the new university, 2,160 are faculty members, according to Kaplan. All but about 360 of them are part-time employees. According to Purdue, 1,034 of the faculty members have Ph.D.s. Kaplan has no tenure system and no apparent plans to institute one. It remains to be seen whether faculty members from the new institution will become part of the Purdue University Faculty Senate, as are professors from Purdue’s Fort Wayne and Northwest regional campuses, or continue under their own faculty senate.

Why all the secrecy around the deal, which only became public last week once all the terms were settled?

Purdue officials said they worked secretly for five and a half months to negotiate and vet the deal because Graham Holdings is covered by SEC laws that prohibit selective disclosure of information material to its finances. Those deans, trustees, and others whom Purdue did involve agreed not to disclose details. Members of the Purdue Faculty Senate have said some of their representatives should have been included in that group. On Thursday the senate voted to ask university leaders "to rescind any decisions, to the degree possible, made without faculty input."

In some sense, the secrecy was a choice. Had Graham Holdings wanted to, it could have disclosed that it was in negotiations with Purdue, like another for-profit college company, Grand Canyon University, which publicly disclosed its intentions to convert to nonprofit status a couple of years ago. Little about Grand Canyon’s subsequent negotiations became public between the time of the disclosure and release of its full plan. (Eventually its accreditor rejected the plan.) A Graham Holdings spokeswoman said on Friday that the company has a longstanding policy of not disclosing business opportunities until they are materially binding or otherwise already public. Until the board of trustees signed the agreements, she said, "disclosure of ‘discussions’ with uncertain outcomes would have been inappropriate."

How does the financial payment work?

Ignore that $1 purchase price. That’s standard practice in transactions where the real value is based on other factors. In this case, the key is the revenue-sharing agreement between Purdue and the rest of Kaplan, which remains a subsidiary of Graham Holdings. During the first five years of the 30-year deal, the priority of payments from revenues generated will flow like this: First, the new institution is repaid for its direct operating costs; then the new institution receives a guaranteed payment from Kaplan of $10 million; then Kaplan receives a payment covering its direct operating costs for the marketing, recruiting, technology, and others services it has provided; then Kaplan receives a payment equal to 12.5 percent of total revenue. Any money left over after that goes to the new institution.

After five years, the $10-million guarantee goes away and a new payment priority kicks in. Under that deal: First the new institution is repaid its direct costs; then Kaplan gets repaid its direct costs for services; then the new institution receives 10 percent of profits; then Kaplan receives 12.5 percent of total revenues. Any money left over then goes to the new institution.

The Purdue-Kaplan arrangement is hard to compare with the deals many universities have struck with online-program managers to run their distance-education programs. That’s because in this one, Kaplan is slated to receive payment for its direct costs earlier in the list of priorities. Under most OPM deals, the companies simply receive a majority of the revenues, which makes up their direct costs and their profits.

Will this be profitable for Purdue?

Kaplan does not publicly report profit margins for Kaplan University, so it’s hard to judge. According to SEC filings, enrollments at the university have dropped by more than half since 2010 ­— from 70,000 to 32,000. But even at that smaller size, Mr. Daniels said, Kaplan University has been profitable. He expects the deal will produce a "very substantial revenue stream" for Purdue. Based on what Kaplan has reported to the SEC and the U.S. Department of Education, it appears Kaplan University generated $567 million in revenues in 2016; 77 percent of that — or about $437 million — came from federal Pell Grants or federal student loans. (A university spokeswoman said on Friday that Kaplan University’s 2016 revenues were $505 million.)

If Purdue is counting on revenues from new programs, however, it could be stymied for a while. In December 2015, the Department of Education put Kaplan’s certification to participate in federal student-aid programs on "provisional" status until at least the end of September 2018, as a result of its review of the university’s management of student aid. During the period of provisional certification, Kaplan must obtain prior department approval "to open a new location, add an educational program, acquire another school, or make any other significant change," according to a Graham Holdings filing.

Is Purdue assuming any potential legal liabilities from Kaplan University?

Mr. Daniels said the deal indemnifies Purdue from any potential liabilities (and vice versa). He also said Kaplan has not been sued by a student in 10 years — but he did not mention that the university, like many for-profit colleges, requires all students to sign mandatory-arbitration agreements that prevent them from pursuing claims via lawsuits. A Kaplan spokeswoman said the university has no current arbitration actions and has had "extremely few over the years." She said the university offers "multiple other avenues" for students to address concerns. The new board, she added, will determine the policies and practices of the new institution.

Goldie Blumenstyk writes about the intersection of business and higher education. Check out www.goldieblumenstyk.com for information on her new book about the higher-education crisis; follow her on Twitter @GoldieStandard; or email her at goldie@chronicle.com.