Meeting of the Board of Regents | December 2008

Monday, December 1, 2008 - 9:55am

sed seal

THE STATE EDUCATION DEPARTMENT / THE UNIVERSITY OF THE STATE OF NEW YORK / ALBANY, NY 12234

TO:
FROM:	Frank Muñoz
SUBJECT:	St. Paul’s School of Nursing: Provisional Authority to Award the Associate in Science (A.S.) Degree
DATE:	November 26, 2008
STRATEGIC GOAL:	Goals 2 and 4
AUTHORIZATION(S):

Summary

Issue for Decision

Should the Board of Regents confer upon St. Paul’s School of Nursing provisional authority to award Associate in Science (A.S.) degrees for a period of up to five years?

Reason for Consideration

              Required by State Regulation.

Proposed Handling

This question will come before the Higher Education Committee at its December 2008 meeting, where it will be voted on and action taken. It then will come before the full Board at its December 2008 meeting for final action.

Procedural History

St. Vincent Catholic Medical Centers (SVCMC) of New York is authorized to operate two degree-granting schools of nursing, which are classified in the independent sector of higher education. In July 2005, SVCMC filed for Chapter 11 bankruptcy protection. As part of its restructuring, SVCMC proposes to sell its two nursing schools located in Queens and Staten Island to Education Affiliates (EA), Inc., a school company and Delaware corporation, which is owned by Education Affiliates, LLC, a Delaware corporation and holding company that has no operations and holds no assets or liabilities other than its interest in EA. Education Affiliates, LLC was started as a platform company in 2004 by New York private equity firm JLL Partners, Inc. to acquire, own, and operate career-oriented educational institutions. Consistent with the EA practice of owning and operating each of its schools through wholly-owned subsidiaries, the company recently received a Certificate of Incorporation for a new New York business corporation named St. Paul’s School of Nursing. The EA ownership structure is presented in Attachment 1.

The transfer of ownership is to occur in two phases, according to an agreement dated December 21, 2006. The first phase occurred on December 21, 2006 when the option agreement for Education Affiliates to purchase certain assets of the SVCMC Schools of Nursing was entered into. These assets include the furniture, instructional and laboratory resources, intellectual property and all goodwill and other intangible assets associated with the schools. Contemporaneously with the parties’ execution of the asset purchase agreement, the parties entered into an administrative services agreement, whereby the SVCMC Schools of Nursing retained EA to assist in the administration of its nursing schools, with the SVCMC Schools of Nursing retaining responsibility for the day-to-day operations of its schools. The asset purchase and administrative services agreements were reviewed and approved by Department staff. The second phase of the agreement will take place after the Board of Regents grants St. Paul’s School of Nursing, Inc., a New York corporation, provisional authority to confer degrees.

On June 16, 2008, Education Affiliates submitted a proposal for approval of degree-conferring authority upon a transfer of ownership of the SVCMC Schools of Nursing. Section 3.58 of the Rules of the Board of Regents provides that the Regents “may grant a for-profit institution provisional authority to confer degrees for a period of up to five years, which may be extended by the Regents. At least 12 months prior to end of the provisional authority period, such institution holding provisional authority to confer degrees shall apply for permanent authority to confer degrees, pursuant to the procedures of subdivision (d) of this section, at which time the Board of Regents shall determine whether to grant the institution with permanent authority to confer degrees, or extend the provisional authority to confer degrees for an additional period of up to five years, or deny continuing degree-conferring authority past the term of the previously granted provisional authority.” Authorization of degree-conferring authority is necessary in order to ensure that the two nursing schools continue operations and students are able to continue their current programs of study and obtain the degree required for licensure.

Background Information

ST. VINCENT CATHOLIC MEDICAL CENTERS SCHOOLS OF NURSING

The SVCMC Schools of Nursing evolved from two separate ownership structures. The nursing school located in Queens was first registered by the Education Department in 1969 as a three-year diploma program under the name of the Catholic Medical Center of Brooklyn and Queens (CMCBQ). In 1983, the Board of Regents granted CMCBQ authority to award the Associate in Applied Science (A.A.S.) degree. The nursing school located in Staten Island was founded in 1904 as a three-year diploma program named the St. Vincent Hospital School of Nursing. It remained in operation until the early 1940s when lack of financial support resulted in its closure. The school reopened in 1961 as a two-year diploma program under its original name, which, in 1967, was changed to St. Vincent Medical Center of Richmond School of Nursing. In 1996, the Board of Regents granted the School authority to award the Associate in Science (A.S.) degree. Two years later a merger of Bayley Seton Hospital and St. Vincent Medical Center of Richmond led to a new name for the school, Sisters of Charity Medical Center School of Nursing. In 2000, a merger of the Sisters of Charity Health Care Systems and St. Vincent Catholic Medical Centers of Brooklyn and Queens created a new corporate entity called St. Vincent Catholic Medical Centers of New York. The nursing schools in Queens and Staten Island came under one administrative structure and became formally known as St. Vincent Catholic Medical Centers of New York, Brooklyn and Queens region and Staten Island region, respectively. At the time of the merger, the Board of Regents changed the degree awarded by the nursing school in Queens from the A.A.S. to the A.S. to make it consistent with the degree awarded at the program on Staten Island.

Between January 2005 and November 2008, graduates of the SVCMC Schools of Nursing had first-time licensure examination pass rates of 82.8 percent for 203 candidates from the Queens school and 83.3 percent for 168 candidates from the Staten Island school. These pass rates approximate the New York State average for this period. Although the SVCMC Schools of Nursing offer educational programs that prepare graduates to pass the licensure examination at an acceptable rate on the first attempt, the sponsoring institution’s filing for Chapter 11 bankruptcy protection in July 2005 forced a reexamination of its mission priorities. In 2006, SVCMC and EA entered into discussions that resulted in execution of option and administrative services agreements supportive of continued operation of the nursing schools. These agreements would allow Education Affiliates to acquire ownership of the St. Vincent Catholic Medical Centers Schools of Nursing and provide additional operating capital and administrative assistance needed to ensure the viability of the nursing schools.

On May 1, 2008, the Department conducted site visits to the SVCMC Schools of Nursing located in Queens and Staten Island to evaluate the working relationship between the Schools of Nursing and EA that was established under the terms of the administrative services agreement, as well as the programs’ adherence to the Commissioner’s Regulations. Each program was found to be in compliance with the required regulations. Additionally, all parties were in agreement that the relationship between the SVCMC Schools of Nursing and EA represented a positive arrangement. Faculty noted that EA representatives sought their input regarding what is needed in future space and that EA has been instrumental in providing computers and a Scantron machine for item analysis of tests. Faculty further noted that there has not been any pressure applied to increase enrollment by admitting individuals who would be considered marginal qualifiers. Other assets that faculty attributed to the presence of EA are the availability of a nurse consultant and access to online professional development materials. Students spoke positively about their programs, noting that the schools’ association with EA has resulted in improved computer and library resources, as well as upgrades in the clinical skills laboratory equipment.

EDUCATION AFFILIATES

The proposed purchaser of SVCMC Schools of Nursing is Education Affiliates, Inc., a Delaware corporation and school company, which is owned by Education Affiliates, LLC, a Delaware limited liability company that is a holding company with no operations and no assets or liabilities other than its interest in Education Affiliates, Inc. The SVCMC Schools of Nursing would be replaced by St. Paul’s School of Nursing, a New York corporation and wholly-owned subsidiary of EA.

Education Affiliates, Inc. is headquartered in Baltimore, Maryland and has as its sole purpose the operation of post-secondary, career-oriented schools. At the end of 2007, the company owned 20 post-secondary institutions, with 35 campuses located in 9 states. Total enrollment as of August 2008 was 10,408 students, with 1,038 of this total engaged in online instruction and the remainder enrolled in on-site classes. Practical nursing (diploma) and registered nursing (associate degree) programs are offered at four schools, four schools offer only practical nursing (diploma) programs, and one school offers only registered nursing programs (associate and baccalaureate degrees). At the end of August 2008, enrollment in the nursing programs at the 9 EA schools ranged from a low of 82 students in a practical nursing program at one campus in Ohio to a high of 558 practical nursing and registered nursing students at another campus located in Ohio. The total nursing enrollment among the 9 campuses was 2,148 students.

The associate degree nursing program at RETS College in Ohio is accredited by the National League for Nursing Accrediting Commission. All of the EA nursing education programs are approved by their respective State Boards of Nursing. Other accreditations held by EA schools include the Accrediting Commission of Career Schools and Colleges of Technology, the Accrediting Council for Independent Colleges and Schools, and the Accrediting Bureau of Health Education Schools.

EA began acquiring post-secondary, for-profit, career-oriented schools in 2004 with acquisition of 100 percent of the outstanding stock of the Marco Group and its subsidiaries. The Marco Group operated 10 private, for-profit schools devoted to career program training in the technology, medical and commercial driving fields. Schools are located in Florida, Maryland, Ohio, and Pennsylvania. In 2005, EA acquired 100 percent of the outstanding stock of EH, Inc., Tri-State Business Institute, Inc. (TSBI) and RETS Tech Center, Inc., now known as RETS College. EH, Inc. is a private, for-profit school with campuses in Georgia, Maryland and New Jersey that offers career programs in the dental and medical fields. TSBI, Inc., located in Erie, PA, is a private, for-profit career school offering programs in business administration, computer science, practical nursing, medical assisting, medical transcription/coding, secretarial sciences, cosmetology, and welding. RETS College is a private, for-profit career school with campuses in Ohio that offer programs in the computer, electronics, business, nursing (practical and registered), and allied health fields. In 2007, EA acquired 100 percent of the outstanding stock of Virginia Career Institute (VCI), Inc., Capps College, Inc., the Denver School of Nursing, and Career Training Institute, Orlando, Inc. VCI operates two campuses in Virginia with programs in allied health, practical nursing, security and court reporting. Capps College has four campuses in Alabama and one in Florida that offer programs in allied health and massage therapy. The Denver School of Nursing in Colorado offers associate degree and baccalaureate degree nursing programs. The Career Training Institute, with six campuses in Florida, offers programs in allied health, cosmetology, criminal justice, health information technology, and nursing.

Duncan Anderson, President and Chief Executive Officer of Education Affiliates, indicated that EA has never sold an acquired school since its establishment in 2004.

REGULATORY PROVISIONS

The purchase of a not-for-profit institution by a for-profit institution does not include a transfer of degree-conferring powers. Pursuant to §224 of the Education Law, the consent of the Board of Regents is required before a for-profit institution can award degrees. A for-profit institution that has no degree-conferring authority must first obtain provisional authority to confer degrees for a period of up to five years. Section 3.58 of the Regents Rules includes the standards, requirements, and procedures the Department shall use in determining whether to recommend to the Board that it grant such authority to a new proprietary college.

A report of the Department’s findings, below, provides information about the new owner and its ability to meet the requirements of §3.58.

Standard (a) in §3.58 (c)(2)(i)

: Evidence confirming the owner’s capacity to operate the institution in compliance with the Education Law, program registration standards set forth in Part 52 of this Title, other Rules of the Board of Regents and Regulations of the Commissioner of Education, other State statutes and regulations, and Federal statutes and regulations, relevant to the operation of degree-granting institutions.

Education Affiliates, Inc. was established in 2004 exclusively to acquire, own and operate career-oriented schools. EA owns 20 post-secondary schools with 35 campuses located in 9 states. The EA team consists of a group of administrators, educators and investors.

Education Affiliates, Inc., a Delaware school company, makes acquisitions through Education Affiliates, LLC, a Delaware limited liability company that is a holding company with no operations and no assets or liabilities other than its interest in Education Affiliates, Inc. The officers of Education Affiliates, Inc. are Duncan Anderson (president) and Stephen Budosh (vice president, secretary and treasurer). Mr. Anderson serves on the Board of Directors of Education Affiliates, Inc. along with Alexander Castaldi, Paul Levy, Frank Rodriguez and Ramsey Frank, all of whom are managing directors of JLL Partners, Inc., Education Affiliates, LLC’s financial sponsor and majority shareholder.

Managing Director Alexander Castaldi, prior to joining JLL in 2003, was the Chief Financial & Administration Officer of Remington Products Company. Before that he served as the Chief Financial Officer for Uniroyal Chemical Company and Kendall International, Inc., and was Vice President and Controller for Duracell, Inc. He holds a bachelor’s degree from Central Connecticut State University and is a Certified Public Accountant.

Managing Director Paul Levy founded JLL in 1988. His prior experience includes Managing Director of Drexel Burnham Lambert, Restructurings & Exchange Offers; Chief Executive Officer, Yves Saint Laurent, Inc., New York, Vice President of Administration & General Counsel, Quality Care, Inc.; and attorney for Stroock & Stroock & Lavan, LLP. He holds a bachelor’s degree from Lehigh University, a J.D. from the University of Pennsylvania Law School and a Certificate from the Institute of Political Science in Paris, France.

Managing Director Frank Rodriguez joined JLL in 1995. He previously worked as an analyst for Donaldson, Lufkin & Jenrette Securities Corporation in Merchant Banking. Mr. Rodriguez holds a bachelor’s degree from the Wharton School at the University of Pennsylvania.

Managing Director Ramsey Frank joined JLL in 1999. He previously served as a managing director at Donaldson, Lufkin & Jenrette Securities Corporation in Restructuring & Leveraged Finance, was a managing director at Smith Barney & Co. and a vice president at Drexel Burnham Lambert. Mr. Frank holds a bachelor’s degree from Indiana University and an M.B.A. from the University of Chicago.

Education Affiliates, Inc. President and Chief Executive Officer Duncan Anderson has been with the company since its inception. From 1997 to 2003, he was the President and Chief Executive Officer of Global Knowledge, Inc. Mr. Anderson holds a bachelor’s degree in economics from the University of North Carolina, Chapel Hill and an M.B.A. from Northeastern University.

Education Affiliates, Inc. Vice President Stephen Budosh joined EA in 2004 and has served as the Chief Financial Officer since the company’s inception. Prior to joining EA, he was a corporate vice president for Global Knowledge, Inc. for seven years, and before that was the CFO of MWI, Inc. Mr. Budosh holds an M.B.A. from Loyola College in Baltimore.

Mr. Anderson indicated that Education Affiliates intends to maintain ownership of St. Paul’s School of Nursing on a long-term basis. In a January 21, 2008 communication to the Associate Commissioner for the Office of Higher Education, President Anderson noted that no school owned by EA has ever been sold and that 7 new schools have been opened.

Standard (b) in §3.58(c)(2)(i)

: Evidence confirming that the institution has sufficient financial resources to ensure satisfactory conduct of its degree programs and achievement of its stated educational goals.

Education Affiliates, Inc. was established for the sole purpose of acquiring and supporting post-secondary, career-oriented educational institutions, and has established a track record of stable and steady financial commitments in support of its degree and non-degree granting institutions. EA is a Delaware school company with total assets for fiscal year 2008 forecasted to be approximately $264.4 million, equity projected to be approximately $128.4 million and total cash and cash equivalents expected to be about $22.7 million. Total liabilities for the 2008 fiscal year are projected to be approximately $136 million. Total assets are expected to increase by nearly 23 percent between fiscal years 2007 and 2008, and cash and cash equivalents are projected to increase by about 32 percent between these 2 fiscal years. Furthermore, EA, under the terms of the administrative services agreement, has provided $970,334 to fund operating losses incurred by the SVCMC Schools of Nursing over the last two years.

EA participates in Title IV Federal Student Financial Assistance Programs. Institutions participating in Title IV programs may not receive more than 90 percent of tuition collections from Title IV sources. For the year ended October 31, 2007, Education Affiliates consolidated tuition cash collections from Title IV programs amounted to 74.6 percent of its tuition collections. Institutions participating in Title IV programs are also required by the U.S. Department of Education (DOE) to demonstrate financial responsibility. DOE determines an institution’s financial responsibility through the calculation of a composite score based upon certain financial ratios as defined in regulations. Institutions receiving a composite score below 1.0 are required to submit a letter of credit in order to continue participation in the Title IV programs. For the fiscal year that ended on October 31, 2007, EA had a composite score of 0.1.

President Anderson discussed the low composite score in his October 31, 2008 communication to the Department’s Director of the Division of Professional Education. In his response, he noted that the DOE calculation does not favor the typical financing vehicles used by EA to implement its recent growth strategy. President Anderson stated that “Over the last four years, EA has used a mix of equity and debt to acquire schools, which has also negatively affected EA’s composite score. And yet, EA has been very conservative with the leverage (the level of debt to its EBITDA) it has undertaken. This conservative posture has allowed it to be well within its bank covenants and grow its cash balances over time.” President Anderson projected that the EA composite score will improve from 0.0 in October 2008 to 1.5 in October 2012. EA, as a result of the DOE composite score of 0.1, issued a letter of credit in the amount of $10.5 million. This amount represents 10 percent of the Title IV funds EA schools received in 2007.

President Anderson noted that the “heavy acquisitions” phase of Education Affiliates’ business plan is concluded and that EA is not anticipating additional significant capital expenditures or the incurrence of additional debt related to acquisitions.

Standard (c) in §3.58(c)(2)(i)

: Evidence that the individuals having ownership or control of the institution have experience operating an educational institution or other business or enterprise in an effective manner which demonstrates their capacity to operate a degree-granting institution.

Education Affiliates, Inc. owns 20 post-secondary, career-oriented degree and non-degree institutions at 35 campuses located in 9 states. Four of the schools offer practical nursing and registered nursing programs, four schools offer only practical nursing programs and one school offers only a registered nursing program. The schools are in compliance with state and federal regulations and remain eligible for Title IV federal aid assistance.

The Department conducted a site visit to Tri-State Business Institute in Erie, Pennsylvania on November 17, 2008 to assess the impact of EA ownership on the institution in general and on the nursing program specifically. The site visit included discussions with faculty, staff and nursing students, review of nursing program materials and a tour of the facility. The review team determined that EA has provided considerable material support in equipping the Learning Resource Center and the clinical skills laboratory and funding 15 full-time nursing faculty positions. The current enrollment of 187 is down from 300 in 2006. The 2006 enrollment represented a large increase over the 2005 enrollment. Faculty noted that this increase was both market-driven and related to an administrative desire to reduce attrition. The 2007 licensure examination pass rate for first-time candidates was 98 percent.

Standard (d) in §3.58(c)(2)(i)

: Evidence that the individuals having ownership or control of the institution have not engaged in fraudulent or deceptive practices.

The Department’s review revealed no evidence of fraudulent or deceptive practices by Education Affiliates or any of its related wholly-owned subsidiaries.

NEW OWNER’S PLAN FOR OPERATION

Education Affiliates plans to acquire and refurbish leased space in Queens and Staten Island to house St. Paul’s School of Nursing. This will replace space currently leased by SVCMC Schools of Nursing, whose leases expire at the end of December 2009. A curriculum change approved by the Department in August 2007 that authorized the SVCMC Schools of Nursing to teach both nursing and general education courses required in the nursing curriculum will continue to be implemented by St. Paul’s School of Nursing, the recently formed New York corporation that is a wholly-owned subsidiary of EA.

The five-year budget plan projects a 2009 enrollment of 190 students at St. Paul’s Queens site and 152 students at its Staten Island site, rising to about 250 the following year at each site, and remaining at that level through 2012. EA will continue to evaluate the need for additional health-related programs such as dental assistant, dental hygiene, practical nursing, paramedic and emergency medical technician. The current program development plan identifies practical nursing as the first new program scheduled for possible introduction in early 2011. EA intends to keep most of the SVCMC Schools of Nursing current first-line operational structure in place, using the same semester model, curriculum, student policies and faculty.

While senior administration will be responsible for final policy determinations, Education Affiliates is committed to the full participation of faculty in the governance of St. Paul’s School of Nursing. Toward this end, the committee structure will remain in place and faculty will be responsible for development and revision of courses.

Recommendation

Based on a review of the documentation received and its site visits to St. Vincent Catholic Medical Centers Schools of Nursing and Tri-State Business Institute, the Department has determined that Education Affiliates satisfies the Regents criteria for provisional authority to confer degrees as St. Paul’s School of Nursing. Accordingly, it is recommended that the Board of Regents confer provisional authority upon St. Paul’s School of Nursing, to award Associate in Science (A.S.) degrees to duly qualified students successfully completing the registered programs for a period beginning upon execution of the final phase of the purchase agreement and ending on December 31, 2013, and that the Board rescind the authority granted to St. Vincent Catholic Medical Centers of New York to award degrees.

Timetable for Implementation

If the Board of Regents authorizes St. Paul’s School of Nursing to award the Associate in Science (A.S.) degree, the authorization will take place immediately upon execution of the final phase of the purchase agreement by Education Affiliates.

Attachment 1:

PROPOSED OWNERSHIP STRUCTURE OF SVCMC NURSING SCHOOLS

Education Affiliates LLC a Delaware =limited liability company Holding Comcpany