United States General Accounting Office

GAO 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

GAO United States

General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

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

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.

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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.)

Results in Brief 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.

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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 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

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established a college construction loan insurance corporation—

Connie Lee.

Municipal Bonds 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 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

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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

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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 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

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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.

Connie Lee Primarily

Insures the Lowest

Investment Grade

Bonds

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

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.

Page 7 GAO/HEHS-96-6 Financing College Facilities
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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

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.

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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

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.

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Federal Law Limits Connie

Lee to Insuring

Lower-Rated Bonds

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

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

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

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

Page 10 GAO/HEHS-96-6 Financing College Facilities
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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

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

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

As discussed earlier with respect to all schools, some HBCUs, especially

small schools, either do not need multimillion-dollar facilities or are

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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

6

These include the Strengthening HBCUs, Strengthening Historically Black Graduate Institutions, and

Endowment Challenge Grants programs authorized by the Higher Education Act, as amended.

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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.

Connie Lee’s

Suggestions for Better

Serving Targeted

Schools

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.

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.

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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.

Conclusions 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.

Page 14 GAO/HEHS-96-6 Financing College Facilities
B-260631 

Connie Lee and

Department of

Education Comments

and Our Evaluation

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.)

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

Page 15 GAO/HEHS-96-6 Financing College Facilities
Contents

Letter 1

Appendix I 

Historically Black

Colleges and

Universities

18

Appendix II 

The College

Construction Loan

Insurance

Association’s

Financial Record and

Profitability

21

Appendix III 

Scope and

Methodology

23

Appendix IV 

Comments From the

Department of

Education

24

Abbreviations

FFELP Federal Family Education Loan Program

HBCU Historically Black Colleges and Universities

Page 16 GAO/HEHS-96-6 Financing College Facilities
Page 17 GAO/HEHS-96-6 Financing College Facilities
Appendix I 

Historically Black Colleges and Universities

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 College AL 2-yr., public 4,650

Concordia College AL 2-yr., private 387

Fredd State Technical College AL 2-yr., public 241

J.F. Drake State Technical College AL 2-yr., public 825

Lawson State Community College AL 2-yr., public 2,307

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 College AL 2-yr., public 945

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 Bluff AR 4-yr., public 4,075

Howard University DC 4-yr., private 10,538

Univ. of the District of Columbia DC 4-yr., public 10,608

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 Theological Center GA 4-yr., private 374

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

(continued)

Page 18 GAO/HEHS-96-6 Financing College Facilities
Appendix I 

Historically Black Colleges and Universities

HBCU State Institution type Enrollment 1993

Southern University and A&M College at

Baton Rouge

LA 4-yr., public 9,502

Southern University at New Orleans LA 4-yr., public 4,277

Southern University at Shreveport-Bossier City LA 2-yr., public 1,083

Xavier University of Louisiana LA 4-yr., private 3,391

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 Eastern Shore MD 4-yr., public 2,637

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 University MS 4-yr., public 2,330

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 University NC 4-yr., public 2,130

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 University NC 4-yr., public 8,013

North Carolina Central University NC 4-yr., public 5,645

Saint Augustine’s College NC 4-yr., private 1,745

Shaw University NC 4-yr., private 2,504

Winston-Salem State University NC 4-yr., public 2,909

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 Pennsylvania PA 4-yr., public 1,519

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

(continued)

Page 19 GAO/HEHS-96-6 Financing College Facilities
Appendix I 

Historically Black Colleges and Universities

HBCU State Institution type Enrollment 1993

Morris College SC 4-yr., private 938

South Carolina State University SC 4-yr., public 4,779

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 College TX 4-yr., private 182

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 Islands, St. Thomas

Campus

VI 4-yr., public 1,867

Bluefield State College WV 4-yr., public 2,601

West Virginia State University WV 4-yr., public 4,756

Source: Department of Education data.

Page 20 GAO/HEHS-96-6 Financing College Facilities
Appendix II 

The College Construction Loan Insurance

Association’s Financial Record and

Profitability

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

Page 21 GAO/HEHS-96-6 Financing College Facilities
Appendix II 

The College Construction Loan Insurance

Association’s Financial Record and

Profitability

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.

Page 22 GAO/HEHS-96-6 Financing College Facilities
Appendix III 

Scope and Methodology

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.

Page 23 GAO/HEHS-96-6 Financing College Facilities
Appendix IV 

Comments From the Department of

Education

Page 24 GAO/HEHS-96-6 Financing College Facilities
Appendix IV 

Comments From the Department of

Education

(104782) Page 25 GAO/HEHS-96-6 Financing College Facilities
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