SENATE BILL REPORT

SB 5880

BYSenators Benitz, Saling, Bailey, Owen and Bauer

Establishing a tuition recovery fund for private vocational schools.

Senate Committee on Education

Senate Hearing Date(s):March 5, 1987

Majority Report:  That Substitute Senate Bill No. 5880 be substituted therefor, and the substitute bill do pass.

      Signed by Senators Gaspard, Chairman; Bauer, Vice Chairman; Rinehart, Vice Chairman; Bailey, Bender, Benitz, Craswell, Patterson, Saling, Smitherman, Warnke.

Senate Staff:Don Bennett (786-7424)

                  March 5, 1987

AS REPORTED BY COMMITTEE ON EDUCATION, MARCH 5, 1987

BACKGROUND:

In 1986 the Legislature passed ESHB 1687 regulating private vocational schools.  The act is essentially a consumer protection measure to assist students in evaluating private vocational school programs and obtaining refunds in the event of their withdrawal or school cancellation or closure.  Under prior law, the Educational Services Registration Act of 1979, schools which were accredited by national organizations were exempt from filing fees and bonding requirements.

All private vocational schools are now required to have an approved surety bond or other security on file with the Commission for Vocational Education.  The bond amount must be at least $5,000, but not more than $200,000, and is determined on an incremental scale based on the average amount of prepaid tuition in possession of the school, as determined by CVE.  Schools are permitted, in lieu of a surety bond, to make a cash deposit or other negotiable security with CVE.  Other forms of acceptable security determined by agency rule include escrow accounts, letters of credit, and certificates of deposit.

The surety bond requirement is a problem for the private vocational schools financially, and CVE administratively.  Surety carriers require strict financial qualifications as a condition of underwriting the bonds and charge annual premiums as high as 10 percent of the bonded liability.  The agency has been unable to strictly enforce the law in this setting due to the fear that the requirements may contribute to financial instability of private vocational schools which are otherwise solvent.

A private vocational school advisory committee has studied the approach taken in other states to recommend an alternative security requirement which addresses the problems stated and still provides student-consumer protection as required by the 1986 act.

SUMMARY:

The Commission for Vocational Education is to establish, maintain, and administer a tuition recovery fund.  The tuition recovery fund is payable to the state for the benefit and protection of students of private vocational schools.  The liability of each private vocational school is determined on an incremental scale based on the average amount of unearned prepaid tuition in possession of the school.  The minimum liability of each school is at least $5,000 and the maximum amount is not to exceed $200,000.

The fund will be initially capitalized at $200,000 increasing to a $1,000,000 operating balance in five years.  The contribution required from each school will be on a pro rata basis.  A school's total contribution is determined by dividing the school's liability by the aggregate liability of all private schools and multiplying by the $1,000,000 fund.  An initial contribution is required which is determined by multiplying the percentage by the $200,000 initial fund.  The total contribution, less the initial payment, is due in ten equal installments over a five year period.  The initial contribution is due within thirty days after the effective date of the act.  Surety bonds or other security filed under prior law will be released within sixty days after payment of the initial contribution.  New licensees are also required to make an initial contribution prior to a license being issued.

No vested right or interest is created in the tuition recovery fund because all funds are payable to the state.  When the fund balance reaches $5,000,000 the agency may reduce the schedule of deposits.  Surplus funds may be disbursed for vocational scholarships subject to future legislative approval. 

Annual financial data of each licensed school is reviewed by the agency to determine whether an increase or decrease in the school's contribution is necessary.  If 51 percent or more of the ownership interest of a licensed entity is transferred by sale or otherwise to new owners, the previous contribution schedule is canceled.  Previous contributions on behalf of the school accrue to the fund.  The new owner commences contributions as a new licensee.

The agency has authority to settle complaints and claims resulting from closure of a school by disbursements from the fund.  The liability of the fund for claims against a closed school is not to exceed the total of the school's contributions to the fund.  The agency will seek to recover the amount disbursed from the assets of the defaulted entity and may proceed as a creditor in bankruptcy proceedings.

When funds are disbursed to settle claims against a current licensee, the agency will demand reimbursement to the tuition recovery fund.  Failure to make such reimbursement will subject the school's license to suspension or revocation. 

A minimum operating balance of $200,000 will be maintained in the fund.  Any time the fund balance is below that amount, each school will be assessed a pro rata share of the deficiency.

The tuition recovery fund is established in the custody of the state treasurer.  All funds received are deposited in the fund.  Disbursements may be made with agency authorization.  No appropriation is required for disbursements.  All earnings of investments shall be credited to the tuition recovery fund.

Existing licensing requirements are amended to include required participation in the tuition recovery fund.  The surety bond section of the existing law is repealed.

Fiscal Note:      available

Effective Date:The bill contains an emergency clause and takes effect immediately.

EFFECT OF PROPOSED SUBSTITUTE:

An appropriation of $26,000 is added to provide the Commission for Vocational Education with start-up costs of administering the tuition recovery fund.  After expenditure of that amount, the agency's costs of administering the tuition recovery fund will be paid from the fund.  The title of the proposed substitute reflects the inclusion of an appropriation.  An internal reference is corrected.

Senate Committee - Testified: Charles Johnson, Executive Secretary, Washington Federation of Private Vocational Schools; Linda Broderick, Deputy Director, Commission for Vocational Education