'Nonprofit in Name Only:' Grand Canyon University's Conversion Criticized

Two years ago, Grand Canyon University President Brian Mueller was fuming.

The for-profit university had been blocked by its accreditor after an attempt to convert to a nonprofit institution. A wounded Mueller ripped the Higher Learning Commission, saying the accreditor had “wronged” GCU and left the Christian school "extremely disrespected."

All that has changed.

On July 2, sporting a purple tie and in an ebullient mood, Mueller announced that GCU had officially executed the long-sought conversion to nonprofit status.

The university's academic assets were sold to a new, nonprofit entity for around $875 million on July 1. Meanwhile, the profit-seeking company that formerly owned the school, Grand Canyon Education, Inc., will handle campus operations like marketing and financial aid processing through a 15-year contract, in exchange for a hefty share of GCU's tuition revenue.

The deal is an audacious and eyebrow-raising victory for GCU. But for-profit critics are alarmed.

Experts say that GCU's conversion papers over contradictions in the institution's new split identity. They also criticize Mueller's dual roles of company CEO and university president.

“No other university in the country has its CEO working for its contractor and for itself,” said Robert Shireman, a former deputy undersecretary in the Obama administration’s Department of Education. He now works for the Century Foundation, a progressive think tank based in New York City.

Over the past decade, for-profit colleges have been investigated for predatory enrollment strategies that burned students and left them in a mountain of debt. These days, companies like GCU are changing their tactics, Shireman said.

“The wolves are putting on sheep’s clothing, and hoping that the rest of us will not notice," he said.

GCU has pursued explosive growth in ground enrollment and online students since 2004, when the school was the first nonprofit university in the country to convert into a for-profit company.

GCU's continued growth and steadily rising stock price has also meant a personal financial windfall for Mueller himself. The Chronicle of Higher Education reported on Monday that since January 2017, Mueller has made approximately $15 million from his sale of shares. The company trades as LOPE, a reference to GCU’s antelope mascot, on the NASDAQ stock exchange.

Mueller will take a 50 percent cut to his base annual salary under the new agreement, reducing his pay to $321,000 according to a financial filing.

In another gigantic financial advantage, GCU will no longer pay property taxes on its 275-acre campus, which has transformed the surrounding neighborhood in west Phoenix. GCE will continue to pay taxes on an office complex.

Mueller announced the deal in front of a crowd of GCU employees on Monday. Looking out over the sea of purple shirts, Mueller told them it was a momentous occasion as he recalled past milestones in GCU history.

Southern Baptists founded the university in 1949 in Prescott and moved it to Phoenix two years later. In 2004, the university, deep in debt and about to close, was bought by investors and converted to a for-profit company. In 2008, the company went public and received a flood of investment dollars.

With the July 1 deal, Mueller suggested that GCU is making history again by reverting to a nonprofit.

A lot has changed since GCU was denied nonprofit status in 2016, including the shift to a new presidential administration that is unenthusiastic about policing for-profit colleges and universities.

In December, GCU submitted an application for nonprofit status to the regional accreditor, and in March the HLC signed off on the deal. The IRS approved the split, too.

During the nonprofit conversion, GCU sought to mimic a recent acquisition by Purdue University. The public university in Indiana bought the online programs of for-profit Kaplan University, spinning these programs off as a new, nonprofit arm of Purdue with the blessing of the HLC.

Mueller will continue to serve as the CEO and chairman of the board of the publicly traded company Grand Canyon Education Inc., which will serve as a campus operations company for GCU. Yet Mueller will remain the president of GCU, raising the hackles of for-profit university watchdogs.

"Such dual roles are permitted under guidelines adopted by the Higher Learning Commission," GCU said in a press release. "Aside from Mr. Mueller, no other employee of GCU or GCE has a dual role in both organizations."

GCU's nonprofit conversion is, in a word, unprecedented. It's also extremely complicated.

GCU, as the new, nonprofit school, will have to pay GCE, the for-profit service company, around $875 million via a seven-year loan in return for the institutional academic assets and property. GCE’s footprint will extend across campus, as the service company handles a long list of tasks for the nonprofit, from marketing to technology to counseling to financial aid processing. In exchange, 60 percent of the university's tuition and fee revenue will be paid to the company.

For all of his talk of historic dates, Mueller, in his speech on Monday, downplayed the uniqueness of the deal, arguing that universities have outsourced key functions for decades.

“This is very mainstream in higher education today,” Mueller told the crowd. “Hundreds of universities are doing it, and our model is almost an identical replica of that, so we’re in the mainstream of what’s happening.”

Others who follow higher education are skeptical.

Colleges and universities rely on outside contractors for minor campus tasks all the time. But Shireman argues that this conversion is extremely unusual because GCE is going to run a battery of campus operations for a single, all-important client: the newly nonprofit GCU.

“No nonprofit or public university operates that way except for GCU. GCU is not in the mainstream. It is completely different from other universities,” he said.

According to the statement, GCE expects to provide services to other colleges and even Christian high schools nationwide.

Shireman named two main reasons for GCU’s success at converting to a nonprofit on its second attempt — rule changes at the Higher Learning Commission, and a weakening of the IRS due to budget cuts, which he said is no longer able to adequately oversee nonprofit organizations.

Because of the conversion, the university will be able to avoid regulations on gainful employment and federal loans that apply to for-profit schools.

Even analysts who take a favorable view of the for-profit sector acknowledge that there are risks under GCU's new structure.

Trace Urdan, an analyst with Tyton Partners who's friendly to for-profit universities, said that GCU will face challenges regardless. GCE, as a for-profit company, will need to retain GCU as a primary, massive client in order to maintain its bottom line, he said.

“You’re trading one kind of risk for another,” Urdan said. When the contract between the two parties expires, another service-provider company might try to swoop in to serve GCU instead, he suggested.

Mueller downplayed this option on Monday likening the deal to a divorce during the Middle Ages. “There's no divorce possible here," Mueller said.

An executive who spent his career with the University of Phoenix’s parent company, Mueller eventually may have to face competition among other companies who want a share of the higher education service-provider dollars.

Success or failure will be on Mueller, Urdan explained.

“There’s a ton that’s tied up with Brian Mueller, all the way around,” Urdan said. “He’s sort of godlike inside that organization.”

Two separate boards will govern the company and the university. Each can select and fire the university's president and company's CEO. Nevertheless, both GCU's board of trustees and the corporate board tapped Mueller to maintain his leadership roles, he said.

Other experts are more blunt, arguing that Mueller’s role and the school’s new tax status contain glaring contradictions.

“This is an organization that is a nonprofit in name only,” said Brian Galle, a Georgetown University law professor who has scrutinized the GCU conversion.

Pointing to Mueller’s dual positions, Galle argues that his two roles are contradictory. “Each of those obliges him to serve a different set of constituents whose interests are not aligned,” he said.

Galle said that the split structure of GCU may prioritize profit over educational outcomes. The for-profit service provider and a highly influential Mueller will oversee much of campus life, Galle explained; when prospective students see GCU’s new nonprofit label, they may think they are enrolling in a certain kind of school even though the incentives of the old, for-profit institution haven’t changed.

“We have lots of evidence that consumers believe nonprofits act differently than for-profits,” Galle said. “We believe that nonprofits are not looking out for their bottom line — that they’re not going to cut quality to make money.”

GCU has aggressively refuted the idea that the nonprofit conversion is an end run around regulations enacted by the Obama administration to police the worst abuses of the for-profit sector. The university cites a low loan default rate of 6.2 percent for the most recent student cohort.

"The University supports measures that ensure educational institutions are meeting recognized standards — particularly as it relates to student support services, academic integrity and financial transparency — and believes those measures should apply to all institutions (for-profit and nonprofit)," GCU said in a press release.

Galle himself has received pushback from GCU over his analysis of the conversion. After Galle discussed GCU’s case in front of a Department of Education oversight committee on accreditors in May, GCU blasted Galle for “numerous material inaccuracies” and argued that his conclusions were drawn “out of whole cloth.”

For now, the conversion appears to be moving forward. The Department of Education did not respond to a pre-acquisition review of the deal, according to GCU's press release, but the university said that the department approves deals after they close. The department could choose to place regulatory restrictions on GCU under the new arrangement.

Approximately 1,400 faculty and academic staff now work for the nonprofit, along with “substantially all” of the 6,000 part-time, adjunct, and student employees, according to GCE’s corporate filing with the Securities and Exchange Commission.

The company's 2,600 full-time employees will continue to work from the company’s Phoenix office complex.

GCU went public in 2008, and at that time a group of former Apollo Education Group executives including Mueller carried out explosive enrollment growth, on campus and online.

But as Phoenix New Times reported last fall, some online GCU students feel dissatisfied with their program or misled based on the sales pitch they heard before they enrolled. Court documents and interviews with former enrollment employees described a quota-driven atmosphere to recruit new students.

The university expects to enroll almost 21,000 students on its ground campus this fall, eventually growing to 30,000. Mueller said that he expects the current online population of 70,000 students to swell to 100,000.

Another unknown aspect of the conversion is how GCU's institutional peers will respond.

There is a running feud between Mueller and Arizona State University President Michael Crow, who has criticized GCU’s entrée into NCAA Division 1 athletics. So far, the two universities have not met in D1 competition because ASU has refused to schedule games against the for-profit school located in its backyard.

In a statement to New Times, ASU recognized GCU’s emergence as "a nonprofit Christian college," and indicated that the two schools might collaborate.

“As each of us evolves, we see opportunities to work together across a spectrum of activities in academics and athletics,” the university's statement said. “What we’re most interested in is working together to ensure the success of the community more broadly. Arizona needs more high-quality college graduates, and we recognize the role GCU plays in contributing to our graduate pool and strengthening the Phoenix metropolitan area overall.”

In an email, GCU spokesperson Bob Romantic wrote, “We do not have any comment to the New Times.”

From Urdan’s perspective, the conversion is a major victory for GCU. The nonprofit label will invite more mainstream recognition, which will lead to more D1 athletic competition, which will help GCU recruit more students, and so on.

“They pulled it off, and it’s definitely a huge coup for them,” Urdan said.

Experts who are more skeptical of the for-profit landscape are disappointed by the development. They argued that the public might not know the scope of GCU’s historic switch until many years from now.

Shireman said that it took years before the titans of the for-profit college industry began to strain under bloated enrollments and the negative reputation about their sector. Financial pressure caused companies to make questionable decisions intended to spur growth.

The expansion tactics spiraled into predatory practices, Shireman said, frequently without the leaders of those institutions realizing what they had done.

"Usually by the time that evidence emerges, the problem has gotten out of control," he said.