In the Matter of YORK COLLEGE, San Juan, Puerto Rico
Respondent.

Docket No. 93-2-ST
Student Financial Assistance Proceeding

DECISION

RENATO BARRIOS, Esq., for Respondent. DONALD C. PHILIPS, Esq., for Student Financial Assistance Programs of United States Department of Education

Before Paul J. Clerman. Administrative Law Judge.

This proceeding was commenced by the Compliance and
Enforcement Division of the Department of Education (ED) on
December 15, 1992, with the issuance and transmission to the
President of York College (York or respondent) of a
letter/notice in which there was stated the intention of ED to
terminate York's eligibility to participate in programs
authorized under Title IV of the Higher Education Act of 1965,
as amended (HEA), 20 USC 1070 et seq. and 42 USC 2751 et seq.,
for reasons set forth in the letter/notice. The procedures
being followed in this matter are those established by the
Secretary of Education (the Secretary) and set out in 34 CFR
Subpart G, specifically at section 668.86, as amended, for
initiating the termination of eligibility of educational
institutions to participate in Title IV programs under HEA.

The Title IV HEA programs in connection with which ED intends
to terminate York's eligibility to participate are: Federal
Pell Grant, Federal Supplemental Educational Opportunity
Grants, Federal Work-Study, Federal Perkins Loans, and the
Federal Family Education Loan Program, which was formerly
called the Guaranteed Student Loan Programs. Included also
are the Robert T. Stafford Federal Student Loan Program, the
Federal Supplemental Loans for Students Programs, the Federal
PLUS Loans Programs, and the Federal Consolidation Loans
Programs.

         

93-2-ST - Page 2

The termination action is stated to be based on the alleged
failure of York to meet the regulatory requirements for
financial responsibility at 34 CFR 668.13, particularly at
subparagraph (c)(2), which provides that an institution is
considered not to be financially responsible if, under an
accrual basis of accounting, the institution had, at the end
of its latest fiscal year, a ratio of current assets to
current liabilities of less than 1:1. The letter/notice
indicated in this regard that, based on a year-end 1991 review
of York's audited financial statements by ED's Financial
Analysis Branch, York had at the end of its then latest fiscal
year a ratio of current assets to current liabilities of less
than 1:1, specifically a ratio of 1:1.25.



The letter/notice pointed out to York, also, that under
subparagraphs (d), (e) and (f) of section 668.13 there are
certain options available to the Secretary pursuant to which
the Secretary may determine an institution to be financially
responsible despite the institution's adverse
asset-to-liability ratio. Reference was made to section
668.13(d) under which an institution may be determined to be
financially responsible if it submits to the Secretary a
performance bond or letter of credit payable to the Secretary
in an amount fixed by the Secretary to demonstrate that the
institution has sufficient financial responsibility to
continue to participate in Title IV HEA programs. Under
subparagraphs (e) and (f), additionally, the Secretary may
require an institution to submit for its latest complete
fiscal year, and its current fiscal year, a profit and loss
statement and balance sheet based on the same basis of
accounting used by the institution for financial

    -    reporting, or to submit a financial audit report by a certified

public accountant. The Secretary may then make a financial
responsibility determination after evaluation of these
documents.
Additionally, since October 1992, pursuant to 20 USC c(c)(3),
notwithstanding an institution's failure to satisfy regulatory
requirements for financial responsibility, the Secretary may
determine an institution to be financially responsible if that
institution submits to the Secretary third-party financial
guarantees that shall be equal to not less than one-half of the
annual potential liabilities of the institution to the
Secretary
for Title IV funds, including loan obligations, and to
students for
refunds of institutional charges.

The letter/notice indicates that pursuant to the above, ED
notified York in August 1992 that it must within thirty days
provide surety through August 1993 in the amount of $350,000
in the form of an irrevocable letter of credit payable to the
Secretary. The amount of that surety requirement was appealed
by York. That appeal was denied by ED's Institutional
Participation Division in October 1992 because, the
letter/notice states, respondent submitted insufficient
financial information. To date, according to the
letter/notice, York has not submitted the $350,000 letter of
credit, and ED construes that failure to submit to mean that
York

         1

93-2-ST - page 3

does not satisfy regulatory requirements for financial
responsibility as set out at 34 CFR 668.13. ED notified York
that its eligibility to participate in Title IV programs must
be terminated, and would be terminated on January 8, 1993,
unless York files a timely request for a hearing or submits
written material indicating why termination should not take
place. On January 7, 1993, through its counsel, respondent
requested a hearing in this matter. Such a hearing was
ordered to be held before me, that hearing to consist of the
submission by the parties of briefs and related written
materials, which were filed in due course.

On brief, counsel for ED's Student Financial Assistance
Programs (SAP) contends that respondent's poor financial



condition impugns its ability to administer Title IV programs
in the manner required by law and regulation. SAP alleges
that by allowing its financial condition to deteriorate York
failed to satisfy the prerequisites of continued
participation in Title IV programs and, indeed, raised doubts
as to the institution's viability. SAP regards it as an
absolute prerequisite to continued participation in Title IV
programs that:

...an institution must demonstrate to the
Secretary that it is financially
responsible under the standards
established in this section. [34 CFR
668.13(a)]

SAP stressed in that connection, in its brief, that York's
1991 financial statement demonstrated a year-end current
assets to current liabilities ratio of less than 1:1,
contrary to the

    -    requirement of section 668.13(c)(2), and that, given the

opportunity to show financial responsibility by providing the
Secretary with a letter of credit, York failed to do so.

In its brief York states that it is now solvent, profitable,
and financially responsible. York alleges in this regard that
it is financially responsible within the meaning of section
668.13(b), in that it is able to: (1) Provide the services
described in its official publication and statements, (2)
Provide the administrative resources necessary to comply with
the requirements of Subpart B of Part 668, and (3) Meet all of
its financial obligations including, but not limited to,
refunds of institutional charges, and repayments to the
Secretary for liabilities and debts incurred in programs
administered by the Secretary. York points out, also, that
notwithstanding subparagraph (b) of section 668.13, an
institution may be considered by the Secretary not to be
financially responsible if, under its basis of accounting, it
has had operating losses over at least its two most recent
fiscal years, or, it had a deficit net worth for its latest
fiscal year (see section 668.13(c)). York contends that it
does not fall under this latter category. In support, York
submitted what it refers to as its financial statement for the
natural year 1992, appended to its brief.

93-2-ST - Page 4

There is a cover letter to York's financial statement
(reproduced as an appendix to this Decision) in which the
preparing accountant describes her review of York's financial
data as, among other things,"...substantially less in scope
than an examination in accordance with generally accepted
auditing standards...." The balance sheet in this financial
statement shows total current assets of $409,873 and total
current liabilities of $409,770, reflecting, according to
York, a ratio of current assets to current liabilities in
excess of 1:1.

In its reply brief SAP contends that York's 1992 financial
statement is unreliable, and that even if it is deemed to be
reliable it fails to demonstrate that York meets the
requisite standards of financial responsibility. In the
latter regard, SAP alleges that a key factor in York's
calculation of its total current assets, $409,873, is an item
captioned stockholders receivable, $157,306. SAP points out



that at no place in the financial statement is there any
indication as to what this item consists of, by what is it
secured, or when that receivable is due and payable. SAP
alleges that with this major uncertainty there is no
demonstration by York that its current assets exceed its
current liabilities or that York passes the section
668.13(c)(2) ratio test of current assets to current
liabilities.

Primarily, however, SAP emphasizes the alleged unreliability
of York's financial statement. SAP points out that the
Secretary's determination as to the financial responsibility
of an institution may be based on a financial audit of that
institution, which, under section 668.13(e)(2), must have been
conducted by a certified public accountant in accordance with
generally accepted auditing standards. In this case, SAP
notes, York's accountant specifically disclaimed any adherence
to generally accepted standards in her review. See appendix
hereto. SAP asks that York's 1992 statement be disregarded
because of its unreliability.

Aside from the issue of the reliability of York's financial
statement, and assuming arquendo that the statement reflects
York's financial condition, SAP contends that York has failed
to meet other "numeric tests" of financial responsibility. SAP
notes that under section 668.13(c)(1)(i) and (ii) the
Secretary considers an institution not to be financially
responsible if it had operating losses over its two most
recent fiscal years or had a deficit net worth for its latest
fiscal year. As previously indicated, York contends that it
does not fall under this category. SAP contends to the
contrary, however, that York's own 1992 financial statements
show a net loss of $1,135 for that year and a net loss of
$156,201 for 1991. SAP notes that the same statements show for
the item of retained earnings a negative value of $157,336,
which is regarded by SAP as synonymous with a negative net
worth. Thus, according to SAP, York has failed in every way to
pass the tests imposed in section 668.13(c).

l
93-2-ST - page 5

Respondent was given the opportunity, the same as SAP, to submit a
reply brief in this matter, but failed to do so.
I have considered the facts and arguments submitted by the parties.
Based on my evaluation thereof, I make the following findings of
fact:

1. York is an educational institution that participates in Title
IV HEA programs.

2. York was notified through proper channels that ED intends to
terminate York's eligibility to participate in such programs,
because of York's failure to meet the regulatory requirements
for financial responsibility in 34 CFR 668.13.

3. York was given the opportunity, at its request, to demonstrate
at an administrative hearing before me that it is a
financially responsible institution under standards
established in 34 CFR 668.13.

4. York failed to demonstrate that it is a financially



responsible institution under the standards in 34 CFR
668.13(b), in that York failed to show, in particular, that it
is able to meet all of its financial obligations.

5. York failed to demonstrate that it is a financially
responsible institution under the standards in 34 CFR
668.13(c), in that the evidence established that York has had
operating losses in 1992 and 1991, and in 1992 had a deficit
net worth; and in that the evidence failed to establish that
York in the latter year had an acceptable ratio of current
assets to current liabilities.

    6.    York was given the opportunity under 34 CFR 668.13(d)(1) to

demonstrate its financial responsibility by submitting to the
Secretary a letter of credit payable to the Secretary in the
amount of $350,000, but failed to submit any such letter of
credit or to establish that the amount thereof is
unreasonable.

7. York failed to demonstrate to the Secretary as required under
34 CFR 668.13(a), that it is a financially responsible
institution under the standards established in that section.

8. York has failed to demonstrate under governing statute and
regulations that it is fit to continue to participate in any
Title IV HEA programs.

In light of the foregoing findings of fact, I conclude and find
that the eligibility of respondent, York College, of San Juan,
Puerto Rico, to participate in student financial assistance
programs under Title IV, HEA, should be, and it is hereby,
terminated.

93-2-ST - Page 6

This Decision shall take effect when it is served, and at that time
this proceeding will be closed.

IT IS SO ORDERED.


By Paul J. Clerman Administrative Law Judge.

October 25, 1993,
at Washington, D. C.