The Story of Charlotte, the NBA, and For-Profit Education

What does NBA basketball in Charlotte have to do with private for-profit colleges and universities?

A lot. In fact, it is safe to say that one might never have existed without the other.

The Charlotte Hornets franchise was born from the efforts of George Shinn. George Shinn was a true Horatio Alger story who went from cleaning bathrooms to owning a professional sports franchise. Shinn earned his money as the owner of Rutledge Educational Systems. Rutledge was a private for-profit business school.

Shinn worked at Evans Business College as a janitor. When the school had some financial trouble, Shinn stepped forward and bought the school. While the price paid for the school is not known, it seems likely that it was close to nothing. Shinn saw the opportunity. He saw that there were scores of people that needed basic job training and that could qualify for federal grants and student loans.

Shinn’s analysis was prescient. Consider this comment from a recent annual report of Strayer University (STRA):

“As Congress increases available Title IV aid, we are often effectively required to increase tuition prices in order to maintain compliance with the 90/10 Rule; conversely, ED’s “gainful employment” regulations could require us to reduce tuition prices in order to limit the debt burden of our students. Our institutions may not be able to comply with both rules.”

In 2008, when it was under review for certification by the Department of Education, management at Apollo Group (University of Phoenix) wrote this warning to investors:

“Although University of Phoenix’s current certification for Title IV programs expired in June 2007, University of Phoenix submitted its Title IV program re-certification application to the Department of Education in March 2007 and we have been collaborating with the Department of Education regarding the University of Phoenix re-certification application. As we continue to supply additional follow-up information based on requests from the Department of Education, our eligibility continues on a month-to-month basis until the Department of Education issues its decision on the application….The Department of Education could limit, suspend or terminate an institution’s participation in Title IV programs for violations of the Higher Education Act or Title IV regulations. Title IV eligibility is critical to the continued operation of our business. If one of our institutions is not recertified, it would have a material adverse effect on our business, financial condition, results of operations and cash flows.”

How many industries turn on the same tensions in 2012 as they did in 1980? In private for-profit education, Title IV funding has never ceased to be the important lifeline.

I interned at a small VC fund back in the 80s. My job consisted of answering phones and filing the paperwork generated by the company’s business. I got to read a lot of proposals. One written by a small school went something like this:

“Our student profile draws heavily from non-traditional students. Honestly, few will graduate because they generally have not had adequate preparation in high school. Regardless, most can qualify for student loans and Pell Grants. These federal programs set our prices. We can price as high as possible as long as we fall under the federal ceilings. The underlying truth is that our client is not the student. Our client is the Department of Education.”

If that sounds harsh, consider the context – private notes to venture capitalists.

Back to Charlotte: As years passed, Shinn added more campuses to his portfolio. Ultimately those schools were brought under the common corporate umbrella of Rutledge. Rutledge schools offered programs that lasted between 18 and 24 months.

In 1987, the Associated Press reported that 69 percent of Rutledge’s students were in default on their student loan payments. At the time, this performance still fell within the good graces of boundaries set by the Department of Education. Shortly thereafter, the Department of Education said that it would push schools to keep their default rates below 60 percent, lest the Department rethink their their access to Title IV dollars.

In 2001, the Hornets moved to New Orleans. Shinn remained part owner of the Hornets until 2010 when the NBA bought back the Hornets from Shinn. The NBA sold the team to Saints owner Tom Benson. Meanwhile, the NBA brought basketball back to Charlotte when it sold a franchise to Robert Johnson.

It turns out that Robert Johnson is also an active participant in the world of private for-profit schooling. Robert Johnson is a member of the Board of Directors at Strayer University. Johnson has other enterprises – he is the owner of BET Network, sits on several Fortune 500 boards, and owns a fair bit of commercial real estate. Formerly he owned a portion of Urban Trust Bank.

Though Johnson is certainly different than Shinn, their for-profit schools have a common devotion to federal education funding.

Today, the NBA exists in Charlotte without private for-profit education. But proprietary schools helped the city to gain entry into the league and subsequent ownership also derived some revenue from a similar source.