The U.S. Department of Education (ED) recently released a Dear Colleague Letter (DCL), GEN-01-02, explaining ED's calculations of certain ratios that are used to determine whether institutions demonstrate financial responsibility under the regulations in Subpart L of 34 CFR 668. Institutions provide the information that is used to perform these calculations in their required annual financial statement audits. ED, in turn, uses these ratios to determine whether an institution demonstrates financial responsibility under the regulations.

    As described in §668.172(b) and Appendices F and G to §668, ED calculates three financial ratios: primary reserve, equity, and net income. These three ratios are combined to produce a composite score. The minimum composite score for an institution to demonstrate financial responsibility is 1.5. If an institution's composite score is less than 1.5, ED informs the institution of its calculated score and asks the institution to comply with the alternative financial responsibility requirements that are described in §668.175.

    Some institutions have questioned ED's calculation of the primary reserve ratio that allows the inclusion of "debt obtained for long-term purposes." Specifically, a limited amount of debt obtained for long-term purposes can be included in the numerator of the primary reserve ratio. Of particular interest to some institutions is whether debt obtained for long-term purposes may include any or all long-term debt reported on an institution's audited financial statement.

    In order to be included in the primary reserve ratio calculation, an institution must be able to show that the long-term debt was related to its "long-term purposes" as demonstrated by investment in the institution's Plant, Property, and Equipment  (PP&E). The DCL goes on to provide a detailed explanation.

    The DCL concludes by stating that "debt obtained for long-term purposes" is not the equivalent of any "long-term debt." Consequently, debt that is included in the primary reserve ratio must be associated with investments in an institution's PP&E. Other long-term debts that do not represent investments in PP&E are not considered to be "debt obtained for long-term purposes" under regulations, and may not be included in the ratio calculation.

    Additional questions concerning this DCL can be directed to Dan Madzelan at  (202) 502-7816.  A copy of this Federal Register is available on ED's web site at http://ifap.ed.gov.  If you are unable to access ED's web site and would like a hard copy, please contact Stacey Roberts at (801) 321-7211.  Any questions regarding this Bulletin should be directed to the UHEAA Policy and Training Department at (801) 321-7166 or by e-mail at cjudd@utahsbr.edu.