About That Project Kitty Hawk Article

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I have covered the University of North Carolina’s $97 million Project Kitty Hawk (PKH) initiative since its 2021 inception, admittedly with a fairly skeptical take at least on the stated goals. This “internal OPM” initiative for the UNC system has been hailed by many others as the way to help stopped-out and working adult students within public education but without the messiness of external for-profit providers. The theme of my coverage has been essentially that I saw good intentions that are worth watching, but they need to get rid of the delusional assumptions. What we need in the higher ed community is transparency and the ability to learn from this initiative, and I hope the initiative succeeds, as it provides another model for other states to consider.

By early 2024, thankfully PKH had cut its forecast in half from the initial business plans. From 100 degree programs with 30,800 students at the end of FY28 to 56 programs and 14,800 students. From PKH revenue (based now on fee-for-service OPM model) forecast of $128.0 million at the end of FY28 to $76.9 million. I still didn’t believe the numbers, but at least they were getting closer to being reasonable.

A June 2024 revision kept the same program and headcount and revenue estimates but included additional savings from cutting expenses and reducing program grants. More on that later.

After Pam Kelley’s early April 2024 reporting in The Assembly, the story got bigger.

Financial Irregularities

Kelley has a new article out today in The Assembly, this time describing highly questionable spending.

Zemp resigned three weeks after the April article, citing family medical needs. Between that time and today’s article, there was a state audit that partially looked at PKH expenses and found numerous problems and that the UNC system was exercising no meaningful oversight of PKH. In parallel, a PKH internal review resulted in a return of $102,000 of expenses.

There’s a lot more in the article, including $110,000 spent on a new logo and branding.

Clearly PKH is changing its practices and tightening its belt, but I find two aspects particularly problematic.

• The consistent reply to the Assembly reporting was that PKH is a private non-profit organization and not a state entity (with different reporting requirements), and that it operated according its UNC operating agreement. That type of legalistic answer ignores whether it is wise to spend as PKH has been, using taxpayer money, and whether it was actually needed. There is an incoherence in PKH responses in the article, referring both to “our commitment to transparency and responsible use of state resources” and to we don’t need to share full financials and there are technicalities.

• There is a structural problem with oversight, with Peter Hans acting as the UNC System President and the chair of the PKH board. And I noted in April that the chair was more of a cheerleader.

PKH should go with the full transparency angle with real oversight. The initiative and all of higher education will benefit, even with some short-term pain.

Explaining My Comment

I was quoted at the end of Kelley’s article, but I think I should add some color.

I had been planning a fairly thorough breakdown of the June 2024 forecast (provided upon request by PKH) to explain my skepticism, but I don’t think this needs to be complicated, and we can see the problem just by looking out to FY28. The problem is that the forecast attempts to show three trends happening simultaneously.

• Growth - PKH is forecasting 36 - 50% year-over-year (YoY) growth in the number of programs and 66 - 100% YoY growth in student enrollments. Somehow PKH expects to grow to half the size of Coursera’s OPM business in just a few short years without the benefit of MOOCs or a rev-share business model. It would be triple the size of UF Online, which has been in operation for a decade. And note that both Coursera and UF Online have the benefit of offering programs much lower-priced than the on-campus equivalent.

• Cuts and Fee-for-service - At the same time, PKH is trimming the budget, including cutting out most of their program grants. Those grants act to offset the weakness of a fee-for-service model (along with deferred service fees), by reducing somewhat the financial risk for a university to start an online program. Grants remain at just $1.3 million through FY28 and go away completely by FY30. You cannot just assume financial risk aspects away.

• Shortfall - Even with these optimistic assumptions, there would still be a shortfall of $4.9 million by FY28. By shortfall, I mean available cash on hand at the end of the year, balance sheet stuff. In other words, PKH is under pressure to become even more optimistic to survive (PKH does not carry debt that I know of, so available cash cannot drop below zero). Yes, the state can inject some cash, but note the viability of the model becoming more and more unrealistic.

Again, I would like to see PKH succeed. But I do not believe even the most recent forecast. PKH has had a partial turnaround, but it needs even more of a change. And the state and UNC system funders should come to grips with reality on forecasting a fee-for-service OPM model.

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