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Thursday, August 23, 2007

Bonus Time At PHEAA

Jan Murphy at the Patriot News on PHEAA's latest round of bonuses, noting that PHEAA CEO Dick Willey's bonus is higher than Governor Rendell's salary.

The headline "PHEAA's bonuses blasted by lawmakers" is intriguing--given that the reason these bonuses seem so unscrupulous is that PHEAA was created and is overseen by lawmakers (16 of the 20 board members are current state legislators, two are former legislators). PHEAA, of course, defends the bonuses claiming they are standard among their private sector competitors. But this raises a number of questions?

1) Why is PHEAA a public agency?
2) Is PHEAA providing a "public service" or is it just a playground for legislators and PHEAA staff?
3) Why are bonuses are awarded - for political reasons or to encourage greater profitability?

Either answer to question #3 goes back to question #1--if the goal of PHEAA is to be a profitable company, it should be privatized. If PHEAA bonuses are used for political process, PHEAA should be privatized to eliminate such abuses.


average joe said...

PHEAA is actually a public corporation, not a typical state agency as it is often misunderstood to be. It consumes no tax dollars for any of its operations, including salaries, heath benefits and retirement contributions. As a nonprofit business, its not set up to be profitable, per se. That is the role of a private for profit organization, which strive to be profitable in order to generate returns for shareholders. They make money from consumers, but don't give it back to consumers. PHEAA is set up to generate money for the sole purpose of giving it back to pay for student aid in Pennsylvania. PHEAA currently returns more than 90 percent of its earnings back to the students, families and taxpayers. This amounts to more than $1 billion over the last ten years, and $200 million over the last year alone.

Since money does not grow on trees, you have 2 choices: Raise taxes... or earn money in the market as a nonprofit business for the direct benefit of Pennsylvania. How successful you are as a business defines how much money you can give back. 90 percent of $500 million is much more than 90 percent of $100 million. So superior performance directly benefits Pennsylvania. If you limit that success you limit the return to the commonwealth and risk a big tax increase to make up the difference.

Privatizing PHEAA would be incredibly shortsighted. Doing that would make managers at PHEAA happy because they would be able to keep all the money and would not have to talk to pesky reporters. The money they don't keep would be used to make Wall Street investors very happy. They would be immune from the right to know law, which would make reading the patriot news very boring. They would not be subject to any policy oversight from the legislature as they are now. Without the nearly $100 million PHEAA provides to support the state grant program, about 36,000 students would drop out of the program and lose that important source of funding. Thousands more would lose loan forgiveness and scholarships that PHEAA funds... and student loans would get very expensive in PA, costing students tens of millions of dollars more than they pay now. Look at the private sector in any billion dollar industry... greed is very powerful and scandals are hidden in the darkness as managers cash in million dollar paychecks. it's crazy to suggest unless you are an investor trying to get rich yourself in the process... but if that's the case, I bet you don't have a college age or younger student... if you did, then you'd want to keep PHEAA working as hard as it can to make more money to help your family pay for school.

Nathan Benefield said...

"They would not be subject to any policy oversight from the legislature as they are now." Good! That is exactly what I want to end. The "oversight" by the legislature is why the legislature gets all the perks and benefits from PHEAA's largesse. I want those "greedy" shareholders to offer the oversight. Why? Those greedy shareholders lose money from PHEAA's largesse.

As for PHEAA's charitable mission, the $2-3 billion we sell PHEAA for would more than make up for PHEAA's grant program. Not to mention a privatized PHEAA would start paying taxes on profits, and would lose exemptions on property and sales tax. Of course, any distribution of profits to their shareholders would be taxed as well. And of course, PHEAA could continue to offer financial, just as "greedy" companies like Sallie Mae and other lenders offer scholarship programs.

"student loans would get very expensive in PA" - nonsense. Non-PHEAA loans have the same interest rates as PHEAA loans. I even recently consolidated my loans away from PHEAA, and got a lower interest rate.

I would also suggest we start to rethink how we support college students. "Making college affordable" has really had the effect of driving up tuition costs.

average joe said...

You seem to be misdirecting your anger and making inaccurate assumptions.

Do you really think that the legislature considers the media attention PHEAA has been getting to be a perk? The legislature receives zero perks from PHEAA, but they stand behind it because PHEAA is putting millions of dollars into the pockets of taxpayers and helping millions of students achieve a higher education. Look at PHEAA's annual report online for proof of these facts. PHEAA's board also serves without compensation and they, like PHEAA staff, are subject to the most strict travel and business expense policy of any government agency anywhere in the nation. Those expensive business conferences you read about in the media ended years ago.... and PHEAA has reformed themselves into a national student lending role model, being the first to draft and adopt a student lending code of conduct and the aforementioned travel and expense policies.

You are mistaken in understanding the nonprofit vs. for profit business model. Sallie Mae does not give scholarships like PHEAA. While PHEAA returns more than 90 percent of its earnings back to students, Sallie Mae returns less than 1 percent. In fact, according to news stories and SEC statements, they pay their management team much more money annually than they return through all of their so called philanthropic activity. The CEO alone made $40 million a year. Who do you think pays for that compensation? The students do.

The long and short of it is that private companies are in the business of making money, not giving it away. Also according to Sallie Mae's SEC filings, they have lowered prices on student’s loans ONLY to compete with nonprofits such as PHEAA that provides low-cost loans in their home states. They have actually apologized to shareholders for this inconvenient necessity and have indicated that when there are no nonprofits to compete with, they will raise prices to maximize profits at the expense of students. Is this the future you want for Pennsylvania? Be very careful what you ask for.

And PHEAA is not worth $2-3 billion on the private market. Sallie Mae's offer was for $500 million upfront and $100 million a year for five years... then nothing. And since PHEAA already pays out $200 million a year to PA why would anyone think that $100 million a year for only five years is a good deal? Sallie Mae wanted to pay for its purchase of PHEAA with PHEAA's own money... money that belongs to Pennsylvania students. And at a reduced level to boot - - reduced by 50 percent a year.

Also, no matter what price you sell PHEAA for, you will have a finite sum of money that will be spent down to nothing while tuition costs continue to escalate. Then what? Raise taxes to pay for a stupid decision to sell PA's only well-performing asset? PHEAA returns more money to the Commonwealth every year as it becomes even more successful. $1 billon in the last ten years... $200 million a year now... and another $1 billion in the next 5 years... and the numbers keep growing. A wise and wealthy person knows when to hold on to an asset that will pay even greater returns in the future...

Also, PHEAA makes voluntary payments to local government in lieu of taxes, so that nullifies that argument. And don't forget that the NY AG investigations all involve private companies, like Sallie Mae, that are immune from Right to Know Laws... and private companies are the ones caught up in a web of pay-to-play and insider trading scandals, not to mention countless class action lawsuits on behalf of students who have been wrongly buried in debt so the private companies can get richer and richer. And these are the companies that you want to sell PHEAA to? As I said, be very careful what you ask for...