PHEAA Wrongfully Collected $92 Million from Taxpayers

PHEAA is being sued along with other student loan agencies for taking advantage of a federal government loophole allowing them to wrongfully collect $92 million. In the 1980's, the federal government enacted a subsidy program guaranteeing a 9.5% return on a limited class of student loans. By reusing older loans and packaging them with new ones, PHEAA reaped millions in profits at the taxpayer's expense.

When confronted with this serious case of fraud, the Department of Education didn't even attempt to recover the funds. A 2007 settlement with Nelnet--the worst abuser of the scheme receiving more than $400 million in over payments--did not require the loan company to repay the federal government. It was left to a DOE researcher, Jon Oberg, to bring the suit on behalf of the federal government.

PHEAA was among the first agencies to employ the scheme--clearing the path for other agencies to follow. The lawsuit implies PHEAA relied on the authority of the Education Finance Council to justify their practices; this is disconcerting since the group has close ties with the Department of Education and Republican staff on the House Education Committee.

It's amazing that such flagrant abuse of the system was disregarded for so long. This is a perfect example of why state and federal governments should not be in the student loan business.

How Colleges are Cutting Costs

Two recent articles in the New York Times prove universities can cut costs without decreasing the quality of education.

• Susquehanna University saved almost $3,000 as students participated in a contest to reduce energy consumption. Participating dorms received 25% of the savings.
• Dickinson College is saving $150,000 by cutting back on free laundry for students and the school held a virtual swim meet saving about $900 in travel costs.
• And my favorite, Carleton College in Minnesota saved $75,000 by cutting free access to HBO and ESPN in college dorms.

In related news PHEAA's board approved a resolution to cut the number of legislators on the board from 16 to 12. Auditor general Jack Wagner wasn't impressed, his audit called for a 50% reduction or 8 lawmakers.

For more cost cutting suggestions check out our policy brief on higher ed.

Is PHEAA reformable?

The Pittsburgh Tribune-Review questions whether PHEAA can be reformed, as the Auditor General suggests, given that the legislators who dominate the PHEAA board don't think legislators should vote to reduce the power of legislators in PHEAA.

Phix PHEAA

Pennsylvania Auditor General Jack Wagner has released his audit of PHEAA, recommending among other things that PHEAA's board not be dominated by legislators (news release here).  Wagner does not go as far as he should, and suggest PHEAA should be fully privatized.

To shock of many, legislators on PHEAA's board defend having lots of legislators on PHEAA's board.  Of course, they can't say that it is because they likes the perks of office, but point to a bogus concern that "it might effect their tax exempt status" as though having legislators on the board is an IRS criteria for tax exemption, or that for-profit companies (like most of PHEAA's competitors) can't provide financial aid.

I didn't think I would have to point this out, but there are millions of nonprofit organizations across the country and in PA (including the Commonwealth Foundation), and only a handful have boards dominated by legislators.  Those that are dominated by legislators seem to occur all too often in PA, and between PHEAA, Mike Veon's BIG, and Vince Fumo's Citizens Alliance they have a pretty consistent record of pilfering taxpayer money to the benefit of their legislator-board. 

PHEAA Must Phace the Phacts.

The Board of Directors of PHEAA (Pennsylvania Higher Education Assistance Association) too umbrage with our highlighting that government agency's misuse and abuse of taxpayer dollars (see their letter to us here).

Our response (provided here) and pasted below was sent to all members of the General Assembly...



July 16, 2008

Board of Directors
Pennsylvania Higher Education Assistance Agency
1200 North Seventh Street
Harrisburg, PA 170102-1444

Dear PHEAA Board of Directors:

Thank you for your letter dated July 7, 2008, in response to our informational postcard which referred to the past excesses and abuses at the Pennsylvania Higher Education Assistance Agency (PHEAA).

While we commend the new leadership at PHEAA for implementing reforms to reduce waste and curb the inappropriate use of public funds, I’m sure you’d agree that these changes would not have occurred without organizations like ours holding your agency accountable. I must also respectfully disagree with your implication that you needn’t feel obligated to be held accountable with expenditures of PHEAA revenues because they are “NOT TAXPAYERS DOLLARS” (your emphasis, not mine).

While PHEAA likes to claim that its operations, salaries, bonuses, board retreats, and advertising campaigns are not paid for by taxpayers, the “business earnings” that pay for such activities are effectively public funds, a fact that former Rep. Elinor Z. Taylor and chairperson of PHEAA’s Board of Directors, has acknowledged in the past. I’ve enclosed a commentary I wrote in May 2006 that elaborates on the problem of PHEAA’s “split personality” in which the agency wants to operate like a private business one day, but then claim government agency protections the next.

The reality is that PHEAA is an agency of state government. Its board consists primarily of persons whose salaries are paid by taxpayers. PHEAA’s employees are enrolled in the State Employees Retirement System—which is backed by the full faith and credit of the taxpayers. PHEAA is also exempt from local, state, and federal taxes. These are all benefits that no private entity enjoys. Therefore, as a public agency, PHEAA must he held accountable to the taxpayers, voters, and residents of this state, including how it spends its money.

As to lobbying expenses, I would also point out that our report, Government on a Diet—which referred to PHEAA’s expenditures on lobbyists—was released in February, at which time multiple lobbying firms were under contract with PHEAA. In fact, PHEAA’s most recent lobbyist expenditure/registration update with the Department of State (dated 4/30/2008) shows a continuing relationship with the lobbying firm of Stevens & Lee along with $30,000 in lobbyist communication expenditures and gifts during the first quarter of 2008.

Your claim that PHEAA has now eliminated all contracts with outside lobbyists is a positive step; however, we are concerned not just with “outside” lobbyists, but agency staffers acting in a lobbying capacity as well. Given that such action would be illegal at the federal level, and the preponderance of legislators serving on the board, I hope you have eliminated all lobbying expenditures.

Furthermore, I would contend that, while the reforms you have taken are a step in the right direction, you have not offered the type of reform PHEAA truly needs. PHEAA operations should be competitively bid to a private-sector operator. There is no reason for PHEAA to continue to be a function of state government, or for its board to continue to be dominated by members of the General Assembly. Our efforts to educate the public about waste at PHEAA and complaints about PHEAA performance all generate from the fact that PHEAA has served, at least historically, as a “playground” for legislators. Our fear is that although the excesses and abuses may have been discontinued for now, under your leadership, these accountability reforms will likely be short-lived.

Again, thank you for your letter and the opportunity to respond why we believe we must continue to hold government agencies and elected officials such as yourself accountable for your use of power and the public’s money.

Sincerely yours,

Matthew J. Brouillette
President & CEO

Enclosure (see http://www.commonwealthfoundation.org/commentary/pheaa-s-split-personality)

cc: Members of the General Assembly

PHEAA must pay legal fees

The Commonwealth Court ruled that PHEAA must pay $48,000 in legal fees to the AP, WTAE TV, and the Patriot News for "wanton disregard in withholding public records":

Commonwealth Court Judge Doris Smith-Ribner says there's no question that the Pennsylvania Higher Education Assistance Authority acted willfully and disregarded the Right-to-Know Law in a battle over records pertaining to its lavish board retreats.

Vinsanity at PHEAA

Vince Fumo came to the defense of excesses at PHEAA, demaninding that the Auditor General stop auditing. Jan Murphy of the Patriot News has the story.

Fumo contends that Auditor General Jack Wagner is only motivating by politics, trying to garner a lot of publicity by investigating waste and corruption at PHEAA. In contrast, if Jack Wagner were simply following the mandates of his position, he would be ... investigating waste and corruption at PHEAA.

Matt Brouillette gets the punchline of the article,

"Only someone under a 139-count federal indictment for the misuse of public money could believe that PHEAA should be permitted to misuse public money," Brouillette said.

$2 million spent by PHEAA on giveaways

Jan Murphy of the Patriot News exposes more PHEAA expenses - including "giveaways" such as golf balls, LL Bean Jackets, and T-Shirts bearing the PHEAA logo, I-Pods and DVD players, and candy (including Gummy Brains, which look disgusting). Rep. Josh Shapiro gets the punch line:

“Gummy brains?” Shapiro asked. “The officials at PHEAA must have gummy brains if they were willing to waste scholarship money on these types of wasteful expenditures.”

Sean Logan half-heartedly defends PHEAA,

Sen. Sean Logan, D-Allegheny County, PHEAA’s board vice chairman, said in a recent interview that there’s a big difference between PHEAA and other state agencies.

“There’s one turnpike, one place to get a driver’s license, one Department of Welfare, but there isn’t just one place to get a student loan,” Logan said. “PHEAA has to compete with some of the largest for-profit corporations, so some of that stuff needs to be done.”

...

“We engaged in marketing activities to grow our business outside of Pennsylvania ... and we also had to engage in marketing activity to retain our market that our competitors were trying to take away in Pennsylvania,” he said.

Which raises the obvious question: Why is PHEAA a government agency?

PHEAA chief asked to step down

Jan Murphy in the Patriot News on the more abrupt forced resignation of Dick Willey from PHEAA, follwing the Auditor General's preliminary report. Apparently even board members like Rep. Bill Adolph and Sen. Sean Logan are mad - either they've had a "road to Damascus" conversion, or are just upset they weren't invited to Hershey Park - calling for reduced perks and for PHEAA to stop acting like a private company (see Pennsyltucky Politics for more).

Also: Tony Phyrillas applauds Dick Willey's departure, but thinks the board should join him.

Audit Rips PHEAA For Hersheypark Day, Huge Bonuses

WTAE Pittsburgh's Jim Parsons on PHEAA.

Pennsylvania's student loan agency, PHEAA, has paid hundreds of employees more than $7.5 million in bonuses over the last three years, according to a preliminary report of an ongoing audit by state Auditor General Jack Wagner.

Watch the videos too.

$7.5M bonus bonanza at PHEAA

Brett Lieberman on the latest embarrasing revelation of PHEAA's extravagances, from the state audit of the agency.

Here is the Auditor General's news release on the interim audit report.

PHEAA CEO to get $360,000 annual pension

Jan Murphy on the pension retiring PHEAA CEO Dick Willey will receive. The pension is so elevated because his $180,000 bonus counts toward the pension calculation.

Of course, he will receive that pension even if takes another job with the state - and he would be wise to take the pension now, as no other job is likely to pay as well (pension are based on the final three years' pay). That is what is predecessor at PHEAA did: as the Tribune Review notes, Michael Hershock received a $222,000 annual pension (following a $321,000 lump-sum withdrawal) when he retired at PHEAA, then took a $147,000 job heading the PHEAA Foundation.

These over-sized pensions indicate both the excesses at PHEAA and the problems in our state pension system.

PHEAA CEO to step down

PHEAA CEO Dick Willey announced he will resign at the end of the year. Possible reasons include a better paying job in the private sector, belief that Governor Rendell is serious about privatizing PHEAA, realization that he will never again get a $200,000 bonus, or that he is tired of taking heat for PHEAA's expenses and lawsuits to hide them from the public.

Readers are encouraged to answer this poll about where Dick Willey will end up next:

Time to put PHEAA up for sale

Editorial on PHEAA from The Valley Independent:

"While the concept of placing the agency in the hands of a private, for-profit company might seem - considering the whole PROFIT aspect - to be nonsensical, the idea unfortunately makes too much sense."

Read on as to why...

Calls for heads to roll at PHEAA

The Patriot News says PHEAA employees who think they would earn more in the private sector should go earn more in the private sector (by which they mean not in another government agency or as a lobbyist). The Post Gazette seconds that emotion.

Brad Bumsted takes to task the suggestion that PHEAA salaries could be increased to avoid bonuses. He doesn't seem to believe that all of the top assistants would leave PHEAA if their only compensation was $213,000, plus a state pension and health care plan.

Gov. Rendell says "change or be changed"

Sen. Eichelberger calls for "totally restructuring PHEAA."

Ripping Off Taxpayers, Pennsylvania Style

Richard Vedder of the Center for College Affordability and Productivity weighs in on the PHEAA bonuses.

Vedder's book Going Broke by Degree: Why College Costs Too Much is a must-read for wonkish types concerned about the rising cost of college education and thinking about how we should fund higher education.

PHEAA's solution to bonus furor: pay raises

PHEAA's solution to bonus furor: pay raises - from the Post-Gazette.

Rendell targets PHEAA

Rendell is calling for an "overhaul" of PHEAA. in today's Tribune-Review. Our guess is that it will just be a shakedown rather than a true effort to reform that agency. Serious reform would be to privatize it!

Rendell, Orie: Privatize PHEAA

Post Gazette - PHEAA bonuses enrage Rendell:

"I haven't seen a mind-set change to 'We're a public agency and we're going to act like a public agency,'' Mr. Rendell said yesterday. 'If PHEAA is going to act like a private agency, let's privatize."

Governor Rendell has obviously been reading PolicyBlog.

Also watch this video from KDKA, featuring Sen. Orie talking about PHEAA and her desire to privatize the agency.

More on PHEAA from the Guv

Governor calls PHEAA bonuses "outrageous" - Breaking News with The Patriot-News

Sens. Jane Orie, R-Allegheny, and John Rafferty, R-Montgomery, reacted to the bonuses by saying they plan to push their leaders in the GOP-controlled Senate to hold a hearing this fall and move legislation to force changes at PHEAA, including eliminating the executive bonuses. Rendell said he wants to be part of that effort.

I love this little quote as well:

Rendell said he had to "quarrel" with Adolph on that point. "If we could get high quality people as governor ... why can't we get people to do that in these positions at PHEAA, which is a public agency." He said, "That's what public service is all about. You make the choice."

Matt and Eric are expected to take up PHEAA on TheBOX this Saturday, so be sure to tune in, and call in if you want to talk PHEAA.