Connecticut Student Loan foundation facing changes; Board members shocked at executive spending

Wednesday, March 11, 2009


Connecticut Student Loan foundation facing changes; Board members shocked at executive spending
By Don Michak
Journal Inquirer
Published: Wednesday, March 11, 2009 10:50 AM EDT
The Connecticut Student Loan Foundation is expected to run out of money to function by next fall and may sell off part or all of its operations, a top state education official who serves on the board of directors at the nonprofit corporation said Tuesday.

But another board member said that questionable expenses incurred by the financially troubled organization — including ample raises, bonuses, and benefits provided to its executives — may first force a reorganization similar to that which followed a scandal at the state trash authority several years ago.

Both officials expressed surprise and alarm at the expenditures disclosed last week by the state auditors, who described them as appearing “more for the benefit of those in management than for the operation of the foundation.”

State higher education Commissioner Michael P. Meotti and Rep. Ryan P. Barry, a Democrat from Manchester who co-chairs the state legislature’s Banks Committee, said the apparent spending improprieties reflected the “insular” nature of the group that for years has run the foundation.

The comments by the two board members came after the auditors reported that the foundation generously compensated its four top executives even as its workforce was slashed, its financial condition deteriorated, and its Rocky Hill headquarters became the target of a foreclosure lawsuit.

The auditors added that despite five successive years of negative cash flows totaling $35.5 million, the foundation also had forked out thousands of dollars to pay for parties, business lunches and dinners, football and basketball tickets, golf club fees, and even a satellite radio for its president.

Asked exactly what was going on at the foundation, Meotti said its troubled finances had to be considered separately from its questionable expenditures.

He said the foundation was established 44 years ago when the government encouraged states to create agencies to guarantee federal student loans made by banks and to assume responsibility for debt collections. The foundation itself began making loans in the mid-1990s.

He said the foundation would issue bonds — which were not backed by the state — and that the proceeds of the bond sales would go into a trust to be loaned out.

But Meotti said “that whole approach to student lending fell into disfavor in the last couple of years” as the government sharply reduced the amount of money entities like the foundation could extract in service fees to fund their operations.

President Obama, he added, now wants to end the practice, “because it’s heavy on transaction costs and overhead.”

Meotti said that faced with successive years of negative cash flows, the foundation had started up related software and consulting businesses and “tried to go regional” by making loans to students from outside of Connecticut.

“But they just didn’t have a lot of success with their new business activities and the federal government has lowered the size of the service fees you can take out,” he said. “So you have an organization this is running out of cash and, by their own internal projections, by October will be in a position where they just can’t even make payroll.

“That doesn’t mean they don’t have over $100 million in a trust for lending, but they just can’t touch that,” he added. “The foundation has money to lend for next year if it needs it, but they may not have the cash flow to actually operate as an organization.”

As a result, Meotti said, the foundation is considering selling its guarantee business to “a big multistate entity” such as several other nonprofit corporations that guarantee student loans on a national basis.

“The business is just too expensive,” he continued. “Rather than operate on a really lean business model, it operated on an expansive way of doing business and so it can’t meet its operational costs on the current volume of guarantee and lending business.”

No checks and balances

Meotti said that after joining the board of directors a year ago, he had had “concerns” about the foundation’s spending — especially on the compensation packages for its executives.

He added that the “normal things you see” in organizations concerned with checks and balances “just weren’t there,” and that “a lot of things were going on within a small group of the board’s leaders — decisions being made away from the whole board, either not being shared or just sort of being reported back.”

But Meotti also said that the specific details provided by the auditors had surprised him.

“I would say this kind of behavior fits with an organization where there are not proper controls in place, where they don’t have an open and transparent environment between its top managers and the board of directors and the board’s advisers,” he said.

Meotti said he believed “things may be under way” to reconstitute the foundation’s board of directors, much like the governor and legislative leaders reorganized the Connecticut Resources Recovery Authority after the quasi-public authority lost $220 million in a questionable deal with the politically-connected Enron Corp.

Barry, meanwhile, said he was at work on exactly that.

“A lot of the stuff the auditors found, when you put everything together and in context, it’s very surprising,” the state lawmaker said. “When you look at it all in one package, you say, ‘Jeez, something’s got to be done.’ I think the legislature’s got to do something on whether to reconstitute the board.

“You don’t know how to make a change unless you move a lot of furniture around, sit down there in the governor’s office, and see if you can move some people around,” he added.

Meanwhile, a bill awaits action by the General Assembly that would permit the foundation, whose board of directors are appointed by the governor and legislative leaders, to “terminate, outsource, or transfer” its authority to lend funds and acquire and guarantee loans.

The foundation’s president, Mark W. Valenti, last month testified in favor of the measure, saying it would allow for “necessary corrective action.”

He said the foundation was asking for “the opportunity and flexibility” to negotiate the transfer of all or part of its guarantee or lending business “to one or more entities.”

“We have had expressions of interest by large nonprofit agencies to acquire CSLF’s guaranty business,” the official said.

Valenti said confidentiality agreements prohibited him from disclosing the names of those entities, which he described only as having “economies of scale that do not exist at CSLF.”




Comments: 0
Votes:4