Student Loan Blog : James Preston

Restructuring of Pennsylvania Student Loan Agency’s Board Wouldn't Affect Tax-Exempt Status as Agency Claims

Student Loan Girl — Tue, 16 Sep 2008 00:03:00 GMT

The Internal Revenue Service has reportedly disproven the Pennsylvania Higher Education Assistance Agency’s claim that cutting the number of lawmakers on its board in half — as recommended by Pennsylvania Auditor General Jack Wagner — would threaten the state student loan agency’s tax-exempt status, according to an article in The Patriot-News (“PHEAA tax status not issue, IRS says,” Sept. 14, 2008).

A letter obtained by The Patriot-News confirms that an IRS official told Wagner’s Chief Counsel Robert Teplitz during a telephone conversation that the proposed board restructuring — based on an audit that found the agency to be lavishly overspending under the current lawmaker-dominated board — “would have ‘absolutely no effect’ ” on PHEAA’s tax-exempt status.

In response to the audit, Wagner proposed that PHEAA, the state’s student loan agency, replace half of the 16 lawmakers on its 20-member board with banking and community leaders, college and university officials, and a full-time college student to restore public confidence in the student loan agency.

James Preston, the CEO of PHEAA, had expressed concern that adhering to Wagner’s suggestion to reduce the number of legislators on the board would threaten the agency’s “tax-exempt status, the loss of which could reduce PHEAA’s ability to provide future public service programs.”

State Sen. Sean Logan, the vice chairman of PHEAA, said, however, that if the PHEAA receives written confirmation directly from the IRS, he would support Wagner’s proposal. “Reducing the number of legislators on the board is a reasonable thing to do,” Logan said.

Wagner’s recommendation followed a special audit of PHEAA’s spending practices between July 1, 2004, and June 30, 2007, in which Wagner concluded that “The PHEAA was governed and managed within a culture that sometimes allowed self-reward to supersede fiscal prudence.”

The audit revealed that PHEAA board members used public money for facials, pedicures, culinary classes, and falconry lessons and spent $768,000 on trips to lavish resorts between 2000 and 2005. Wagner also found that the PHEAA’s 12 executives were grossly overpaid, prompting Wagner to recommend that the salaries of these executives, whose combined income totaled $121 million during the three-year period of the audit, be trimmed.

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Audit of State Student Loan Agency Calls for Major Reform

Student Loan Girl — Thu, 21 Aug 2008 21:23:00 GMT

The Pennsylvania Auditor General Jack Wagner has recommended sweeping changes for the Pennsylvania Higher Education Assistance Agency a year after the state student-loan agency was found to be lavishly overspending on internal operations, according to a Forbes.com article (“Pa. Audit Seeks Loan-Agency Board Overhaul,” Aug. 19, 2008).

In a performance audit of the agency, Wagner concluded that “The PHEAA was governed and managed within a culture that sometimes allowed self-reward to supersede fiscal prudence. In those instances PHEAA failed its mission by not using all available resources to benefit Pennsylvania students.”

Wagner began the audit in April 2007, after news reports accused the agency of overpaying executives and staff members and freely spending hundreds of thousands of dollars on extravagant banquets, bar bills, golf outings, and spa treatments — all while failing to increase college grant amounts to keep pace with rising tuition costs.

Now, after a year-long investigation that analyzed the agency’s spending and management practices between July 1, 2004, and June 30, 2007, Wagner is asking the student loan agency to trim the salaries of PHEAA’s 12 executives whose combined income totaled $121 million during the three-year period of the audit.

Wagner is also urging the PHEAA to replace half of the 16 lawmakers on the 20-member PHEAA board with heads of banking and community agencies, leaders of colleges and universities, and a full-time college student.

PHEAA Bends on Some of Report’s Recommendations

PHEAA President and Chief Executive Officer James Preston said while the agency agrees with most of Wagner’s findings, the audit is based on “really old information.”

“What you have to look at is what’s really happened going forward,” he said. “Our board and our management and employees are dedicated to reform.”

Over the last 18 months, PHEAA has overhauled its spending practices, instituted annual internal spending audits, and increased oversight of its travel policies.

But Preston rejects Wagner’s proposal to alter the makeup of the agency’s board — a change that would require legislative approval — saying that too many adjustments to the board’s organization would jeopardize the PHEAA’s ability to retain its tax-exempt status, which allows the agency to receive state funding for its student loan programs.

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