NEWS RELEASE
For Immediate Release
Contact: Steve Halvonik 717 787-1381
Audit Text

Auditor General Jack Wagner Calls for Reforming PHEAA’s Board by Replacing 8 Legislators with Financial, Academic Pros

HARRISBURG, Pa. (Aug. 19, 2008) – Auditor General Jack Wagner today called for a sweeping overhaul of the governing board of the Pennsylvania Higher Education Assistance Agency (PHEAA) by replacing eight of the 16 legislators on the 20-member board with financial and academic experts. Currently, PHEAA’s board is comprised of 16 members of the General Assembly (eight each from the House and Senate), the Secretary of Education, and three appointees by Gov. Rendell. This overall conclusion and reform plan was contained in a report issued today and is a result of the Department of the Auditor General’s first-ever special performance audit in PHEAA’s 45-year history. The final report, covering the period of July 1, 2004 to June 30, 2007, follows an interim report Wagner issued to PHEAA on Oct. 4, 2007, asking for immediate corrective action.

Wagner recommended that half of the General Assembly’s current seats be reassigned to promote greater professional diversity. While the Secretary of Education’s seat would remain in place, two of the other seats would go to the secretaries of the Department of Banking and the Department of Community and Economic Development. Five seats would be filled by representatives of higher education, including the chancellor of the Pennsylvania State System of Higher Education; a representative of the state-related universities (Pitt, Penn State, Temple, and Lincoln); and one each to represent independent colleges and universities, community colleges, and post-secondary vocational or trade schools. Gov. Rendell would get four appointees, with one reserved for a full-time post-secondary student. Adding a full-time post-secondary student to the board would provide board members with a real-life perspective on the challenges faced due to the increasing cost of higher education.

“Leadership changes are necessary because PHEAA has failed its mission by not using all of its available resources to benefit Pennsylvania students,” Wagner said. “Greater diversity will expand the professional base of PHEAA’s board and provide much stronger oversight. Our audit provides the blueprint for reform that students deserve and taxpayers demand.”

“While PHEAA has agreed with the majority of our recommendations, the agency resisted our recommendation to restructure the board,” Wagner said. “The negative reaction clearly demonstrates that PHEAA is not fully committed to the reforms needed to better serve Pennsylvania students.”

A 1963 state law established PHEAA to assist Pennsylvania residents in obtaining loans to attend post-secondary educational institutions both inside and outside the commonwealth. A 1966 state law established the Pennsylvania State Grant Program, through which PHEAA issues monetary grants to state residents. Since its inception, PHEAA, which is headquartered in Harrisburg, has disbursed $6 billion in financial aid that does not need to be repaid.

During the 2008-09 fiscal year, the General Assembly is providing PHEAA with a $472.9 million appropriation, including $407 million for student grants based on financial need. The General Assembly has not provided funds to cover PHEAA’s salaries and other operating expenses since 1988. These expenses are paid for primarily with revenue PHEAA generates by servicing student loans both in-state and out-of-state, where it does business as American Education Services.

The special performance audit report contains an overall conclusion and six findings; one of the findings – bonuses and other unnecessary spending – was contained in the Oct. 2007 interim report.

Auditors documented a pattern of expenditures by which top management benefited themselves at the expense of taxpayers and students, including excessive spending on salaries and cars, as well as annual bonuses that will inflate their pension benefits on retirement. Auditors found that PHEAA had two pay scales for employees, a “Commonwealth Pay Scale” for most of its then-2,600 workers, and a “Management Pay Scale’’ for top management that was unique to state government agencies.

PHEAA paid $121 million in salaries for management staff during the three-year audit period, Wagner said. At least 12 PHEAA executives earn base salaries and bonuses that were more than Gov. Rendell’s annual salary of $164,500 during fiscal year 2006-07.

PHEAA paid out $6.4 million in bonuses during the three-year audit period, Wagner said. While hundreds of employees participated in the bonus program, most of the benefits accrued to top management. For example, union employees received only $152,195, or 2.4 percent, while top management received 62 percent, or nearly $4 million.

According to Wagner, the $6.4 million in bonuses could have provided 1,702 Pennsylvania students a maximum education grant, which ranged from $3,300 to $4,500 during the audit period. Or, PHEAA could have provided 2,563 borrowers $2,500 apiece in loan forgiveness.

While PHEAA’s operational spending soared by nearly 10 percent, to $287 million, from the 2006 to 2007 fiscal years, the need-based grants could not keep up with tuition increases, Wagner said. During the three-year audit period, the average grant increased from $2,621 to $3,135, and the maximum grant allowed increased from $3,300 to $4,500.

“As tuition costs soared faster than the overall inflation rate, PHEAA’s management took care of itself first,” Wagner said, “leaving hard-working Pennsylvania families and students to grapple with the difficult choice of going deep into debt to pay for college, or not go at all.”

PHEAA’s board approved the separate and elite executive compensation package, which was structured in such a way that both base salaries and bonuses are included in the employee’s annual salary for pension calculation purposes, Wagner said.

In addition to annual bonuses, auditors also found other examples of excessive spending. These included:

• $80,000 to buy tickets to Hersheypark for an employee appreciation day in April 2007
• $900,000 to two human resources firms for services that included assistance in designing the executive compensation program
• $30 million in advertising and promotional expenses, including $26,000 for “rally towels’’ at two Penn State football games; $10,000 for iPod music players for an Internet Web contest; $5,300 for steak dinners at an exclusive Scottsdale, Ariz., steakhouse; and $4,300 for a holiday luncheon in late 2005 for senior management to celebrate what PHEAA said was “the success of the past year”
• $62.5 million in professional service fees. About $37.7 million of the total was spent on contractor fees. Included in the total was $12.4 million in legal fees and $2.1 million for lobbying services, including a $64,551 bonus paid to a single lobbyist that PHEAA sparingly described as a “merit bonus for April 2004 through January 2005.”
  

Wagner said that auditors also determined that PHEAA misclassified almost $2 million in operational expenditures and allowed some of its employees to skirt reporting requirements for vehicle usage. Auditors found that, as of June 30, 2007, PHEAA had a fleet of 73 vehicles – 30 pool cars and 43 vehicles assigned permanently to employees. PHEAA’s policy not only permitted the 43 employees who were assigned vehicles to drive them for personal use, but it also permitted the employees’ spouses to drive the vehicles.

Auditors also found that PHEAA maintained incomplete records of vehicle usage. For example, most of the core 13 to 15 employees examined by the Department of the Auditor General reported only monthly odometer readings, without breaking down how much of the mileage was for business or personal use. By PHEAA’s own calculation, about 40 percent of the mileage recorded by these employees from November 2003 to December 2006 was for personal travel. Looking only at the employees ranked senior vice presidents and above, auditors found that personal travel rose to 70 percent of the usage.

Based on a standard mileage reimbursement rate, auditors determined that it would have cost PHEAA at least $131,000 for personal use of vehicles by those employees whose records were reviewed.

“These expenditures point to a problem with internal financial controls,” Wagner said. “They reflect a lack of transparency and openness to the public, and they show that PHEAA could be doing more to demonstrate financial prudence and operational efficiency.”

Wagner said that PHEAA had tightened its travel policy following media reports that PHEAA board members rang up more than $800,000 in travel expenses between 2000 and 2005. Nevertheless, PHEAA could still do more. A review of PHEAA’s new travel policy found some vagueness that could lead to misuse of travel expenditures, Wagner said. For example, there is still no explicit prohibition of PHEAA-sponsored retreats at expensive resorts.

Auditors also found concerns with the performance of the Pennsylvania Higher Education Foundation – PHEAA’s fundraising arm for soliciting private donations. Only 11.4 percent of total contributions to the foundation through June 2007 were from private donors. Wagner said the foundation might have had better fundraising success and saved on costs by substituting an experienced development director for its fundraising consultant, which cost the foundation $280,000.

Wagner praised PHEAA’s board for steps it has taken since he issued his interim report last October, including the closing of all out-of-state PHEAA offices such as those in California and the Caribbean, but he said that the agency has not gone far enough. For example, bonuses for top management have been suspended but not eliminated.

“The only way to get true reform and return PHEAA to its intended mission is to change its leadership structure, and that begins with its board of directors,” Wagner said. “PHEAA can no longer have a governing board with 80 percent of the board members from the General Assembly rather than the education and finance professions, and with PHEAA’s top management having minimal oversight and guidance. I pledge to work collaboratively with the PHEAA board, members of the General Assembly, and Gov. Rendell, to ensure that these necessary changes are made.”

Wagner’s audit, containing PHEAA’s response, is available to the public at www.auditorgen.state.pa.us.

Auditor General Jack Wagner is responsible for ensuring that all state money is spent legally and properly. He is the commonwealth’s elected independent fiscal watchdog, conducting financial audits, performance audits, and special investigations. The Department of the Auditor General conducts approximately 5,000 audits per year.

###