Governor proposes $1 billion EdFund sale
Sacramento Bee 5/15/07
To help close the state's budget gap, the Republican governor proposed Monday to sell EdFund for $1 billion on the private market. EdFund maintains a $27 billion loan portfolio and insures loans for roughly half of California college students who receive aid through federal programs.
The proposal drew immediate criticism from Democratic leaders, who accused the governor of taking a piecemeal approach by selling state assets for a one-time budget fix. One consumer group also warned that selling EdFund would reduce oversight of student loans in California just as Congress is investigating abuses in the private student loan market.
But Schwarzenegger insisted that EdFund's role as a loan guarantor is limited in scope by federal regulations and that students would see no difference in the handling of their financial aid.
"This is why in this particular case (EdFund) will not go and give loans or make decisions on the loan rates or anything like that," Schwarzenegger said Monday in a budget press conference. "This is just a loan guarantee, so therefore it does not affect the students."
EdFund insures private loans that students obtain through the Federal Family Education Loan program, while the federal government provides collateral and acts as a reinsurer, according to a California State Auditor report.
When students default, EdFund receives payment from the federal government and then handles collection duties, where it earns revenues through fees, said Steve Boilard, higher education director in the nonpartisan Legislative Analyst's Office.
"It's not up to EdFund to make policy choices; it's more of a pass-through," Boilard said. "It's unlikely students would notice much difference."
The state Department of Finance estimates that as many as 10 banks and loan guarantors would bid on EdFund. Nelnet, a Nebraska-based student loan firm, offered two years ago to buy EdFund for a total of $3.4 billion paid in 10 annual installments, according to Finance chief operating officer Fred Klass.
But Klass downplayed that offer as a "ridiculously high number that was put out there to get our attention." Klass, who did not work for Finance at the time, said the state never considered the deal.
Investment banking firm Goldman Sachs recommended to Schwarzenegger officials this spring that the state examine selling EdFund, Klass said. Both Goldman Sachs and the Department of Finance calculated that the state could sell it for $1 billion based on its revenues and expenditures.
Klass dismissed the suggestion that the sale price could move lower because buyers may fear that federal inquiries into the student loan market could result in more regulation. But Boilard warned that "if anything, the restrictions will tighten up and the market will be less profitable."
EdFund was projected to provide $20.3 million in revenues to the state's general fund next year, though the nonprofit had provided more than three times that amount in previous years. Boilard said lawmakers should calculate potential revenue losses in their evaluation of whether to sell EdFund.
Senate President Pro Tem Don Perata, D-Oakland, questioned Schwarzenegger's budget approach.
"I mean, these are the mix and matches, and we're going to sell this off, we're going to sell that off," Perata said. "Are we about done with that now? The question is whether we're going to start rationalizing our system, capturing revenues and spending revenues in some kind of a rational way."
State lawmakers established EdFund as a nonprofit public benefit corporation in 1997 to administer the federal loan program in California and provide counseling and outreach to students.
The nonprofit, which employs more than 650 people in California, came under fire in 2005 when three performance reviews showed it had problems with overbudgeting, paying hefty executive bonuses and using noncompetitive contracting practices.
The California Student Aid Commission voted in 2005 to oust six of EdFund's 13 board members. A 2006 audit found that management problems resulted in a loss of $24 million in federal funding when a contract negotiation lapsed.
Steve Blackledge, legislative director for the California Public Interest Research Group, said those problems showed that EdFund needs more public oversight, not less.
"To make sure that EdFund works for students, we need to make sure it's accountable to the public," Blackledge said. "One concern with selling it off is that it becomes less accountable to the public."