THE TURNAROUND AT PHEAA:
LESSONS TO LEARN AS LAWMAKERS CONSIDER A NEW BUDGETBy Charles E. Greenawalt, II, Senior Fellow
Before the economic meltdown that millions of Americans became aware of in the fall of 2008, PHEAA experienced considerable regulatory changes in the federal student loan industry in early 2008. At that time, PHEAA leadership took notice of market conditions and circumstances which foretold of the looming financial crisis that soon hit the financial services sector of our economy, with specific ramifications for the student loan industry.
PHEAA leadership took some aggressive steps which included lobbying Congress in Spring 2008 to seek solutions to the unfolding student loan crisis. Congress eventually took actions, which were signed into law by the President. But not before PHEAA was forced to indefinitely suspend student lending from its own resources. However, PHEAA’s quick action to curtail its lending activity saved the agency approximately $58 million.
PHEAA leadership also realized that housekeeping and administrative steps were needed to be taken to bring further cost savings. Here are some of the actions that have brought about cost-savings:
- PHEAA adopted strict travel guidelines governing reimbursements for travel and business expenses. These policies are stricter than those employed by the Commonwealth of Pennsylvania and the Internal Revenue Service.
- PHEAA adopted an industry-leading Code of Ethics, whereby PHEAA will not provide any postsecondary school with financial benefits or inducements for preferential treatment or competitive advantage. The Code also makes it clear that PHEAA chooses to partner with only those lenders and schools that provide products and services that directly put the interest and financial needs of students and families first, without regard for financial benefits or gain to a school or lender.
- PHEAA appointed a new President and CEO (Jim Preston) in March 2008 which implemented a number of these reforms.
From October 2007 to December 2008, PHEAA was able to realize a savings of $77.7 million. How did these savings come about? According to a recent report to the General Assembly, a total of $23.7 million was realized in 2008-09 through workforce reductions, since PHEAA suspended lending it was necessary to realign the workforce to match operations. An additional $4.4 million was brought about due to the elimination of management bonuses and automatic COLA increased for non-union associates. Other personnel savings brought about $5.5 million in savings. Cuts in professional services realized savings of $15.2 million as did cuts in travel and professional development of $1.5 million. An additional $8.7 million was brought about through savings in IT, equipment, and supplies; and cuts in advertising and sponsorships realized $8.9 million.
Once PHEAA leadership realized the depth of the changes that were needed, they took action and are to be commended for acting as aggressively as they did. Auditor General Jack Wagner, in his performance audit issued in August 2008, made 20 specific recommendations to PHEAA. Even prior to reading the Auditor General's final report, PHEAA had already acted on 18 of the 20 recommendations.
In conclusion, calendar years 2007 and 2008 were very challenging times for PHEAA and the national student lending industry. This turbulence led to an operating loss of $27 million for the 2007-2008 fiscal year. However, due to the quick and decisive action taken by PHEAA leadership, PHEAA is starting to rebound with a positive operating income of $17.1 million during the first quarter of fiscal year 2008-09.
While the Governor and many legislators were quick to call for a total restructuring of the PHEAA board and leadership team and questioning many of PHEAA's spending practices, PHEAA has shown that they have the ability and the determination to make drastic cuts which has brought about cost-savings. The governor and lawmakers should follow PHEAA's example during these drastic fiscal times and make the same type of dramatic spending cuts to the state budget.
PHEAA's experience of how they were able to turn things around is a good example that lawmakers should examine during budget season and put into practice to save further taxpayers' dollars.
(Dr. Charles E. Greenawalt II, Ph.D., is Senior Fellow for The Susquehanna Valley Center for Public Policy.)
