Two years ago, Gov. Janet Napolitano signed an order that granted a newly formed corporation the power to oversee state-authorized, low-interest student loans.
Now, the governor says, she didn’t know that the company, the nonprofit Arizona Higher Education Loan Authority, or AHELA, was headed by two of her closest political allies, Billy Shields and Pat Cantelme, the current and former heads of the Phoenix firefighters’ union, the United Phoenix Firefighters Association, when she signed the order in December 2004.
She says she also did not know the two were affiliated with the company, when four months later, she vetoed a bill that would have allowed competition from local industrial development authorities.
Napolitano’s chief of staff, Alan Stephens, said last week he worked with Cantelme, Shields and a bond company executive, Chris Hamel, on getting the nonprofit the state designation. Stephens said he never told the governor that Cantelme and Shields were on the board when he recommended she sign the order. When the veto came up, he says, he again did not tell the governor they were involved.
“It wasn’t a big deal,” Stephens said.
Napolitano’s spokeswoman, Jeanine L’Ecuyer, said last week it may have been better for the governor to know about the involvement of Shields and Cantelme in the company earlier.
“Maybe in retrospect she should have,” L’Ecuyer said. “But it’s completely moot. She didn’t. Does is look bad? I don’t know that I can necessarily dis- agree with you on that point.”
States can issue tax-exempt bonds to finance student loans under a provision in federal tax law, passed in 1965, aimed at making college loans affordable. Because the bonds are tax free, the companies that issue them are able to charge lower interest rates from the students who borrow money for college. That also forces for-profit companies to charge lower rates to remain competitive.
Napolitano said no other lenders sought the designation before it was awarded to AHELA. And, she said, she did not open it up to competitive bid because she followed the process used by previous governors — issuing the designation through executive order.
Stephens and Napolitano are quick to point out AHELA has done a good job in the past two years. Stephens noted AHELA offers the lowest interest rates in the state for student loans and that the nonprofit is focusing in part on loans to community college students, a market that other lenders had not been addressing.
“This has worked very well,” Napolitano said. “It’s a good deal for the students.”
But critics, including Sen. Dean Martin, R-Phoenix, question whether it was appropriate for the state designation to have been awarded without a competitive bid process and to political allies.
“Your qualifications should never be how close you are to the executive branch,” Martin said. “That’s not good public policy. It should be how good you are at doing your job.”
Last year, AHELA issued $95 million in tax-exempt bonds as the state’s sole designated lender. It’s currently marketing a new issue for the same amount.
Napolitano and Stephens say other nonprofits could seek the same designation, and the amount of bonds to be issued would be divided through a lottery process.
But Martin, who was elected state treasurer this month, thinks it would be tough for another lender to move in, especially given the political connections of Cantelme and Shields.
Napolitano and Stephens said AHELA was fully qualified to become the designated lender. Cantelme and Shields brought in people with expertise in the education and financial markets, and there have been no complaints about how it is doing business, Napolitano said.
“Not only did I not know there were firefighters involved at the time, to me the issue is were they qualified? Yes,” Napolitano said.
“The question is: Were they in a position with the right staff, the right expertise, the right experience to put the financial and business plan together to be able to issue the paper?” she said. “And they were. They had people who had very extensive backgrounds involved at that point, and there have been absolutely no problems since.”
In 2005, the state Legislature passed a bill, sponsored by Martin, that would have authorized local industrial development authorities to issue tax-free bonds for student loans. IDAs already issue taxexempt bonds for a variety of public projects.
None of the county IDAs wanted to get into the business of issuing bonds for student loans, said Tom Manos, executive director of the Maricopa County authority. Rather the bill was merely an attempt to make Arizona conform to the federal law, he said.
Napolitano and Stephens say the governor’s staff believed the bill as written would have put the state in violation of federal law. The governor did not raise that concern in her veto message.
But AHELA officials saw the legislation as a threat to their new business because it would have allowed competition from local IDAs that could undermine the fledgling nonprofit, Shields said.
“We asked the governor to consider vetoing that because we were in such a critical startup phase,” Shields said. “If everybody else could start taking down the tax-exempt bonding, then it would have split up our ability to sustain the nonprofit that we already started.”
Stephens said he met with Cantelme over the legislation. But, he said, he never passed on to the governor that Cantelme and Shields were requesting a veto.
Still, she vetoed the bill, explaining in her veto message that the “current system of financing student loans exclusively through state-sanctioned issuers who specialize in student loans has served Arizona well. Student loans are subject to a volume cap and every loan that is administered by an IDA would mean a reduction in the number of loans administered by state-sanctioned student loan specialists.”
This year, Martin pushed a nearly identical measure that removed the reference to student loans. Napolitano signed that bill.
Martin said he believes the governor vetoed the legislation because her political allies might have been hurt.
“We found out later that Pat and Billy were involved in this so we knew the governor wouldn’t change her mind,” Martin said.
Since then, AHELA has asked the governor to give it the exclusive designation as the state’s recognized student loan authority. But Stephens and L’Ecuyer said Thursday the nonprofit will not be granted exclusivity.
NEW AGENCY NEEDED
Since 1982, companies affiliated with the Southwest Student Services Corp. had been the recognized state lending authority for college loans. But in October 2004, Southwest sold its assets and loan portfolio for $500 million and no longer qualified for Arizona’s designation.
Stephens and Cantelme say Hamel, a top executive at the firm RBC Dain Rauscher, approached Cantelme about putting together a nonprofit to be the new designated lender.
Hamel’s firm was hired to market the tax-free bonds. AHELA records show the firm was paid $140,915 in 2005 for handling the $95 million bond issue.
Hamel is the managing director and head of public finance at RBC Dain Rauscher, the nation’s eighth-largest securities firm. Like Cantelme, Shields and Stephens, Hamel also is a longtime Democrat with close ties to Arizona politics.
Hamel did not return repeated phone calls seeking comment.
Stephens also is familiar with the student loan and bond business. He was a paid board member of the Southwest-related company that had been the state’s designated lender, but resigned when he went to work for Napolitano in January 2003.
Cantelme says he told Hamel he “didn’t know a whole lot” about the student loan bond market during their initial meeting in October 2004. He met with Stephens about the project.
Stephens said he encouraged Cantelme and Shields to form the new corporation.
Stephens said he did not raise the issue with Napolitano until December, shortly before he urged her to sign the executive order. At the time, there was no reason to tell Napolitano that Shields and Cantelme were on the AHELA board, he said.
Napolitano and Stephens defend the decision to designate AHELA as the statesanctioned lender without going through a competitive bid process or making any attempt to find out if other nonprofits would be interested in pursuing the designation.
Stephens said no other corporations in Arizona had the necessary tax status to qualify for the designation, although he acknowledged that others could have received the tax status fairly easily, the same as AHELA.
And while Stephens and Napolitano say no other corporations were interested in being the state’s lender, at least one company — ALL Student Loan in California — would have been interested. ALL is one of two designated lenders in California, and that state’s sixth largest issuer of student loans.
“If there had been (a request for proposal) open to organizations we certainly would have been interested in going for it,” said Keith Malone, a spokesman for ALL. “Any time an opportunity opens in a location or a state that we are interested in, we would certainly pursue it.”
Two other states have recently created competitive processes for state-sanctioned student loan entities.
Ohio moved to a competitive process last year when its designated nonprofit lender was bought by a for-profit company, similar to what happened in Arizona. At least four companies submitted proposals, said Jeff Wallace, marketing and operations director for Student Lending Works, which won the designation.
Washington, which also recently had its lending authority sell to a for-profit company, earlier this month issued a request for information from companies interested in receiving the designation for that state.
The Arizona Department of Commerce oversees the operation of AHELA and is supposed to perform annual audits, Stephens and L’Ecuyer said.
But David Drennon, a spokesman for the department, said Friday the agency can’t find any audits of AHELA in the past two years.
Though members of the AHELA board are not paid, the company’s bylaws do allow them to start giving themselves compensation.
Federal law caps administrative expenses at 2 percent of the value of the bonds issued. Last year, AHELA spent $229,546 on administrative fees.
That figure does not include the $140,915 paid in brokerage fees, or the $207,000 AHELA spent for marketing and $178 for advertising, according to company tax reports.
Those records do not disclose who the marketing and advertising fees were paid to.
Cantelme owns an advertising and marketing company called Grupo N Advertising, which had been listed on the AHELA Web site as a partner. However, after the Tribune asked about the relationship, AHELA removed any mention of Grupo N.
Cantelme said Grupo N was never paid cash, but did receive free rent from AHELA at its Tempe headquarters, amounting to what Cantelme estimated was several thousand dollars.
Also listed, but now taken down on the AHELA Web site, was a loan program designated specifically for employees of Professional Medical Transport, an ambulance company owned by Cantelme. Working with Phoenix College, the program offered to reimburse PMT employees in obtaining their paramedic’s license through the school.
L’Ecuyer and Stephens said Thursday AHELA’s affiliations with Cantelme’s companies warrant scrutiny.
“It’s a valid inquiry and, sure, I’m happy to make it,” L’Ecuyer said.