Iron Triangles, Part I

December, 2017

Washington -- The Chronicle of Higher Education has outed me; I'm a "university professor." Which is more or less true, as I have taught many years in the classroom, undergraduate and graduate.

This reminds me of the line uttered by the late Daniel Patrick Moynihan when he was in an election contest for the U.S. Senate. His opponent called him "Professor Moynihan," to which Moynihan replied, "The mud-slinging has begun." (I knew the professor and senator, as I sat behind him for five years in meetings of the Senate Budget Committee.)

All of which gives me occasion to conduct a college class discussion, via this blog post, in Public Administration 101, or perhaps 401 if the course is for graduate credit. The topic is "iron triangles."

An iron triangle at either the state or federal level is a lobbying association's dream, always sought and often achieved. One corner is the lobbying group; another is the staff of an elected official in the legislative branch with jurisdiction over the subject area; in the third corner are the officials in the executive branch who administer the relevant government programs.

The goal is to get the lobbying association's own people in charge of all the corners. This is done by means of the "revolving door," through which like-minded people sympathetic to the lobby group fill and then rotate among the corner positions, moving from one to another as opportunities arise.

The Pennsylvania student loan lender and secondary market PHEAA achieved an iron triangle in 2002. Its Washington lobbying association, the Education Finance Council, was led by a former PHEAA employee, Kathleen Smith, and governed by a board with PHEAA membership. The House of Representative's authorizing committee with jurisdiction over student loans was chaired by a Pennsylvania congressman, William Goodling, through 2001; he had hired former PHEAA employees as staff and they were retained by his successor. One of the committee staff, Sally Stroup, former PHEAA chief counsel, soon went over to the U.S. Department of Education to be an assistant secretary in charge of student loan policy. Already waiting at the Department was an undersecretary (later deputy secretary), Eugene Hickok, who had been a PHEAA board member when he was a Pennsylvania government official.

The iron triangle was therefore established and staffed. The only question remaining was how PHEAA would turn its good fortune into gold, so to speak.

It soon came up with a scheme, outlined by the CFO, Timothy Guenther, to its incoming CEO, Richard Willey, in May of 2002, to move student loans around among different tax-free and taxable bond estates to claim a windfall of extra federal taxpayer subsidies. The scheme would even have the loans wind up in a location where PHEAA could avoid any "excess interest" penalties under U.S. Treasury regulations, so PHEAA could put the money to any purpose it wanted, including big bonuses and retirement packages for its executives. Although the CFO said this too-good-to-be-true scheme was allowed under government regulations, PHEAA never sought opinion of counsel, never asked the Department of Education if it was legal, and in fact internally cautioned against anyone at PHEAA asking the Department if the scheme was proper, for fear of getting an answer that it was not.

CFO Timothy Guenther's memo had a note of caution. PHEAA shouldn't do too much of the scheme for fear of "political" ramifications. Meaning, of course, someone might notice. Nevertheless, Richard Willey, soon to be CEO, quickly told his CFO to "maximize" the revenue from the scheme.*

Working as a researcher at the Institute of Education Sciences, I noticed about a year later that PHEAA's payments were going up rapidly and asked the Office of Inspector Gereral to look into it. A few weeks after that, U.S. News and World Report contacted me about a cover story they were writing, entitled "Big Money on Campus." I told them they had a good story and should check out how excess subsidies were distorting the student loan markets. They did and included the observation in one of their articles.

After the story appeared, the aforementioned assistant secretary, formerly of PHEAA, formerly of the House committee staff, announced from a stage at a student financial aid conference that whatever U.S. News was talking about, "it's all legal." No one seems to remember exactly what the question from the audience was, but her answer was quickly published by the lobbying association's newsletter, published by the former PHEAA person who worked there.

Did the assistant secretary have Departmental clearance to make such an announcement? No, she later testified under oath in a deposition. No matter. Her statement that "it's all legal" circulated throughout the student loan industry, and soon nine other lenders and secondary markets were participating in the scheme. When I alerted the Government Accountability Office (GAO) a few weeks later, GAO wrote a report to Congress that indicated billions of dollars were at stake and that the scheme had to be cut off as soon as possible.

GAO said there were three ways to cut it off: Congressional action; new Department regulations; or simply clarification of existing regulations to make it clear the scheme was never allowed. The third option was one that I had recommended to the Department and the one Secretary Margaret Spellings eventually chose to kill the scheme, after the Department's Inspector General informed her that the scheme had never been legal. In the meantime, Congress acted to cut off the scheme prospectively.

Eventually the iron triangle collapsed. Deputy Scretary Hickok was caught holding stock in a bank while regulating it. Assistant Secretary Stroup was returned by Secretary Margaret Spellings to the House staff from which she came, (but only after she passed along information to PHEAA as to how to prepare for the Inspector General's audit). Another government employee with a student loan industry background, Matteo Fontana, who had supervised program reviews that somehow always overlooked legal problems with the scheme, was suspended, convicted, and fined for accepting stock in a student loan lender while supposedly regulating the industry. His boss, Terri Shaw, the COO of the Office of Federal Student Aid who paid the illegal claims for years from taxpayer dollars, without question, was not retained by Secretary Spellings when her appointment expired.

The extra revenue for PHEAA during the heyday of the iron triangle almost sank the company. When the Pennsylvania Auditor General, Jack Wagner, looked at PHEAA, he concluded that spending on perks and bonuses were so excessive that PHEAA had lost sight of its mission, which supposedly was to provide students with financial aid. He recommended changing the PHEAA board structure; Richard Willey resigned as CEO in the face of public outcry.** Pennsylvania Governor Ed Rendell was so incensed he tried to sell PHEAA to rival private company Sallie Mae.

All's well that ends well? No. In 2017, through discovery, we found the 2002 PHEAA internal memo that set off the whole scheme. PHEAA had told the OIG during its audit that no such document existed, that it had provided all its records dealing with its claims. PHEAA's CFO gave a deposition under oath that denied the existence of such a plan. The 2017 evidence showed that testimony to be false. No matter. When a jury was asked if PHEAA should return the illegally claimed money, which our expert witnesses put at $116.5 million and PHEAA did not dispute, the jury declined to get it back. Only the jury knows the reasons for its decision, but surely it had to do with the "it's all legal" statement by the assistant secretary as she moved through the iron triangle.

So that's today's class lesson in Public Administration 101/401 from a "university professor." There will not be a test on this material unless you think of this discussion the next time you go to the polls.

Note to my colleagues in academe: feel free to use this example the next time you teach about iron triangles.

* These records, uncovered by legal discovery in 2017, were public evidence at the trial of PHEAA in federal district court, just completed.

** Pennsylvania Auditor General Jack Wagner wrote: "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." Unfortunately, this report was not allowed into evidence in the PHEAA trial and the jury never saw it, but it can be read here.