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The company selected by Governor Janet Napolitano to handle $236 million in tax-free bonds has admitted, after questioning from New Times, that it failed to properly disclose its finances to the IRS and then filed an amended tax return to correct the problem.
The Arizona Higher Education Loan Authority, or AHELA, also acknowledged that it is poised to appoint three additional board members to correct another problem first flagged by this newspaper: Rather than people with experience in financial aid and higher education, the nonprofit is being run by Democrats with close ties to the governor.
The new appointees, according to the group's newly hired spokesman, Jason Rose, will include Republicans. And Rose claims they'll also be well-respected and knowledgeable about the loan business.
As New Times first reported, AHELA was formed in December 2004. Within days, Napolitano signed off on an executive order giving the company sole rights to more than $90 million annually in tax-free bonds, with the charge to use them to generate money for low-cost student loans (see "Bonds. Big Bonds," November 16).
Since New Times' story was published, the governor has claimed, somewhat incredibly, that she had no idea who was running AHELA when she gave the group its virtual monopoly. As it turns out, the group's officers are all Napolitano supporters: the retired president of the United Phoenix Firefighters Union, Pat Cantelme; Cantelme's successor and the current president, Billy Shields; and their longtime associate, Louis DeRoon III, a criminal-defense attorney known for his ability to get firefighters out of legal trouble.
In the wake of questions generated by New Times' story, AHELA signed on Rose, a public relations flack who's made his name as a savvy political operative who's not afraid of a street fight or a cheesy publicity stunt. (Remember Sheriff Joe endorsing the Pink Taco? Both the sheriff and the Scottsdale eatery are Rose clients. He's also represented Cantelme's ambulance company, PMT, which is in the fight of its life over municipal 911 contracts.)
It's Rose who was forced to admit that AHELA had messed up its tax returns.
The IRS requires a nonprofit to list its five highest-paid employees, if they earn more than $50,000 annually, and its five highest-paid contractors, if they cross that same threshold. The idea, according to IRS regulations, is to make sure that no one person or company is enriching themselves at the company's expense and if they are, that it's at least disclosed to the public.
AHELA's initial tax return, filed in June, indicated that it hadn't paid any company more than $50,000 in 2005.
As its amended tax form now makes clear, that isn't true. A Scottsdale company, Cology Inc., was paid $207,000 for marketing. The Greenberg Traurig legal firm was paid $150,000. And RBC Capital Markets, a division of brokerage house RBC Dain, Rauscher, was paid $712,338.
Both Cology and RBC have close ties to the loan authority. AHELA's executive director, Shelly Murphy, worked at Cology just before AHELA hired that company to do marketing. And, as New Times first reported last month, it was an officer at RBC, Chris Hamel, who had the idea of starting the nonprofit in the first place.
The group that previously received the state's bond allocation for student loans had converted to a for-profit company, meaning it was no longer eligible for the work. Hamel admitted to New Times that he told Cantelme, the retired union president, about the business opportunity. Cantelme then filed paperwork to set up AHELA and got the governor to sign off on its designation and then almost immediately began using Hamel's company as its sole bond broker/dealer and underwriter.
Hamel's company, to date, has been paid about $1.2 million, according to bond records.
As it turns out, the sum is that high partly because, in 2005, AHELA asked for a bigger bond allocation than the state usually gives to student loan providers.
Every year, the feds allow Arizona to sell about $455 million in tax-free bonds. Twenty percent, or about $91 million annually, is earmarked for student loans.
But before Cantelme's group could even sell the $91 million in bonds that it was allocated in January 2005, Cantelme asked the Arizona Department of Commerce for yet more money, records show. The amount: $50 million.
David Drennon, a spokesman for the commerce department, says that any unspent allocations are redistributed at the end of the fiscal year on a first-come, first-served basis. And so in July 2005, Cantelme was given his $50 million request without having to submit any justification for the $91 million that his group had already been given.
So what did AHELA do with that money?
Rose, the company's new public relations guy, confirms that the $91 million was used to buy up existing loans. The remaining $50 million, he says, is now sitting in reserve.
"AHELA needed to build up its capacity," Rose says, "so that when it increases its business with the University of Arizona, with Arizona State University, that it has the capacity to service student loans."
This year, armed with yet another $95 million bond allocation from the state, AHELA has begun to make loans of its own. (To date, Rose says AHELA has placed nearly 3,000 loans. It hopes to increase that number to 10,000 loans in the next fiscal year, which begins in July 2007.)