Bonds. Big Bonds.
Published online November 14, 2006, 3:30 p.m. MST
COPYRIGHT 2006, Phoenix New Times
Two years ago, Governor Janet Napolitano gave sole rights to tens of millions of dollars in bond business to a group of politically connected retired firefighters with zero experience in the field, New Times has learned.
And then she vetoed a plan that would have given them competition.
Although the group is charged with making student loans, not one of its officers is involved with higher education, college financial aid, or even bonds.
The group's president, Pat Cantelme, ran the firefighters union in Phoenix for 20 years. Its vice chairman is a criminal-defense attorney. And its secretary/treasurer is Billy Shields, who now runs Cantelme's old union.
As it turns out, Cantelme got the idea to start the Arizona Higher Education Loan Authority from a bond broker, a local Democrat with his own political connections. That broker, Chris Hamel, and his firm have since been paid hundreds of thousands of dollars as the group's sole broker-dealer and underwriter for $227 million in bonds. (Of that total, $186 million were allocated to Cantelme's group by the Arizona Department of Commerce, which means they are tax-free.)
The agency is a nonprofit. Cantelme insists that neither he nor his board members have profited one cent, or will.
No one is accusing them of wrongdoing. But that doesn't mean that someone closely tied to AHELA's creation isn't already cashing in.
After all, there is money to be made in this deal. A lot of money. In the bond business, underwriting and brokerage fees can easily run in the millions of dollars. And just because this is a nonprofit doesn't mean that underwriters aren't paid fees. They are.
The firm that employs Chris Hamel, the guy who gave Pat Cantelme the idea to start the group, has already earned $1.29 million, according to bond records.
Amazingly, Napolitano's spokeswoman, Jeanine L'Ecuyer, defends the inexperience of Cantelme's group by noting that Hamel was part of its start-up team. And he's highly experienced.
But L'Ecuyer's defense makes one thing very clear: The only guy with experience was the guy who planned to profit from the venture.
The federal government allows states to sell bonds as a tool to finance big projects. The bonds are exempted from federal taxes.
The feds allot Arizona approximately $475 million in bonds every year. And, under Arizona's rules, 20 percent of the total is earmarked for student loans.
For 22 years, the nonprofit Arizona Educational Loan Marketing Corporation, or AELMC, was by and large Arizona's only designated seller of tax-free bonds to underwrite student loans.
But in October 2004, AELMC's parent company was sold to Sallie Mae, a for-profit company in Virginia. It was getting out of the tax-exempt-bond business.
And Pat Cantelme wanted to get in.
Cantelme is a soft-spoken, well-liked Phoenix native who became a legend running the United Phoenix Fire Fighters union. As union president, Cantelme turned the firefighters into a political force and dodged every bullet that came his way, including a former police chief's ill-executed attempt to smear him with a charge for dealing cocaine. (The evidence, as it turns out, was virtually nonexistent.)
Perhaps the only thing that really tarred Cantelme's legacy was his ill-fated decision to introduce the guy managing money for three unions to Fife Symington a connection that resulted in Symington's defaulting on a $10 million loan, and the union pension fund holding the bag.
In his retirement, however, Cantelme has become adept at maxing out his political connections for business opportunity.
His political consulting firm won business from Phoenix City Hall, even as it ran campaigns for council members. And the ambulance company he co-owns, PMT, has been winning 911 contracts in part because of support from his union brethren even as a rival company is actually unionized under the International Association of Fire Fighters. It's drawn him some criticism, since Cantelme's former union "brothers" stand to lose their jobs if his company is successful (see "Ambulance Chasers," October 27, 2005).
Cantelme refused to tell New Times how he even knew that the state's bond nonprofit was closing up shop, much less that the work was up for grabs.
But Chris Hamel admits it. It was he who gave Cantelme the tip even as, he admits, he's the guy who's profited from it.
Hamel was a senior assistant to Governor Bruce Babbitt in the 1980s. But he left politics and carved out a lucrative career as a bond salesman. Now a director at RBC Dain, Rauscher, one of the nation's top bond firms, he's helped many municipalities in the Valley sell bonds to finance construction projects.
Hamel says that the idea to start a loan authority "sort of emerged in a conversation between Pat Cantelme and myself. It was one of those conversations I was discussing that a not-for-profit needed to be started to fill a void, and Pat picked up the idea and developed it."
After all, Hamel couldn't just apply to do the work. He knew that the bonds must go to a nonprofit company. That's the law.
Cantelme confirms that he approached Napolitano's deputy that fall and asked if he could start a nonprofit to be designated Arizona's new student loan bond seller. And Napolitano agreed.
In December 2004, barely a week after Cantelme drew up papers to create the Arizona Higher Education Loan Authority, or AHELA, Napolitano issued an executive order making it the state's designated seller.
The designation of the group came with no fanfare and zero publicity. But it made a huge change in who'd be supervising the sale of tens of millions of dollars in tax-free bonds.
Instead of a highly experienced group with expertise in student loans, Arizona's $90 million annual allotment in bonds would be managed by Cantelme and two friends, neither with any particular experience in higher education financing.
Louis DeRoon III is the agency's vice chairman. A longtime "honorary firefighter," he's the lawyer who's often summoned when firefighters have a brush with the law. And AHELA's secretary/treasurer is Shields, who became president of the firefighters union in Phoenix when Cantelme retired. He is also a major Napolitano supporter and was the chair of her 9/11 Memorial commission.
The only other director, Bob Vanosky, is a Paradise Valley native who worked for RBC Dain, Rauscher until retiring in 2003. Hamel was promoted to Vanosky's old job when Vanosky left.
Cantelme defends the governor's choice, saying that anyone else could have made a pitch for doing a piece of the business. (Of course, that would require knowing about it, but, in Cantelme's defense, surely other bond salesmen had the same info as Hamel.) He's doing a public service, he says.
The predecessor to Cantelme's group, the Arizona Education Loan Marketing Corporation, was a big business: The group, along with its parent company, Southwest Student Services Corporation, had 250 employees.
And Southwest Student Services was an industry leader. The directors of the old group included a CEO, a former mayor, and two former educators.
Perhaps because the group had a sterling reputation, there never seems to have been an attempt, on the part of any Arizona governor or legislature, to supervise them or second-guess their decisions. But that's not how it works in some other states.
In Connecticut, the group that issues tax-exempt bonds for student loans is actually considered a quasi-public agency. It issues "requests for proposals" before hiring most contractors, according to its Web site. That means competition for the people seeking its business and, presumably, better rates.
In Connecticut, the group's chairman is appointed by the governor, and the legislature must approve the appointment. In Michigan, the legislature approves the entire board. (That board itself is run by the state treasurer, and its directors include officials from every one of Michigan's major universities.)
But AHELA was formed so quickly, and quietly, that some legislators say they had no idea it existed until after Napolitano vetoed its potential competition in 2005. Far from receiving public scrutiny, it's managed to do two years of business without getting a single mention in the Arizona Republic or even the Capitol Times.
Its first $91.9 million in bonds, in 2005, appears to have been used to purchase student loans from other lenders. But AHELA now originates its own loans, too. It's a preferred lender at the University of Arizona, and on the list to handle loans at Arizona State University.
"We've done what the governor said we should do," Cantelme says. "We've met our mission."
Their mission to whom?
Bond records show that the nonprofit has used Vanosky's old firm where, of course, Hamel currently works as the sole broker, marketing agent, and underwriter on every one of its three bond issues, which total $227 million.
Records show that the former nonprofit used at least three firms in a comparable time period.
"They're under no obligation to use us," Hamel says. He strongly denies any allegations of impropriety, explaining that this is how the bond business works.
"It's a competitive field," he says. "Now that they are in the marketplace, other entities will call on them." That would mean competition, and perhaps ultimately lower fees than Hamel and his firm are charging.
"But in the early stages," Hamel admits, "no one knew they were out there."
Until recently, AHELA's Web site listed a partnership with Grupo N, Cantelme's for-profit marketing firm. But while Cantelme confirms that Grupo N was doing work for AHELA, he says it's all pro bono.
Cantelme insists Grupo N never got paid. "You're way off base with that," he says. "Everything we've done has been donated."
AHELA's tax returns indicate that it spent $207,000 on marketing in 2005, but doesn't say where the money went.
Cantelme says the listing was taken off the Web site a few weeks ago, not because New Times was looking into the matter, but because it was a mistake: "It should have never been on the Web site in the first place."
But there are a few other oddities that remain on the Web site, www.ahela.org.
AHELA lists one special loan designated for workers at a particular company: workers at PMT Ambulance.
Cantelme is one of PMT's owners.
The site also lists only one scholarship "The Governor's 9/11 Memorial Scholarship."
Billy Shields, AHELA's secretary/treasurer, chaired the 9/11 Memorial Commission. Both he and Napolitano took harsh criticism from Republicans, who angrily criticized its anti-war sentiments. The scholarship, given to the writer of a 300-word essay, is intended to commemorate 9/11 and "show support for the Arizona 9/11 memorial."
And there's another Web link out there that Cantelme can't take down: According to a listing with the Arizona Hispanic Chamber of Commerce, his for-profit marketing firm, Grupo N, is using AHELA's Tempe suite as an office.
Cantelme did not return a follow-up call for comment on Monday, so it's unclear what the arrangement between Grupo N and AHELA is. But though Grupo N lists a different address on its Web site, it's obvious that it's not working there. The suite is empty, with exposed electrical wires and construction ladders visible from the doorway.
IRS spokesman Bill Brunson declined comment because the matter involves a specific company.
Cantelme defends AHELA's actions in every case. "This is what's crazy: We receive no compensation and no benefit for doing this. There's nothing we can harvest from this. There is no benefit down the road for us as individuals."
And, he insists, if anyone else wants a piece of the student loan bond money, it's there for the taking.
"There's nothing we could do to stop it," he says.
But history very recent history suggests otherwise. Just ask state Senator Dean Martin.
The Phoenix Republican, who was elected state treasurer last week, sponsored a bill in 2005 to reform some of the rules governing industrial development authorities. Those groups like the one in Maricopa County compete in a lottery for the tax-exempt bonds that aren't earmarked for student loans. They use the bonds to finance things like hospitals and affordable housing.
Martin says that, in many other states, industrial development authorities have the right to sell bonds for student loans. (Both Cantelme and L'Ecuyer dispute this, and New Times could not find any evidence to support Martin's claim. The lobbyist pushing the bill for Maricopa County's development authority, Kevin DeMenna, did not return calls for comment.)
One part of Martin's bill would have opened the student loan market to development authorities. He thought he had everyone on board: The bill sailed through both the House and Senate with virtually no opposition. No one testified against it, and the only no vote came from Senator Karen Johnson, who hardly has Governor Napolitano's ear.
But Napolitano to Martin's shock vetoed the bill. The reason, she wrote in her veto letter in May 2005, was that the student loan system worked just fine as it was.
Never mind that the longtime nonprofit had recently left the state and that its replacement, Cantelme's group, had yet to issue any reports or audits.
Martin says that supporters of the bill talked to Napolitano's staff. They were told that Shields a Napolitano ally, a major political player in the Valley, and AHELA's secretary/treasurer had requested the veto.
L'Ecuyer denies this. "[S]taff had a concern with the provision" about student loans, she wrote an e-mail. "Again, this was an issue identified by staff; AHELA did not raise it."
But in an interview with New Times last Thursday, Cantelme was not bashful about the role he and Shields played. (Shields did not return calls for comment.)
Industrial development authorities, Cantelme insists, should not be in the loan business. He plans to stop them if they try again.
"If a nonprofit wanted to get into this, we'd be fine with that," he says. "But if it's an industrial development authority, we'd ask her to veto it again."
Indeed, earlier this year, Martin introduced legislation with all the same changes for industrial development authorities except the student loan provision, which he omitted. The governor signed it into law.
Martin says he thinks AHELA deserves serious scrutiny.
He believes there should have been a request for proposals where other nonprofits could have competed for the bonds or perhaps a situation where several nonprofits get a piece of the work.
Based on the governor's veto, Martin is fairly sure she will not be receptive.
"Frankly, I thought maybe we could change the governor and not have to worry about a fight over this," says Martin. "But now you're talking about having to go out and make this happen with the same governor who let it happen in the first place.
"This will be a war."
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