Missouri Taps Into the Sale of Student Loans

Missouri's hard-fought decision to become the first state to auction off a sizable part of its student loan portfolio for quick cash sparked enough drama to rival Donald Trump's "The Apprentice" TV show.
There were people fired, lawsuits threatened and opponents harshly rebuked. States leery of tax increases increasingly are looking at raising revenue by selling assets - from Indiana's lease of its turnpike last year to California's proposal to sell control of its state lottery - but Missouri's bitter battle could serve as a cautionary tale.
Gov. Matt Blunt (R) last month signed into law a first-of-its-kind measure that will finance $350 million in new college building projects by ordering the Missouri Higher Education Loan Authority (MOHELA) to sell a portion of its student loans. While MOHELA had the authority to buy and sell student loans before the legislation, profits of the sales had always gone back into the student loan agency. This is the first time that the agency is required to give the state a chunk of its proceeds, which the state will use solely for capital projects at public colleges and universities.
Enactment of the law followed 18 months of acrimonious debate involving MOHELA, a nonprofit student loan agency created by the state Legislature in 1981 to make it easier for college students to get affordable loans .
The Missouri plan is yet another example "of states looking for innovative ways to generate revenue without raising taxes," said Arturo Perez, a fiscal expert with the National Conference of State Legislatures.
Initially, there was speculation that Blunt would push to sell MOHELA outright to a private company for potentially billions of dollars. "People still think we've been sold. … We have not," said MOHELA spokesman Will Shaffner. He called the package "a very good compromise" that still will enable the agency to offer discounted interest rates and loan-forgiveness programs to needy students. In exchange for the $350 million, MOHELA gets a 15-year pledge of tax-exempt bonding authority from the state that will allow the agency to underwrite more loans.
The idea of tapping into state assets for upfront cash caught fire in states after Indiana last year inked a $3.8 billion, 75-year lease on its toll road, with the money used for transportation projects. California, Illinois, Michigan, New Jersey and Pennsylvania are among states still in session considering privatization plans this year.
In Missouri, the passage of Blunt's "Lewis & Clark Discovery Initiative" was a hard-fought victory for the governor. His proposal was controversial as soon as he unveiled it in 2006, with the debate moving from how the plan might affect student loans to an imbroglio over embryonic stem-cell research. "It had all the characteristics of a soap opera," said David J. Webber, a political science professor at the University of Missouri-Columbia.
Blunt was forced to drop the idea of providing seed money for emerging biotechnology and life sciences projects to appease opponents who feared new research buildings could be used for controversial embryonic stem-cell research.
In recent years, Missouri lawmakers have tried to ban embryonic stem-cell research, but voters last fall narrowly endorsed a measure to ensure the legality of such studies in the state.
The governor also ran into stiff resistance from Democrats, who are in the minority in both chambers, and the state's Democratic attorney general, Jay Nixon, who filed a lawsuit against MOHELA for allegedly crafting the deal in secret without public input. MOHELA also was charged with illegally firing the MOHELA executive director who opposed the governor's proposal. Nixon, who announced he will be running for governor in 2008, had urged Blunt to veto the legislation, calling it a "raid on MOHELA assets."
Key Democrats saw swift retribution for their opposition to the bill. Senate Republicans stripped $31 million from the final package for a new cancer building at the University of Missouri and a pharmacy building at the University of Missouri-Kansas City to punish two state Senate Democrats - Chuck Graham of Columbia and Jolie Justus of Kansas City - who represent those areas and led an all-night filibuster to block a vote on the bill. Blunt has promised to seek funding early in next year's session for those projects.
No other state has tried such a plan of this scale. Illinois has used the profits from selling off some student loans, but its $34 million venture was much smaller and the money was targeted for a student grant program, not to build new campus buildings.
Lindsey Luebchow, who tracks education at the New America Foundation, a Washington, D.C., think tank, said she doubts other states will follow in Missouri's steps because the debate got so partisan and rancorous . "It won't be replicated," she predicted.
Indeed, politicians are moving slowly on leasing state assets , primarily turnpikes and lotteries. A backlash in Indiana against leasing the Indiana Toll Road helped Democrats take control of the state House in last year's elections and helped defeat Republican Gov. Mitch Daniels' initiatives this year to build two new toll roads and lease the state lottery. After a heated debate, Texas legislators placed a two-year moratorium on some privately run toll roads, a key initiative of Republican Gov. Rick Perry .
Sujit CanagaRetna, a tax and budget expert at the Council of State Governments, predicts that despite the prospect of political fights, governors will continue to push leasing and privatization plans because states need the money for new projects and don't want to raise taxes. "It's definitely a trend that's here to stay," he said.

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