I am in receipt of your e-mail dated February 25, 2009 raising numerous concerns about H.166, a bill that would authorize $50 million of State of Vermont moral obligation support for VSAC debt financings, and about VSAC in general.  I have also read your testimony to the Senate Finance Committee on this subject.

With all due respect, I do not agree with your conclusions and support H.166 wholeheartedly.   I do not plan to engage in an e-mail or blog debate on this subject, but since you have asked me for a response to your e-mail, here are a number of thoughts to consider:

•         You have asked for a State Audit.  That is your right and I understand you have met with the State Auditor’s Office about your request.  Personally, I don’t think a State audit is necessary, but that is not my call.  Keep in mind that VSAC has received unqualified audit opinions from an independent auditing firm for years and is routinely audited by the federal government in a variety of areas.

•         It has been no secret that VSAC faces significant financial challenges. These challenges have been discussed in the press, on the internet, and in the MD&A of VSAC’s annual financial report. They largely result from the collapse of the auction rate bond market.  There were a number of factors leading to that collapse, but none of them were created by VSAC.  The result, though, is higher borrowing costs and the need for VSAC to utilize accumulated equity to secure new capital for loans and to refinance outstanding auction rate debt.  That is reflected in VSAC’s financial statements and, in essence, is what H.166 is all about.

•         Will H.166 solve all of VSAC’s financial issues?  No, but it could potentially be a tool of significant assistance.  Will it present a significant or unwarranted risk to the State?  I do not believe so.  This bill has been carefully considered by the State Treasurer’s Office, our outside financial advisor, and our outside bond counsel.  In addition, we have discussed the proposal with rating agencies and included a description of the proposal in the most recent bond offering statements.  Bottom line: the proposal has been well vetted, the rating agencies do not have a problem with H.166, and Moody’s has very recently affirmed our Triple-A bond rating.

•         Moral obligation for State created entities is not a new thing in Vermont or elsewhere.  The Vermont Municipal Bond Bank, Vermont Economic development Authority, Vermont Housing Finance Authority, Vermont Telecommunications Authority, and our state university and colleges have all been granted moral obligation support over the years.  In over thirty years of use, there has never been a call on the State to make good on its pledge.  I agree that past performance does not guarantee future results.  That is why the bill is drafted tightly; to minimize risk, while providing assistance in a very difficult time to a State created entity we both believe provides a valuable service.

•         The proposed legislation explicitly provides that each VSAC transaction proposing to utilize a portion of the $50 million moral obligation authorization would be subject to prior analysis and approval by Vermont’s governor and state treasurer, with the maximum exposure outlined prior to the transaction.  Even if VSAC went out of the loan business altogether, this would not likely result in a call on the State’s moral obligation.  Default rates on VSAC loans historically have been very low and the vast majority of all the loans supporting VSAC bonds carry a 97 percent federal guarantee.  Yes, these are unusual times and stress testing assumptions related to VSAC bonds would be expected as part of the analysis by the State Treasurer prior to signing off.

•         I can state unequivocally that VSAC’s Board of Directors, of which I am a member, has been kept fully informed about our financial challenges and the steps VSAC is taking or might take to address them.  Personally, I have confidence in the VSAC Chief Executive, management, and Board of Trustees.  The fact that VSAC has so far navigated through the credit market storm and has been able to attain new capital to continue making loans, when many other state student lending agencies have not been able to do so, should be a testament to their ability.

•         Providing the resources, financial and educational, for Vermonters to access postsecondary education has never been more important.  As you know, a large part of the revenue to support important VSAC programs like outreach counseling in middle and high school are supported by the spread between VSAC borrowing expenses and lending revenues.  Without its loan program revenues, the State would have to find other scarce budget revenues for these critical programs. Frankly, I think that is a bigger risk to Vermonters that the risk generated by the carefully crafted language in H.166.

I hope all is well with you and your family.

Jeb Spaulding, Vermont State Treasurer