Cahill rejects student-loan proposal
His plan turns to taxpayer money
State Treasurer Timothy P. Cahill yesterday rejected a proposal by Governor Deval L. Patrick to tap the state's pension fund to provide loans to college students, asserting it would be an imprudent investment and does not have the support of pension trustees.
Cahill instead proposed the state pledge $450 million in taxpayers' funds as collateral for the Massachusetts Educational Financing Authority, which is trying to arrange a bond sale in coming days and use the proceeds to fund student loans. He said the pledge would help MEFA raise sufficient funds without compromising pension returns.
"We're proposing this as a one-time emergency backstop," said Cahill. "We feel this would be enough to send a positive message to the markets . . . and the risk is minimal."
Cahill's and Patrick's competing proposals are in response to a credit crisis sweeping the student-loan industry that left many agencies, including MEFA, unable to raise funds earlier this year. Just last week, the Massachusetts agency said it would not be able to make any loans in time for this semester's bills.
On Wednesday, Patrick proposed the $51 billion state pension fund buy $50 million of MEFA's upcoming bond sale. The governor also said he would ask college endowments to invest in the bonds - a plan he pursued yesterday with phone calls to Harvard, MIT, Boston College, and at least seven other schools.
Cahill's plan would essentially use taxpayer money as collateral in case MEFA fell into a financial crisis and could not repay its bonds. His proposal, however, needs the approval of the Legislature, which has adjourned for the year. The Legislature would likely be forced to convene a rare special session to consider Cahill's proposal.
"It is important that we all work together to try to solve this crisis for students and their families," Patrick spokesman Kyle Sullivan said. "While we believe that the pension fund proposal in conjunction with the governor's outreach to colleges and universities is the most fiscally responsible solution, we look forward to working with the Legislature, MEFA, and the treasurer on a final resolution."
The competing proposals are yet another high-profile clash between Patrick and Cahill, who have battled recently over a plan to bail out the cash-strapped Massachusetts Turnpike Authority and a measure to borrow $3 billion to expedite repairs of bridges.
Cahill sought to slam the lid on the governor's attempt to tap pension funds yesterday, saying it does not have the support of a nine-member board that must sign off on investment decisions involving retirement funds. Cahill is the chairman of that board.
"In effect, we're being asked to invest in something that would give us a lower rate of return than we have a fiduciary requirement to do," he said.
Patrick has three appointees to the board; Cahill has two.
The remaining four members represent state employees and teachers. One of those offered strong support for Patrick's plan.
"It will help struggling families, and it's a good investment for members of the [pension] system," said Theresa McGoldrick, who represents employee unions on the board.
She said investment in the bonds seemed to fit the criteria of a community fund Cahill fought to establish in 2003 that supports local businesses and community interests. The fund provides investments that generally produce slightly lower returns in order to provide broader social and economic benefits.
"I think it fits the framework of an economically targeted investment," she said, using the official name of the investment program.
But Cahill said buying the student-loan bonds would fail to meet key criteria of the community investment fund, including a requirement that investments appear likely to achieve a market rate of return. He also said the pension board has elected not to pursue economically targeted investments this year because of the shaky economy.
Aides to Patrick said MEFA's bonds provide stable returns of 4 to 6 percent and the governor's plan provides the best chance at restoring the loans before the school year begins. The authority's executive director, Tom Graf, said yesterday he expects to go to market to sell about $400 million in bonds within the next two weeks.
Casey Ross can be reached at cross@globe.com. 