DATELINE: February 4, 2009, Chicago
We disagree with Monday’s statement from Senator Max Baucus, the chairman of the Senate Finance Committee, regarding former Senator Tom Dashcle’s nomination to head the Department of Health and Human Services. Baucus threw his support behind the nomination despite Daschle’s tax problems. At least Baucus took a public position.
Senator Charles Grassley, the ranking member of the Senate Finance Committee, remained largely and mysteriously silent. Silence is uncharacteristic of Grassley, a well-known populist. But Grassley may have been holding all the cards….
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Much has been made of Daschle’s tax problems, but his association with the tax-exempt student loan provider, EduCap, may also have been part of the problem. The Wall Street Journal reported yesterday that the Senate Finance Committee is currently investigating EduCap, a nonprofit and tax-exempt entity. Naftali Bendavid, Laura Meckler, and Glen R. Simpson, Democrats Affirm Support for Daschle (Feb. 3, 2009). According to the Journal, Daschle’s law firm, Alston & Bird, represents EduCap in connection with its response to the Senate probe. EduCap also appears to be under audit by the IRS, or at least the complaint filed by EduCap in federal district court for the District of Columbia suggests so.
In 2007, Senator Grassley issued a press release announcing that he was investigating EduCap, but after 18 months we have seen nothing come of the investigation. In Item 8 of that letter, Senator Grassley asks:
Please provide a detailed log of all trips taken in the Gulfstream IV jet since its purchase. For each trip, include an explanation of its purpose, including whether and in what respect the trip furthered EduCap’s tax-exempt purpose. Provide all passengers for each trip and an itinerary of the travel. Provide all documentation relating to whether and to what extent you or any other individual were reimbursed (or provided reimbursement) for the cost of any of these trips. Please provide all photographs and videotape of these trips. Please provide the same information for any other jet chartered or owned by EduCap.
He also asks about payments to ASC Management Company and contributions by EduCap to the Academy of Achievement. Presumably Senator Grassley and his minions have gathered all sorts of interesting documents, but the Senate Finance Committee disclosed none of the potentially relevant facts. While Daschle twisted in the wind and his Democratic colleagues offered support, Grassley may have been engaged in rough contact under the basket.
Daschle apparently took at least two trips on the plane, one to the Bahamas and one to the Middle East. Nice work if you can get it. Daschle, however, is not the only beneficiary of EduCap’s apparent largesse. The Wall Street Journal is reporting today that Leon Panetta’s Institute for Public Policy received $50,000 from EduCap. Glenn R. Simpson, Nonprofits Linked to Daschle Spread Cash Around Washington. We confirmed the $50,000 payment to the Panetta Institute by reviewing recent Form 990s. Many other Washington, D.C. charities received money from EduCap. As far as we can tell, most had nothing to do with student loans.
Our two favorite contributions are $72 to the Phillips Collection and $100,000 to the Sunlight Foundation. According to GuideStar, the Sunlight Foundation develops and deploys new Internet technology to make information about Congress and the Federal government more accessible to the American people. How about starting with the Senate Finance Committee's vetting of Daschle behind closed doors?
As a tax-exempt provider of student loans, EduCap should be trying to minimize the rate paid student borrowers. It has been reported that EduCap charges high rates of interest on some student loans. Amit R. Paley and Valerie Strauss, Student Loan Nonprofit a Boon for CEO: Watchdogs Question Spending; Company Touts Benefits to Consumers, Washington Post (July 16, 2007). EduCap defends its rates by pointing out that the rates in question are on loans to the riskiest borrowers.
Yet EduCap is making significant grants that have nothing to do with student loans. Interestingly, EduCap operates using at least two names. The other is the Catherine B. Reynolds Foundation. We wonder when EduCap makes charitable grants whether the grants are made using its name or using the dba name “Catherine B. Reynolds Foundation.” The Post described the arrangement was follows:
The foundation appears in some ways to present itself as an independent charity giving away the personal wealth of Catherine Reynolds. It maintains a separate Web site and Reynolds identifies herself as the chairman and chief executive of the foundation, in addition to her role as chairman and chief executive of EduCap, according to a company biography.
The foundation doesn't exist as a separate legal entity, though; it is another name by which EduCap does business, according to documents and company officials. So when the Catherine B. Reynolds Foundation donates money, it is from the tax-exempt lending company, according to company officials and tax filings. Steven Glover, a member of the EduCap board, said Catherine Reynolds usually proposes the donations, which the board then approves.
The largest grants by EduCap shown on each its three most recently available tax returns are to the Academy of Achievement, a charity headed by the husband of EduCap’s CEO and board chairman. Its 2007 Form 990 reports that it gave $8,041,955 to the Academy of Achievement; Its 2006 Form 990 reports that it gave $2,748,915 to the Academy of Achievement; and its 2005 Form 990 reports that it gave $8,242,681 to the Academy of Achievement. We misspeak—actually the student borrowers are in substance the ones who made the contributions to the Academy of Achievement and the other charities.
If EduCap were to reduce its rate of return on its loans by 1%, it could benefit a lot of students. By reducing interest costs by $8,041,955 (the 2006-07 grant to Academy of Achievement), it could reduce the rate of interest on $800,000,000 of loans by 1%. Assuming an average loan of $20,000, that provides a nice benefit to 40,000 students. The irony is that Senator Grassley would be thrilled with a 1% increase in endowment spending rates if the money went to help students pay tuition. For proof of that, see 1-26-09 Grassley: College Endowment Volatility is Not Excuse for Skirting Student Affordability; 9-8-08 Grassley Urges Continued Look at College Endowment Growth, Student Affordability; 9-4-08 Grassley, Welch Release Participant List for September 8, 2008, College Endowment Roundtable; 5-29-08 Grassley Outlines Interest in College Endowments, Student Aid, Addresses Colleges’ Concerns; -24-08 Baucus, Grassley Write to 136 Colleges, Seek Details of Endowment Pay-outs, Student Aid; and 1-14-08 Grassley Welcomes Yale’s Increased Student Aid, Hopes Other Colleges Will Follow Suit.
Instead, the $8,041,955 went to an organization that maintains a Web site that acknowledges the achievements of famous people who already have received plenty of recognition. It also sponsors an annual conference that looks more like a party to us. In theory, the conference inspires 250 young people who are invited to mix with powerful and famous achievers. Yet, if you review the Academy’s Web site, you see what looks like a big party. Taylor Swift and Chuck Berry performed at the 2008 annual summit in Hawaii. There were even fireworks onthe beach. The 250 student delegates appear to us as a beard for the party. Assuming a $5,000 cost per student, the Summit would incur $1,250,000 in expenses. The question is what happens to the remainder of the $8 million contribution from EduCap to the Academy of Achievement. That’s hard to say based on the Academy’s 2007 Form 990, which has a different year-end than EduCap's But we don't see much activity other than the summit and the Web site. The Summit accounts for more than half of the Academy’s 2007 expenditures.
As noted, Daschle flew at least two times on a corporate jet owned by EduCap. Senator Grassley has had a lot to say about jets owned by charities. Click here to listen to Senator Grassley’s own words. He was pretty vocal about a ministry using jets, but we hear nothing about Daschle riding a jet. We can only wonder what Senator Grassley had to say in closed committee hearings.
We have long disagreed with Senator Grassley's public investigations of charities. We believe that to the extent a charity has tax problems, the IRS is the appropriate agency to conduct the investigation. When the IRS commences an audit, the taxpayers involved receive the significant due process and privacy protections offered by the Internal Revenue Code. When the Senate Finance Committee conducts investigations, much of the information collected becomes public. So we have some ambivalence about wanting the Daschle-EduCap information released to the public. Nevertheless, if the information was used behind closed doors for political advanatage in the Daschle confirmation process, it should be be made public.
According to the Wall Street Journal article, the Senate Finance Committee plans to follow past practice, meaning that it will eventually release the documents it gathered in connection with its EduCap probe, but the release will no longer be on an accelerated basis because Senator Daschle has withdrawn his nomination. Could that be because Senator Grassley doesn’t want the information connected to his elbows?
Internal Revenue Service - Circular 230 Disclosure: As provided for in Treasury regulations, any advice (but none is intended) relating to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.
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