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353.88
L72CHEG
1996
M
Legislative Audit Division
i£MStM«
State of Montana
Report to the Legislature
September 1996 Financial Audit
For the Fiscal Year Ended June 30, 1996
Guaranteed Student Loan Program
Commissioner of Higher Education
We issued an unqualified opinion on the financial statements of the program
and our report contains no recommendations.
^^'ft&Stel \iWL«i
^ >L
i 'w 1 11
â– rrir^TJ
STATir DnCUMCNTS COLLCCTIG
FEB ^ 1997
MONTANA STATE LIBRARY
1515 E. 6th AVE.
HELENA, MONTANA 59520
96-6
Direct comments/inquiries to:
Legislative Audit Division
Room 135, State Capitol
PO Box 201705
Helena MT 59620-1705
MONTANA STATE LIBRARY ^ H
3 0864 0010 3632 9
)
FINANCIAL-COMPLIANCE AUDITS
Financial-compliance audits are conducted by the Legislative Audit Division to determine if an
agency's financial operations are properly conducted, the financial reports are presented fairly, and
the agency has complied with applicable laws and regulations. In performing the audit work, the
audit staff uses standards set forth by the American Institute of Certified Public Accountants and
the United States General Accounting Office. Financial-compliance audit staff members hold
degrees with an emphasis in accounting. Most staff members hold Certified Public Accountant
(CPA) certificates.
Government Auditing Standards, the Single Audit Act of 1984 and Amendments of 1996, and 0MB
Circular A-128 require the auditor to issue certain financial, internal control, and compliance
reports. This individual agency audit report is not intended to comply with these reporting
requirements and is therefore not intended for distribution to federal grantor agencies. The
Legislative Audit Division issues a statewide biennial Single Audit Report which complies with the
above reporting requirements. The Single Audit Report for the two fiscal years ended June 30,
1995 has been issued. Copies of the Single Audit Report can be obtained by contacting:
Single Audit Coordinator Legislative Audit Division
Office of Budget and Program Planning Room 135, State Capitol
State Capitol PO Box 20 1 705
Helena MT 59620 Helena MT 59620-1705
Phone (406) 444-3616
MEMBERS OF THE LEGISLATIVE AUDIT COMMITTEE
Senator Greg Jergeson,
Vice Chairman
Representative Ernest Bergsagel, Chairman
Senator Sue Bartlett
Representative Beverly Bamhart
Senator Reiny Jabs
Representative A. R. "Toni" Hagener
Senator Tom Keating
Representative Bob Keenan
Senator Ken Miller
Representative Robert Pavlovich
Senator Linda Nelson
Representative Bruce Simon
MONTANA LEGISLATIVE BRANCH
Legislative Auditor
Scott A. Seacat
Legal Counsel:
John Northey
Deputy Legislative Auditors:
Mary Bryson
Operations and EDP Audit
James Gillett
Financial-Compliance Audit
Jim Pellegrini
Performance Audit
LEGISLATIVE AUDIT DIVISION
September 1996
The Legislative Audit Committee
of the Montana State Legislature:
This is our report on the financial audit of the Commissioner of Higher Education's Guaranteed Student
Loan Program (GSLP) for the fiscal year ended June 30, 1996.
The Montana Guaranteed Student Loan Program was authorized by the Montana Legislature in 1979
and established July 1, 1980. The GSLP allows eligible students to receive loans from lending
institutions to pay for post-secondary education. The federal government guarantees the loans made by
lending institutions and makes administrative cost reimbursements to the GSLP. The Budget
Reconciliation Act of 1993, which includes the Student Loan Reform Act of 1993, may have a material
impact on the operations of the GSLP in future years. For more information see note 21 on page A- 14
of the notes to the financial statements.
The Guaranteed Student Loan Program initially contraaed with United Student Aid Funds, Inc. to
process and service loans. In 1988, the Montana GSLP began assuming the administrative duties
associated with the loan guarantee process. During 1990 the GSLP assumed complete administrative
controls but continues to contract with USA Services, Inc. for computer support services.
We thank the Commissioner of Higher Education and his staff for their cooperation and assistance
during the audit.
Respectfully submitted.
Scott A. Seacat
Legislative Auditor
Room 135. State Capitol Building. PO Box 201705 Helena, MT 59620-1705
Phone (406) 444-3122 FAX (406)444-9784
Digitized by the Internet Archive
in 2010 with funding from
IVIontana State Library
http://www.archive.org/details/guaranteedstuden1996mont
Legislative Audit Division
Financial Audit
For the Fiscal Year Ended June 30, 1996
Guaranted Student Loan
Program
Commissioner of Higher Education
Members of the audit staff involved in this audit were Wayne Kedish
and Charles Nemec.
Table of Contents
Report Summary iii
Independent Auditor's Report A-3
Balance Sheet
Special Revenue Fund
June 30, 1996 A-5
Statement of Revenues, Expenditures and
Changes in Fund Balance, Budget and
Actual, Special Revenue Fund for the
Fiscal Year Ended June 30, 1996 A-6
Notes to the Financial Statements A-7
Guaranteed Student lx)an Program B-3
Independent Auditor's
Report & Program
Financial Statements
Program Response
Page i
Page ii
Report Summary
Guaranteed Student Loan We performed the financial audit of the Montana Guaranteed Student
Program Loan Program for the fiscal year ended June 30, 1996. This repon
contains the audited financial statements and accompanying notes for
fiscal year 1996. We issued an unqualified opinion on the financial
statements. The opinion means the reader may rely on the financial
statement information presented.
The current report does not contain any audit recommendations.
The report does contain information relating to the changing federal
student loan program environment. The prior report contained no
audit recommendations.
Page iii
Independent Auditor's Report
& Program Financial Statements
Page A-1
Page A-2
MONTANA LEGISLATIVE BRANCH
Legislative Auditor
Scott A. Seacat
Legal Counsel:
John Northey
Deputy Legislative Auditors:
Mary Bryson
Operations and EDP Audit
James Gillett
Financial-Compliance Audit
Jim Pellegrini
Performance Audit
LEGISLATIVE AUDIT DIVISION
INDEPENDENT AUDITOR'S REPORT
The Legislative Audit Committee
of the Montana State Legislature:
We have audited the Balance Sheet of the Commissioner of Higher Education's Guaranteed Student Loan
Program - Special Revenue Fund of the state of Montana as of June 30, 1996, and the related Statement of
Revenues, Expenditures and Changes in Fund Balance - Budget and Actual for the fiscal year then ended.
These financial statements are the responsibility of the program's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for our opinion.
As discussed in note I, the financial statements present only the Commissioner of Higher Education's
Guaranteed Student Loan Program - Special Revenue Fund and are not intended to present fairly the
financial position and results of operations of the state of Montana in conformity with generally accepted
accounting principles.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of the Commissioner of Higher Education's Guaranteed Student Loan Program - Special
Revenue Fund of the state of Montana as of June 30, 1996, and the results of its operations for the year
then ended in conformity with generally accepted accounting principles.
Respectfully submitted,
James H. Gillett, CPA
Deputy Legislative Auditor
August 23, 1996
Page A-3
Room 135, State Capitol Building, PO Box 201705 Helena, MT 59620-1705
Phone (406) 444-3122 FAX (406)444-9784
Page A-4
GUARANTEED STUDENT LOAN PROGRAM
SPECIAL REVENUE FUND
BALANCE SHEET
JUNE 30, 1996
ASSETS
Cash in Treasury $854,493
Accounts Receivable 49,158
Due From Federal Government (Note 2) 2,344,889
Loans To Students ( Note 3) 12,086
Investments (Note 4) 7,369,800
Total Assets $10,630.426
LIABILITIES AND FUND BALANCES
Liabilities:
Accounts Payable $237,658
Property Held in Trust (Note 5) 83,353
Due to Federal Government (Note 6) 685,638
Deferred Revenue (Note 7) 4,594,1 1 3
Total Liabilities $5,600,762
Fund Balances:
Restricted (Note 8) $14,701
Unrestricted 5,014,963
Total Fund Balance $5,029,664
Total Liabilities and Fund Balances $10,630,426
The accompanying notes are an integral part of this financial statement.
Page A-5
COMMISSIONER OF HIGHER EDUCATION
MONTANA GUARANTEED STUDENT LOAN PROGRAM
SPECIAL REVENUE FUND
STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE
BUDGET AND ACTUAL
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
REVENUE:
Guarantee Fee Income (Note 7)
Administrative Expense Allowance (Note 9)
Investment Earnings ( Note 4)
Collection Costs Retained (Note 10)
Supplemental Preclaims Assistance (Note 11)
Accrued Interest (Note 12)
Nonreinsured Loan Recoveries
Escrow Disbursement Service Fees (Note 5)
Miscellaneous Revenue
TOTAL REVENUES
EXPENDITURES:
Administrative Costs
Agency Share of Loan Defaults (Note 13)
Equipment and Intangible Assets
Debt Service
TOTAL EXPENDITURES
Excess Revenues Over/
(Under) Expenditures
Prior Year Adjustment (Note 16)
Fund Balance -07/01/95
Fund Balance - 06/30/96
Variance
Favorable
Budget
Actual
(Unfavorable)
$1,338,332
$1,365,554
$27,222
646,000
746,265
100,265
191,637
402,349
210,712
1,156,646
977,782
(178,864)
122,883
219,749
96,866
10,000
31,679
21,679
10,000
12,609
2,609
50,000
54,853
4,853
5,000
21,905
16,905
$3,530,498
$3,832,745
$302,247
$3,158,170
$2,625,788
$532,382
50,000
40,248
9,752
73,203
85,733
(12,530)
1,874
(1,874)
$3,281,373
$2,753,643
$527,730
$249,125
$1,079,102
$829,977
5,461
5,461
3,945,101
3,945,101
$4,194,226
$5,029,664
$835,438
The accompanying notes are an integral part of this financial statement.
Page A-6
COMMISSIONER OF HIGHER EDUCATION
GUARANTEED STUDENT LOAN PROGRAM
SPECIAL REVENUE FUND
NOTES TO THE FINANCIAL STATEMENTS
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
1 . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Description of Program
The State of Montana's Guaranteed Student Loan Program (MGSLP) is located in the
Office of the Commissioner of Higher Education. As a Special Revenue Fund, it accounts
for the proceeds of revenue sources that are legally restricted to expenditures for specified
purposes. MGSLP was established by the Office of the Commissioner of Higher Education
in fiscal year 1981 to coordinate and administer the federally insured student loans issued
by various lending institutions within the State of Montana. Montana's Federal Family
Education Loan Program operates in compliance with agreements with the U.S.
Department of Education (DE), pursuant to Section 428 of the Higher Education Act of
1965, as amended (The Act).
B. Basis of Accounting
The financial statements were prepared using the modified accrual basis of accounting.
Under the modified accrual basis of accounting, expenditures are recorded on the basis of
valid obligations. Revenues are recorded when received in cash unless susceptible to
accrual. Revenues are susceptible to accrual if they are measurable and available to
finance expenditures of the fiscal period or are not received at the normal time of receipt.
Revenues are deferred if material and received before the normal time of receipt or if
received for a particular activity and the expense for that activity has not been incurred prior
to fiscal year end.
2. DUE FROM FEDERAL GOVERNMENT
MGSLP pays individual lending institutions for any loans that have been defaulted or are
unpaid due to the death, permanent disability, or bankruptcy of the borrower. The agency
then seeks reimbursement from DE in accordance with reinsurance agreements between
the agency and DE (See Note 13).
in addition, the receivable Due From Federal Government includes amounts MGSLP had
not yet received for administrative expense allowance payments (Note 9) for the second,
third, and fourth quarters of FY96, and supplemental preclaims assistance (SPA)
reimbursements (Note 1 1) for accounts which were satisfactorily brought current in the last
two months of the fiscal year. The extent of the outstanding reinsurance activity and other
pending reimbursements from DE as of June 30, 1996, is shown below.
Reinsurance claims due from DE $2,096,842
Administrative Expense Allowance for the
last three quarters in FY96 209,843
SPA for May & June, 1 996 38.204
Total Due From Federal Government $2.344.889
Page A-7
3. LOANS TO STUDENTS
In exceptional circumstances, MGSLP has purchased student loans from lenders, prior to
any claim being filed, when the borrower is under extreme financial hardship. MGSLP has
waived the borrower's responsibility to cover loan interest costs and is holding the loans in
a repayment forbearance pending an improvement in the borrower's financial situation.
MGSLP has not received reinsurance from DE on these loans.
4. INVESTMENTS
Investments are units purchased in the State of Montana's Short Term Investment Pool
(STIP) and are reflected at cost, which equals market. At June 30, 1996, MGSLP owned
7,369,800 units valued at $1 per unit for a total of $7,369,800. Investment earnings during
FY96 were $402,349. STIP securities include Banker's Acceptances, Commercial Paper,
Corporate Obligations, Montana Certificates of Deposit, Government Securities, and
Repurchase Agreements. At June 30, 1 996, most securities, classified as Risk Category 1 ,
were held by the state or its agent in the state's name. The remaining portion, classified as
Risk Category 2, was loaned under a security lending agreement with the state's agent.
The State of Montana's STIP investment portfolio contained asset-backed securities and
variable rate securities with market values of $234,329,292 and $31 1 ,229,438; 1 9.74% and
26.22%, respectively, of the total portfolio at June 30, 1996. Board of Investment's policy
requires that STIP investments have the highest rating in the short term category by at least
one of the six Nationally Recognized Statistical Rating Organizations.
Asset-backed securities have less credit risk than securities not backed by pledged assets
and market risk for these securities is the same as market risk for similar non asset-backed
securities. While variable-rate securities have credit risk identical to similar fixed-rate
securities, their market risk is more sensitive to interest rate changes. Market risk may be
less volatile than fixed-rate securities because the value of variable-rate securities will
usually remain at or near par. There are no legal risks that the Board of Investments is
aware of regarding any STIP investments.
5. PROPERTY HELD IN TRUST
MGSLP operates an escrow disbursement service for approximately fifty-one lenders.
Participating lenders are assessed a fee for this service. In accordance with contracts
MGSLP has with the disbursement service lenders, MGSLP automatically debits the
lenders' accounts to collect loan proceeds. MGSLP then disburses funds to the schools
for delivery to the students either by individual State of Montana warrants or electronic
transfers. The MGSLP disbursement service records all adjustments to individual student
loan accounts and ensures that school refunds of loan proceeds are promptly returned to
the lenders. Disbursement service revenues earned during FY96 were $54,853 including
$5,398 which was not received until after June 30, 1996.
As of June 30, 1 996, MGSLP's escrow disbursement service held $83,353 in student loan
funds which were disbursed to the schools or refunded to the lenders after fiscal year end.
Page A-8
6. DUE TO FEDERAL GOVERNMENT
After assignment to the guaranty agency, MGSLP seeks collection of student loans that
have been defaulted or are in Chapter 7 or Chapter 1 3 bankruptcy status. Recoveries of
loans reinsured by DE are owed back to DE (See Note 10). In addition, proceeds of loans
sold back to lending institutions after a loan is rehabilitated or repurchased are also owed
back to DE. At June 30, 1996, the amount owed to DE is $685,638.
7. DEFERRED REVENUE AND GUARANTEE FEE INCOME
Guarantee fees are received from borrowers at the time loans are disbursed. In all years
prior to FY95, MGSLP charged a guarantee fee equivalent to 3% of the loan amount.
Effective July 1 , 1994, the maximum guarantee fee that borrowers may be charged
decreased to 1% of the loan amount. Guarantee fees are deferred and recognized as
revenue, using the straight-line method, over an eight year period. This period
approximates the average life of an outstanding student loan. Deferred revenues from
guarantee fees are invested by MGSLP and are included in the agency's reserves.
Deferred revenue at June 30, 1 996, is $4,594,1 1 3.
Earned guarantee fee income for the fiscal year is made up of the annual guarantee fees
received as follows:
Fiscal Year
One-eighth
1989
$ 135,386
1990
166,654
1991
181,017
1992
203,310
1993
218,329
1994
260,288
1995
107,525
1996
93.045
$1.365.554
8. RESTRICTED FUND BALANCE
The restricted fund balance of $14,701 accounts for interest earnings on the original
federal advance which MGSLP received from DE during its start-up phase. Program
regulations require that these interest earnings be restricted for claim payments. Since its
inception, MGSLP has paid $257,461 in claims which were not reinsured by DE.
9. ADMINISTRATIVE EXPENSE ALLOWANCE
The Omnibus Budget Reconciliation Act of 1993, including the Student Loan Reform Act of
1993, provides that payment of Administrative Expense Allowance (formerly known as
Administrative Cost Allowance and Transitional Support) is dependent upon federal
appropriation on an annual basis. For the first quarter of FY96 administrative expense
allowance (AEA) reimbursements were calculated as 1% of the total consummated loan
guarantees made during the quarter. AEA reimbursements in the last three quarters of
Page A-9
PiOe are calculated as 0.85% of the total principal amount of consummated loans
guaranteed by MGSLP between October 1, 1995 and June 30, 1996.
AEA reimbursements for loan guarantees during FY96 totaled $746,265. This includes
payments of $209,843 for net loan guarantees processed in the last three quarters of FY96
which were not received at June 30, 1996.
10. COLLECTION COSTS RETAINED
When MGSLP collects all or a portion of a defaulted loan reinsured by the federal
government, the recovery applied to the reinsured portion of the loan must be forwarded to
DE. DE allows MGSLP to retain 27% of the gross recovered amount as reimbursement for
the costs associated with collecting. During FY96 MGSLP retained $977,782 from the total
recoveries received on loans assigned to the agency.
1 1 . SUPPLEMENTAL PRECLAIMS ASSISTANCE
MGSLP provides supplemental preclaims assistance (SPA) to lenders holding delinquent
student loan notes that are between 120 and 270 days past due. The MGSLP staff
attempt to contact delinquent borrowers in order to advise them of the options available to
them for bringing their delinquent accounts current. After a borrower has been
satisfactorily assisted in bringing his/her account current, DE reimburses MGSLP for its
efforts. The reimbursement is computed as 1% of the satisfactorily resolved account
balance on each account receiving SPA. Reimbursements for SPA during FY96 were
$219,749. This includes $38,204 in reimbursements for supplemental preclaims activity
during May and June, 1996, which was not received until after June 30, 1996.
12. ACCRUED INTEREST
MGSLP purchases claim eligible bankruptcy accounts from lending institutions. If the
claim survives the bankruptcy discharge, MGSLP sells the bankruptcy claim back to a
lending institution at its outstanding value, including interest which accrued during the
bankruptcy proceedings. During FY96, accrued interest earned on repurchased
bankruptcy accounts was $31 ,679.
13. CONTINGENCIES
The outstanding principal balance of loans guaranteed by MGSLP as of June 30, 1996, is
approximately $449,927,000. This amount excludes bad debt, death, disability, and
bankruptcy claims which have been previously purchased by the agency.
MGSLP has entered into agreements with DE, dated June 13, 1980, for reinsurance and
supplemental reinsurance of loans, in accordance with The Act. These agreements allow
for 100% reimbursement by DE for claims due to the death, disability, or bankruptcy of the
borrower. Claims due to defaulted loans may be reimbursed by DE for up to 100%. The
percent of reimbursement on defaulted loans payable to the agency is dependent upon
MGSLP's annual default rate and date of the original loan guarantee. Annual default rates
are calculated as the ratio of year-to-date default purchases divided by the original
guaranteed amount of loans in repayment status at the beginning of the federal fiscal year.
MGSLP's annual default rate has been less than 5% since the conclusion of the 1 987
federal fiscal year on September 30, 1987. The following schedule reflects the federal
Page A-10
reinsurance rates on defaulted student loans. In the event of extreme future adverse loss
experience, MGSLP could be liable for up to 22% of the outstanding loan volume. During
FY96, MGSLP's share of non-reinsurable defaults was $40,248.
RATE OF ANNUAL
DEFAULTS
to 5%
FEDERAL
REINSURANCE
Loans made on or
prior to 9/30/93
100%
FEDERAL
REINSURANCE
Loans made on or
after 10/1/93
98%
more than 5% but less
than or equal to 9%
over 9%
1 00% of claims thru 5%;
90% of claims over 5%
but less than or
equal to 9%
100% of claims thru 5%;
90% of claims over 5%
but less than or equal
to 9%; 80% of claims
over 9%
98% of claims thru 5%;
88% of claims over 5%
but less than or
equal to 9%
98% of claims thru 5%;
88% of claims over 5%
but less than or equal
to 9%; 78% of claims
over 9%
14. LOSS CONTINGENCY FROM DEFAULTED LOAN CONSOLIDATIONS
Section 428(c)(6) of The Act provides that a guaranty agency is authorized to retain an
amount of any borrower payments received by the guaranty agency on a defaulted loan.
The amount retained is equal to the sum of the complement of the reinsurance percentage
in effect when the Secretary paid the reinsurance claim plus 27% of the payment amount
to cover administrative costs related to collection and default prevention. Under section
428C of the Act, a defaulted borrower is permitted to acquire a Federal Consolidation Loan
and apply the proceeds to pay the balance due on his/her defaulted loans.
Although it is not supported by law or regulation, DE has stated that the payoff amount
received by a guaranty agency for a defaulted loan included in a Federal Consolidation
Loan is not a payment "made by the borrower", as the term is used in section 428(c)(6).
DE claims that The Act does not specifically authorize guaranty agencies to retain any part
of the payoff amount on defaulted loans that are consolidated.
MGSLP does not agree with DE's position. MGSLP maintains that DE's interpretation of a
payment "made by the borrower" is too narrow and that loan payoffs resulting from
consolidation should be subject to agency retention as it is defined in section 428(c)(6) of
The Act until, and unless, at some future date a change in regulation or law differentiates
an alternate retention rate. MGSLP, in conjunction with other guaranty agencies across the
country, are seeking resolution with DE on this issue. Currently, no legal action has been
353.88
L72CHEG
1996
M
Legislative Audit Division
i£MStM«
State of Montana
Report to the Legislature
September 1996 Financial Audit
For the Fiscal Year Ended June 30, 1996
Guaranteed Student Loan Program
Commissioner of Higher Education
We issued an unqualified opinion on the financial statements of the program
and our report contains no recommendations.
^^'ft&Stel \iWL«i
^ >L
i 'w 1 11
â– rrir^TJ
STATir DnCUMCNTS COLLCCTIG
FEB ^ 1997
MONTANA STATE LIBRARY
1515 E. 6th AVE.
HELENA, MONTANA 59520
96-6
Direct comments/inquiries to:
Legislative Audit Division
Room 135, State Capitol
PO Box 201705
Helena MT 59620-1705
MONTANA STATE LIBRARY ^ H
3 0864 0010 3632 9
)
FINANCIAL-COMPLIANCE AUDITS
Financial-compliance audits are conducted by the Legislative Audit Division to determine if an
agency's financial operations are properly conducted, the financial reports are presented fairly, and
the agency has complied with applicable laws and regulations. In performing the audit work, the
audit staff uses standards set forth by the American Institute of Certified Public Accountants and
the United States General Accounting Office. Financial-compliance audit staff members hold
degrees with an emphasis in accounting. Most staff members hold Certified Public Accountant
(CPA) certificates.
Government Auditing Standards, the Single Audit Act of 1984 and Amendments of 1996, and 0MB
Circular A-128 require the auditor to issue certain financial, internal control, and compliance
reports. This individual agency audit report is not intended to comply with these reporting
requirements and is therefore not intended for distribution to federal grantor agencies. The
Legislative Audit Division issues a statewide biennial Single Audit Report which complies with the
above reporting requirements. The Single Audit Report for the two fiscal years ended June 30,
1995 has been issued. Copies of the Single Audit Report can be obtained by contacting:
Single Audit Coordinator Legislative Audit Division
Office of Budget and Program Planning Room 135, State Capitol
State Capitol PO Box 20 1 705
Helena MT 59620 Helena MT 59620-1705
Phone (406) 444-3616
MEMBERS OF THE LEGISLATIVE AUDIT COMMITTEE
Senator Greg Jergeson,
Vice Chairman
Representative Ernest Bergsagel, Chairman
Senator Sue Bartlett
Representative Beverly Bamhart
Senator Reiny Jabs
Representative A. R. "Toni" Hagener
Senator Tom Keating
Representative Bob Keenan
Senator Ken Miller
Representative Robert Pavlovich
Senator Linda Nelson
Representative Bruce Simon
MONTANA LEGISLATIVE BRANCH
Legislative Auditor
Scott A. Seacat
Legal Counsel:
John Northey
Deputy Legislative Auditors:
Mary Bryson
Operations and EDP Audit
James Gillett
Financial-Compliance Audit
Jim Pellegrini
Performance Audit
LEGISLATIVE AUDIT DIVISION
September 1996
The Legislative Audit Committee
of the Montana State Legislature:
This is our report on the financial audit of the Commissioner of Higher Education's Guaranteed Student
Loan Program (GSLP) for the fiscal year ended June 30, 1996.
The Montana Guaranteed Student Loan Program was authorized by the Montana Legislature in 1979
and established July 1, 1980. The GSLP allows eligible students to receive loans from lending
institutions to pay for post-secondary education. The federal government guarantees the loans made by
lending institutions and makes administrative cost reimbursements to the GSLP. The Budget
Reconciliation Act of 1993, which includes the Student Loan Reform Act of 1993, may have a material
impact on the operations of the GSLP in future years. For more information see note 21 on page A- 14
of the notes to the financial statements.
The Guaranteed Student Loan Program initially contraaed with United Student Aid Funds, Inc. to
process and service loans. In 1988, the Montana GSLP began assuming the administrative duties
associated with the loan guarantee process. During 1990 the GSLP assumed complete administrative
controls but continues to contract with USA Services, Inc. for computer support services.
We thank the Commissioner of Higher Education and his staff for their cooperation and assistance
during the audit.
Respectfully submitted.
Scott A. Seacat
Legislative Auditor
Room 135. State Capitol Building. PO Box 201705 Helena, MT 59620-1705
Phone (406) 444-3122 FAX (406)444-9784
Digitized by the Internet Archive
in 2010 with funding from
IVIontana State Library
http://www.archive.org/details/guaranteedstuden1996mont
Legislative Audit Division
Financial Audit
For the Fiscal Year Ended June 30, 1996
Guaranted Student Loan
Program
Commissioner of Higher Education
Members of the audit staff involved in this audit were Wayne Kedish
and Charles Nemec.
Table of Contents
Report Summary iii
Independent Auditor's Report A-3
Balance Sheet
Special Revenue Fund
June 30, 1996 A-5
Statement of Revenues, Expenditures and
Changes in Fund Balance, Budget and
Actual, Special Revenue Fund for the
Fiscal Year Ended June 30, 1996 A-6
Notes to the Financial Statements A-7
Guaranteed Student lx)an Program B-3
Independent Auditor's
Report & Program
Financial Statements
Program Response
Page i
Page ii
Report Summary
Guaranteed Student Loan We performed the financial audit of the Montana Guaranteed Student
Program Loan Program for the fiscal year ended June 30, 1996. This repon
contains the audited financial statements and accompanying notes for
fiscal year 1996. We issued an unqualified opinion on the financial
statements. The opinion means the reader may rely on the financial
statement information presented.
The current report does not contain any audit recommendations.
The report does contain information relating to the changing federal
student loan program environment. The prior report contained no
audit recommendations.
Page iii
Independent Auditor's Report
& Program Financial Statements
Page A-1
Page A-2
MONTANA LEGISLATIVE BRANCH
Legislative Auditor
Scott A. Seacat
Legal Counsel:
John Northey
Deputy Legislative Auditors:
Mary Bryson
Operations and EDP Audit
James Gillett
Financial-Compliance Audit
Jim Pellegrini
Performance Audit
LEGISLATIVE AUDIT DIVISION
INDEPENDENT AUDITOR'S REPORT
The Legislative Audit Committee
of the Montana State Legislature:
We have audited the Balance Sheet of the Commissioner of Higher Education's Guaranteed Student Loan
Program - Special Revenue Fund of the state of Montana as of June 30, 1996, and the related Statement of
Revenues, Expenditures and Changes in Fund Balance - Budget and Actual for the fiscal year then ended.
These financial statements are the responsibility of the program's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for our opinion.
As discussed in note I, the financial statements present only the Commissioner of Higher Education's
Guaranteed Student Loan Program - Special Revenue Fund and are not intended to present fairly the
financial position and results of operations of the state of Montana in conformity with generally accepted
accounting principles.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of the Commissioner of Higher Education's Guaranteed Student Loan Program - Special
Revenue Fund of the state of Montana as of June 30, 1996, and the results of its operations for the year
then ended in conformity with generally accepted accounting principles.
Respectfully submitted,
James H. Gillett, CPA
Deputy Legislative Auditor
August 23, 1996
Page A-3
Room 135, State Capitol Building, PO Box 201705 Helena, MT 59620-1705
Phone (406) 444-3122 FAX (406)444-9784
Page A-4
GUARANTEED STUDENT LOAN PROGRAM
SPECIAL REVENUE FUND
BALANCE SHEET
JUNE 30, 1996
ASSETS
Cash in Treasury $854,493
Accounts Receivable 49,158
Due From Federal Government (Note 2) 2,344,889
Loans To Students ( Note 3) 12,086
Investments (Note 4) 7,369,800
Total Assets $10,630.426
LIABILITIES AND FUND BALANCES
Liabilities:
Accounts Payable $237,658
Property Held in Trust (Note 5) 83,353
Due to Federal Government (Note 6) 685,638
Deferred Revenue (Note 7) 4,594,1 1 3
Total Liabilities $5,600,762
Fund Balances:
Restricted (Note 8) $14,701
Unrestricted 5,014,963
Total Fund Balance $5,029,664
Total Liabilities and Fund Balances $10,630,426
The accompanying notes are an integral part of this financial statement.
Page A-5
COMMISSIONER OF HIGHER EDUCATION
MONTANA GUARANTEED STUDENT LOAN PROGRAM
SPECIAL REVENUE FUND
STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE
BUDGET AND ACTUAL
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
REVENUE:
Guarantee Fee Income (Note 7)
Administrative Expense Allowance (Note 9)
Investment Earnings ( Note 4)
Collection Costs Retained (Note 10)
Supplemental Preclaims Assistance (Note 11)
Accrued Interest (Note 12)
Nonreinsured Loan Recoveries
Escrow Disbursement Service Fees (Note 5)
Miscellaneous Revenue
TOTAL REVENUES
EXPENDITURES:
Administrative Costs
Agency Share of Loan Defaults (Note 13)
Equipment and Intangible Assets
Debt Service
TOTAL EXPENDITURES
Excess Revenues Over/
(Under) Expenditures
Prior Year Adjustment (Note 16)
Fund Balance -07/01/95
Fund Balance - 06/30/96
Variance
Favorable
Budget
Actual
(Unfavorable)
$1,338,332
$1,365,554
$27,222
646,000
746,265
100,265
191,637
402,349
210,712
1,156,646
977,782
(178,864)
122,883
219,749
96,866
10,000
31,679
21,679
10,000
12,609
2,609
50,000
54,853
4,853
5,000
21,905
16,905
$3,530,498
$3,832,745
$302,247
$3,158,170
$2,625,788
$532,382
50,000
40,248
9,752
73,203
85,733
(12,530)
1,874
(1,874)
$3,281,373
$2,753,643
$527,730
$249,125
$1,079,102
$829,977
5,461
5,461
3,945,101
3,945,101
$4,194,226
$5,029,664
$835,438
The accompanying notes are an integral part of this financial statement.
Page A-6
COMMISSIONER OF HIGHER EDUCATION
GUARANTEED STUDENT LOAN PROGRAM
SPECIAL REVENUE FUND
NOTES TO THE FINANCIAL STATEMENTS
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
1 . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Description of Program
The State of Montana's Guaranteed Student Loan Program (MGSLP) is located in the
Office of the Commissioner of Higher Education. As a Special Revenue Fund, it accounts
for the proceeds of revenue sources that are legally restricted to expenditures for specified
purposes. MGSLP was established by the Office of the Commissioner of Higher Education
in fiscal year 1981 to coordinate and administer the federally insured student loans issued
by various lending institutions within the State of Montana. Montana's Federal Family
Education Loan Program operates in compliance with agreements with the U.S.
Department of Education (DE), pursuant to Section 428 of the Higher Education Act of
1965, as amended (The Act).
B. Basis of Accounting
The financial statements were prepared using the modified accrual basis of accounting.
Under the modified accrual basis of accounting, expenditures are recorded on the basis of
valid obligations. Revenues are recorded when received in cash unless susceptible to
accrual. Revenues are susceptible to accrual if they are measurable and available to
finance expenditures of the fiscal period or are not received at the normal time of receipt.
Revenues are deferred if material and received before the normal time of receipt or if
received for a particular activity and the expense for that activity has not been incurred prior
to fiscal year end.
2. DUE FROM FEDERAL GOVERNMENT
MGSLP pays individual lending institutions for any loans that have been defaulted or are
unpaid due to the death, permanent disability, or bankruptcy of the borrower. The agency
then seeks reimbursement from DE in accordance with reinsurance agreements between
the agency and DE (See Note 13).
in addition, the receivable Due From Federal Government includes amounts MGSLP had
not yet received for administrative expense allowance payments (Note 9) for the second,
third, and fourth quarters of FY96, and supplemental preclaims assistance (SPA)
reimbursements (Note 1 1) for accounts which were satisfactorily brought current in the last
two months of the fiscal year. The extent of the outstanding reinsurance activity and other
pending reimbursements from DE as of June 30, 1996, is shown below.
Reinsurance claims due from DE $2,096,842
Administrative Expense Allowance for the
last three quarters in FY96 209,843
SPA for May & June, 1 996 38.204
Total Due From Federal Government $2.344.889
Page A-7
3. LOANS TO STUDENTS
In exceptional circumstances, MGSLP has purchased student loans from lenders, prior to
any claim being filed, when the borrower is under extreme financial hardship. MGSLP has
waived the borrower's responsibility to cover loan interest costs and is holding the loans in
a repayment forbearance pending an improvement in the borrower's financial situation.
MGSLP has not received reinsurance from DE on these loans.
4. INVESTMENTS
Investments are units purchased in the State of Montana's Short Term Investment Pool
(STIP) and are reflected at cost, which equals market. At June 30, 1996, MGSLP owned
7,369,800 units valued at $1 per unit for a total of $7,369,800. Investment earnings during
FY96 were $402,349. STIP securities include Banker's Acceptances, Commercial Paper,
Corporate Obligations, Montana Certificates of Deposit, Government Securities, and
Repurchase Agreements. At June 30, 1 996, most securities, classified as Risk Category 1 ,
were held by the state or its agent in the state's name. The remaining portion, classified as
Risk Category 2, was loaned under a security lending agreement with the state's agent.
The State of Montana's STIP investment portfolio contained asset-backed securities and
variable rate securities with market values of $234,329,292 and $31 1 ,229,438; 1 9.74% and
26.22%, respectively, of the total portfolio at June 30, 1996. Board of Investment's policy
requires that STIP investments have the highest rating in the short term category by at least
one of the six Nationally Recognized Statistical Rating Organizations.
Asset-backed securities have less credit risk than securities not backed by pledged assets
and market risk for these securities is the same as market risk for similar non asset-backed
securities. While variable-rate securities have credit risk identical to similar fixed-rate
securities, their market risk is more sensitive to interest rate changes. Market risk may be
less volatile than fixed-rate securities because the value of variable-rate securities will
usually remain at or near par. There are no legal risks that the Board of Investments is
aware of regarding any STIP investments.
5. PROPERTY HELD IN TRUST
MGSLP operates an escrow disbursement service for approximately fifty-one lenders.
Participating lenders are assessed a fee for this service. In accordance with contracts
MGSLP has with the disbursement service lenders, MGSLP automatically debits the
lenders' accounts to collect loan proceeds. MGSLP then disburses funds to the schools
for delivery to the students either by individual State of Montana warrants or electronic
transfers. The MGSLP disbursement service records all adjustments to individual student
loan accounts and ensures that school refunds of loan proceeds are promptly returned to
the lenders. Disbursement service revenues earned during FY96 were $54,853 including
$5,398 which was not received until after June 30, 1996.
As of June 30, 1 996, MGSLP's escrow disbursement service held $83,353 in student loan
funds which were disbursed to the schools or refunded to the lenders after fiscal year end.
Page A-8
6. DUE TO FEDERAL GOVERNMENT
After assignment to the guaranty agency, MGSLP seeks collection of student loans that
have been defaulted or are in Chapter 7 or Chapter 1 3 bankruptcy status. Recoveries of
loans reinsured by DE are owed back to DE (See Note 10). In addition, proceeds of loans
sold back to lending institutions after a loan is rehabilitated or repurchased are also owed
back to DE. At June 30, 1996, the amount owed to DE is $685,638.
7. DEFERRED REVENUE AND GUARANTEE FEE INCOME
Guarantee fees are received from borrowers at the time loans are disbursed. In all years
prior to FY95, MGSLP charged a guarantee fee equivalent to 3% of the loan amount.
Effective July 1 , 1994, the maximum guarantee fee that borrowers may be charged
decreased to 1% of the loan amount. Guarantee fees are deferred and recognized as
revenue, using the straight-line method, over an eight year period. This period
approximates the average life of an outstanding student loan. Deferred revenues from
guarantee fees are invested by MGSLP and are included in the agency's reserves.
Deferred revenue at June 30, 1 996, is $4,594,1 1 3.
Earned guarantee fee income for the fiscal year is made up of the annual guarantee fees
received as follows:
Fiscal Year
One-eighth
1989
$ 135,386
1990
166,654
1991
181,017
1992
203,310
1993
218,329
1994
260,288
1995
107,525
1996
93.045
$1.365.554
8. RESTRICTED FUND BALANCE
The restricted fund balance of $14,701 accounts for interest earnings on the original
federal advance which MGSLP received from DE during its start-up phase. Program
regulations require that these interest earnings be restricted for claim payments. Since its
inception, MGSLP has paid $257,461 in claims which were not reinsured by DE.
9. ADMINISTRATIVE EXPENSE ALLOWANCE
The Omnibus Budget Reconciliation Act of 1993, including the Student Loan Reform Act of
1993, provides that payment of Administrative Expense Allowance (formerly known as
Administrative Cost Allowance and Transitional Support) is dependent upon federal
appropriation on an annual basis. For the first quarter of FY96 administrative expense
allowance (AEA) reimbursements were calculated as 1% of the total consummated loan
guarantees made during the quarter. AEA reimbursements in the last three quarters of
Page A-9
PiOe are calculated as 0.85% of the total principal amount of consummated loans
guaranteed by MGSLP between October 1, 1995 and June 30, 1996.
AEA reimbursements for loan guarantees during FY96 totaled $746,265. This includes
payments of $209,843 for net loan guarantees processed in the last three quarters of FY96
which were not received at June 30, 1996.
10. COLLECTION COSTS RETAINED
When MGSLP collects all or a portion of a defaulted loan reinsured by the federal
government, the recovery applied to the reinsured portion of the loan must be forwarded to
DE. DE allows MGSLP to retain 27% of the gross recovered amount as reimbursement for
the costs associated with collecting. During FY96 MGSLP retained $977,782 from the total
recoveries received on loans assigned to the agency.
1 1 . SUPPLEMENTAL PRECLAIMS ASSISTANCE
MGSLP provides supplemental preclaims assistance (SPA) to lenders holding delinquent
student loan notes that are between 120 and 270 days past due. The MGSLP staff
attempt to contact delinquent borrowers in order to advise them of the options available to
them for bringing their delinquent accounts current. After a borrower has been
satisfactorily assisted in bringing his/her account current, DE reimburses MGSLP for its
efforts. The reimbursement is computed as 1% of the satisfactorily resolved account
balance on each account receiving SPA. Reimbursements for SPA during FY96 were
$219,749. This includes $38,204 in reimbursements for supplemental preclaims activity
during May and June, 1996, which was not received until after June 30, 1996.
12. ACCRUED INTEREST
MGSLP purchases claim eligible bankruptcy accounts from lending institutions. If the
claim survives the bankruptcy discharge, MGSLP sells the bankruptcy claim back to a
lending institution at its outstanding value, including interest which accrued during the
bankruptcy proceedings. During FY96, accrued interest earned on repurchased
bankruptcy accounts was $31 ,679.
13. CONTINGENCIES
The outstanding principal balance of loans guaranteed by MGSLP as of June 30, 1996, is
approximately $449,927,000. This amount excludes bad debt, death, disability, and
bankruptcy claims which have been previously purchased by the agency.
MGSLP has entered into agreements with DE, dated June 13, 1980, for reinsurance and
supplemental reinsurance of loans, in accordance with The Act. These agreements allow
for 100% reimbursement by DE for claims due to the death, disability, or bankruptcy of the
borrower. Claims due to defaulted loans may be reimbursed by DE for up to 100%. The
percent of reimbursement on defaulted loans payable to the agency is dependent upon
MGSLP's annual default rate and date of the original loan guarantee. Annual default rates
are calculated as the ratio of year-to-date default purchases divided by the original
guaranteed amount of loans in repayment status at the beginning of the federal fiscal year.
MGSLP's annual default rate has been less than 5% since the conclusion of the 1 987
federal fiscal year on September 30, 1987. The following schedule reflects the federal
Page A-10
reinsurance rates on defaulted student loans. In the event of extreme future adverse loss
experience, MGSLP could be liable for up to 22% of the outstanding loan volume. During
FY96, MGSLP's share of non-reinsurable defaults was $40,248.
RATE OF ANNUAL
DEFAULTS
to 5%
FEDERAL
REINSURANCE
Loans made on or
prior to 9/30/93
100%
FEDERAL
REINSURANCE
Loans made on or
after 10/1/93
98%
more than 5% but less
than or equal to 9%
over 9%
1 00% of claims thru 5%;
90% of claims over 5%
but less than or
equal to 9%
100% of claims thru 5%;
90% of claims over 5%
but less than or equal
to 9%; 80% of claims
over 9%
98% of claims thru 5%;
88% of claims over 5%
but less than or
equal to 9%
98% of claims thru 5%;
88% of claims over 5%
but less than or equal
to 9%; 78% of claims
over 9%
14. LOSS CONTINGENCY FROM DEFAULTED LOAN CONSOLIDATIONS
Section 428(c)(6) of The Act provides that a guaranty agency is authorized to retain an
amount of any borrower payments received by the guaranty agency on a defaulted loan.
The amount retained is equal to the sum of the complement of the reinsurance percentage
in effect when the Secretary paid the reinsurance claim plus 27% of the payment amount
to cover administrative costs related to collection and default prevention. Under section
428C of the Act, a defaulted borrower is permitted to acquire a Federal Consolidation Loan
and apply the proceeds to pay the balance due on his/her defaulted loans.
Although it is not supported by law or regulation, DE has stated that the payoff amount
received by a guaranty agency for a defaulted loan included in a Federal Consolidation
Loan is not a payment "made by the borrower", as the term is used in section 428(c)(6).
DE claims that The Act does not specifically authorize guaranty agencies to retain any part
of the payoff amount on defaulted loans that are consolidated.
MGSLP does not agree with DE's position. MGSLP maintains that DE's interpretation of a
payment "made by the borrower" is too narrow and that loan payoffs resulting from
consolidation should be subject to agency retention as it is defined in section 428(c)(6) of
The Act until, and unless, at some future date a change in regulation or law differentiates
an alternate retention rate. MGSLP, in conjunction with other guaranty agencies across the
country, are seeking resolution with DE on this issue. Currently, no legal action has been
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