House gives VSAC help with bonding
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By Louis Porter Vermont Press Bureau - Published: February 12, 2009
MONTPELIER - A bill providing some state bonding help to the Vermont Student Assistance Corporation provoked a surprising amount of interest and questions on the floor of the House of Representatives on Tuesday, although in the end the measure passed with little dissent.
The bill would provide a limited amount of state "moral obligation bonding authority" to VSAC - essentially state-backed collateral the student lending agency can use when it borrows from Wall Street -- to help the organization successfully issue debt and at favorable rates.
That bonding authority is unlikely be called on, since VSAC has a solid repayment history with the student loans it makes. If the state's obligation was tapped for some reason, Vermont would only have a moral - not a legal - requirement to back up the debt. For that reason, a moral obligation bond differs from general obligation bonds like the state issues to pay for road construction, for instance.
However, the authority to give VSAC that state support still raised questions from some members of the House, particularly when the state is considering issuing its own general obligation bonds to pay for road and bridge repair or other needs.
"Will it put us in any jeopardy if we have needs we don't know about yet?" wondered Rep. Anne Donahue, R-Northfield. "We need to do it with our eyes open."
In the end, the House gave preliminary approval to the bill by voice vote Tuesday and is expected to give final approval as early as today.
In large measure VSAC is seeking state help now because of a tightening of the rules in the credit market. Although the bonds issued by the student loan agency are highly rated, lenders are now requiring a greater level of collateral, said Donald Vickers, president of VSAC. That is where the moral obligation authority of the state - about $3 million for now - will come in.
In order to issue $100 million in debt, VSAC must offer $106 million in collateral. Roughly 97 percent is guaranteed by the federal government; more will come from VSAC and other sources; but $3 million will, if the bill passes, be covered by the state moral obligation authority.
"It's a moral obligation, which means it is not a legal obligation," Vickers said.
However, if it came to that, the state might well decide covering that moral obligation was important and cover the debt.
However, over 30 years - and with $850 million in outstanding moral obligation out there now for everything from the Vermont Housing Finance Agency, the University of Vermont and others - the state has never been called on to cover such an obligation, said Rep. Jim Condon, D-Colchester, who explained the bill on the floor of the House.
"The reason we are doing this is so VSAC can issue these bonds at a more favorable rate," Condon said. "It makes the cost of money lower for VSAC and therefore should result in better loans for Vermont college students and their families."
Some members of the House, like Rep. Jason Lorber, D-Burlington, supported the bill after some initial questions.
Rep. Heidi Scheuermann, R-Stowe, said she wanted to know some more about VSAC's finances and organization, as well.
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