Report I960207 Summary - March 1998

Investigative Report:

Conflicts of Interest and Mismanagement of Federal and State Funds at the California Student Aid Commission

The California Student Aid Commission (CSAC) oversees the Federal Family Education Loan Program (FFELP) in California. In fiscal year 1996-97, California received $331 million in federal funds for this program, moneys that are predicated on CSAC's compliance with federal requirements. The members of the CSAC's governing commission also have a responsibility to the governor and legislative leaders who appoint them to ensure that funds are spent properly and economically.

We received an allegation under the Reporting of Improper Governmental Activities Act that an official of the CSAC is improperly employed at the EdFund-a nonprofit corporation established to assist the CSAC in its administration of the FFELP. The complainant also alleged that the official is improperly receiving compensation from the EdFund. Finally, the CSAC allegedly made an improper loan to the official.

We investigated and substantiated these and other improper activities. Specifically, we found the following:

  • By allowing an executive to also work at the EdFund, the CSAC causes a conflict of interest and creates an inadequate separation of duties.

  • The CSAC permitted the EdFund to pay the executive $40,000 for services he had already been compensated for to avoid an impending federal cap on his salary.

  • The CSAC does not spend federal funds economically. During calendar year 1997, taxpayers paid the executive approximately $199,693 in salary and bonuses-$91,000 over his state-approved salary.

  • Because the CSAC has transferred many of its legal and administrative personnel to the EdFund, it is not able to protect public funds entrusted to it.

  • Because the CSAC has inadequate controls over payments to the EdFund, it made a duplicate payment of approximately $1 million to the EdFund in 1997.

  • The CSAC's lack of administrative controls allowed an employee to make a salary advance of $28,647 to the executive without authority to do so or confirmation that the executive was entitled to it. Although the executive repaid this advance within 17 days, this advance was, in effect, an interest-free loan.
Agency Response

Because the governor appoints most of the 15 members of the commission, we sent our report to the Governor's Office for response. The Governor's Office strongly disagrees with our interpretation of the various laws cited in the report and does not believe that the executive's dual employment violates the law. Nevertheless, it has recommended that the commission end the executive's dual employment and that the executive devote all of his energies to the EdFund. The commission accepted the executive's resignation from his CSAC position, effective March 16, 1998.