Missouri Higher Education Loan Authority Financial Statements and Independent Auditors' Report for the Years Ended June 30, 2006 and 2005

2006·0.14 MB·English

by  Higher Education Loan Authority of the State of Missouri

Higher Education Loan
Authority of the State of
Missouri

Financial Statements as of and for the Years
Ended June 30, 2006 and 2005, Supplemental
Schedule as of June 30, 2006, and
Independent Auditors’ Reports
HIGHER EDUCATION LOAN AUTHORITY
OF THE STATE OF MISSOURI
TABLE OF CONTENTS
Page
REQUIRED SUPPLEMENTARY INFORMATION—
Management’s Discussion and Analysis (Unaudited) 1–7
INDEPENDENT AUDITORS’ REPORT 8
FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED
JUNE 30, 2006 AND 2005:
Statements of Net Assets 9
Statements of Revenues, Expenses, and Changes in Net Assets 10
Statements of Cash Flows 11–12
Notes to Financial Statements 13–29
INDEPENDENT AUDITORS’ REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS
BASED UPON THE AUDIT PERFORMED IN ACCORDANCE WITH
GOVERNMENT AUDITING STANDARDS 30–31
INDEPENDENT AUDITORS’ REPORT ON COMPLIANCE AND INTERNAL
CONTROL OVER COMPLIANCE TO EACH MAJOR FEDERAL AWARD
PROGRAM AND ON THE SCHEDULE OF EXPENDITURES OF FEDERAL
AWARDS 32–33
SUPPLEMENTARY SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS
FOR THE YEAR ENDED JUNE 30, 2006 34
NOTES TO SUPPLEMENTARY SCHEDULE OF EXPENDITURES OF FEDERAL
AWARDS FOR THE YEAR ENDED JUNE 30, 2006 35
SCHEDULE OF FINDINGS AND QUESTIONED COSTS
FOR THE YEAR ENDED JUNE 30, 2006 36
STATUS OF PRIOR AUDIT FINDINGS FOR THE
YEAR ENDED JUNE 30, 2006 37
HIGHER EDUCATION LOAN AUTHORITY
OF THE STATE OF MISSOURI
MANAGEMENT’S DISCUSSION AND ANALYSIS
AS OF AND FOR THE YEAR ENDED JUNE 30, 2006
(UNAUDITED)
The financial performance discussion and analysis of the Higher Education Loan Authority of the State of
Missouri (the “Authority”) is required supplementary information. It provides an analytical overview of the
Authority’s condensed financial statements and should be read in conjunction with the financial statements
that follow.
THE AUTHORITY
The Authority is recognized as one of the largest nonprofit student loan secondary markets in America by
statistics gathered and maintained by the U.S. Department of Education. The Authority is a leading holder and
servicer of student loans with more than $5 billion in assets, and annual loan purchases in excess of
$1.5 billion.
The Authority was created by the General Assembly of the State of Missouri through passage of HB 326,
signed into law on June 15, 1981. The Authority was created in order to insure that all eligible post-secondary
education students have access to guaranteed student loans. The act was amended, effective August 28, 1994,
and again effective August 28, 2003 to provide the Authority with generally expanded powers to finance,
acquire, and service student loans, including, but not limited to, those guaranteed or insured pursuant to the
Higher Education Act. The passage of HB 221, effective August 28, 2003, allows the Authority to originate
Parental Loans for Undergraduate Students (PLUS loans) and extends the date for repayment of bonds issued
by the Authority from 30 to 40 years. The Bill also repeals sections of law setting restrictions on variable-rate
unsecured loans. The repeal of variable rate restrictions allows the Authority to restructure the rates assessed
for the Supplemental and Qualified Institution Loan Programs.
The Authority is governed by a seven member Board of Directors, five of whom are appointed by the
Governor of the State, subject to the advice and consent of the Senate of the State, and two others who are
designated by statute, the State Commissioner of Higher Education, and a member of the State Coordinating
Board for Higher Education. Raymond H. Bayer Jr., selected by the Board during fiscal 2006, serves as
Executive Director and Chief Executive Officer of the Authority.
The Authority owns and services student loans established by the Higher Education Act under the Federal
Family Education Loan Program (FFELP). Loans authorized under FFELP include: (a) loans to students
meeting certain financial needs tests with respect to which the federal government makes interest payments
available to reduce student interest cost during periods of enrollment (“Subsidized Stafford Loans”); (b) loans
to students made without regard to financial need with respect to which the federal government does not make
such interest payments (“Unsubsidized Stafford Loans” and, collectively with Subsidized Stafford Loans,
“Stafford Loans”); (c) loans to parents of dependent students, graduate students, or professional students
(“PLUS Loans”); and (d) loans available to borrowers with certain existing federal educational loans to
consolidate repayment of such loans (“Consolidation Loans”). The Authority also owns consolidated Health
Education Assistance Loans (HEAL) established by the Public Health Service Act and insured through the
Department of Health and Human Services (HHS). In addition, the Authority is the lender and guarantor for
supplemental loans made available predominantly to students in the Midwestern area who have reached the
maximum available funding under the FFELP. There are several types of loans under the supplemental
program providing for eligible borrowers attending eligible medical, law, undergraduate, technical, graduate,
and pharmacy schools.
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HIGHER EDUCATION LOAN AUTHORITY
OF THE STATE OF MISSOURI
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
AS OF AND FOR THE YEAR ENDED JUNE 30, 2006
(UNAUDITED)
During fiscal year 2006, the Authority purchased/originated $2,016 million of gross principal student loans
from a variety of financial institutions. This compares to $1,698 million gross principal during fiscal year
2005 and $1,574 million during fiscal year 2004 representing a 19% and 8% increase respectively in gross
purchases over the previous two fiscal years. For fiscal 2006, approximately $1,265 million of loan purchased
were Stafford and PLUS loans. Gross Consolidation loan purchases totaled $694 million with $447 million
representing the consolidation of the Authority’s existing Stafford and PLUS portfolio. The remaining
$57 million primarily consists of supplemental loan purchases/originations within the CASH loan program.
The net loan activity of new purchases less existing loan principal decreases through borrower, consolidation,
and claim payments, cancellation activity, and loan sales, resulted in an increase of 20% from $4,370 million
to $5,238 million in the student loan portfolio from fiscal 2005 to fiscal 2006 as compared to a 15% increase
from $3,808 million to $4,370 million from fiscal 2004 to fiscal 2005. As of the end of this fiscal year the
student loan portfolio held by the Authority is made up of approximately 52% Consolidation Loans, 37%
Stafford Loans, 7% PLUS Loans, 3% Supplemental Loans, and 1% HEAL Loans.
The Authority is able to finance the purchase of student loans through the issuance of Taxable and Tax-
Exempt Student Loan Revenue Bonds, recycled funds, and other credit facilities. During Fiscal 2005
purchases were funded primarily from a $700 million taxable bond financing issued late in Fiscal 2004,
recycled funds, and a $125 million revolving credit facility.
Beginning in fiscal 2005 and continuing through 2006, the Authority primarily utilized a revolving line of
credit to purchase loans. The strategy gives the Authority the ability to fully collateralize any subsequent
bonds issued at the time of issuance or shortly thereafter. It also allows the Authority additional flexibility,
efficiency, and the ability to better match collateral to a particular bond structure prior to issuance.
During fiscal 2006, the Authority carried a revolving credit facility originally issued at $500 million and
increasing to $800 million by fiscal year end. The revolving credit facility was replaced by a $1,020 million
commercial paper conduit in July of Fiscal 2007. In addition, the Authority obtained $508.9 million in bond
financings to support loan purchases including, $218.8 million in tax-exempt bonds in November,
$164.1 million in tax-exempt bonds in April, and $126.0 million in taxable bonds in June.
The tax-exempt financings are utilized to house loans held by borrowers who are Missouri residents and/or
attending Missouri schools and thereby eligible for additional borrower benefits. The taxable financing was
structured to provide additional and select funds for the potential growth of the Authority’s supplemental loan
program.
The Authority continues to focus on the development of creative solutions to continue to support the
Authority’s mission of eliminating barriers for students so they can access higher education. The Authority
advances its benevolent mission through local, regional, and national partnerships with a variety of
educational and financial related institutions. The mission is also supported by a variety of borrower benefits.
The Authority offers various rate reduction programs to borrowers who establish payments through automatic
deduction and or qualify for rate reduction through the Public Service Reward Program.
Stafford and PLUS borrowers who are in repayment can participate in the Authority’s Rate Relief program.
Borrowers who establish payments through automatic deduction can receive a 2% interest rate reduction. An
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HIGHER EDUCATION LOAN AUTHORITY
OF THE STATE OF MISSOURI
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
AS OF AND FOR THE YEAR ENDED JUNE 30, 2006
(UNAUDITED)
additional .5% can be received if the borrower’s loan is guaranteed by the Missouri Department of Higher
Education (MDHE). If the borrower attended a Missouri school and has loans guaranteed by MDHE the
interest rate reduction can be up to 3%.
In addition to the Rate Relief program, the Authority offers the Public Service Reward Program. The Public
Service Reward Program provides rate reductions for people who have chosen careers in public service in the
state of Missouri including police officers, first responders, teachers, social workers, nurses, Missouri
National Guard and Reserves, and Missouri State Government employees. The program reduces the rate for
qualifying Stafford and PLUS borrowers who are in repayment to 3.25%.
The Authority has also granted over $28 million in loan forgiveness for a variety of student borrowers
including teachers, Pell Grant recipients, and those in military service. Borrowers received over $6 million in
loan forgiveness during fiscal 2006, as compared to $4.7 million during fiscal 2005 and $5.1 million during
fiscal 2004.
FINANCIAL POSITION
This report includes three financial statements; the statements of net assets, the statements of revenues,
expenses, and changes in net assets and the statements of cash flows. These financial statements are prepared
in accordance with Government Accounting Standards Board principles. The statements of net assets present
the financial position of the Authority at the end of the fiscal year and include all assets and liabilities of the
Authority. The statements of revenues, expenses, and changes in net assets present the Authority’s results of
operations. The statements of cash flows provide a view of the sources and uses of the Authority’s cash
resources.
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HIGHER EDUCATION LOAN AUTHORITY
OF THE STATE OF MISSOURI
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
AS OF AND FOR THE YEAR ENDED JUNE 30, 2006
(UNAUDITED)
Condensed financial information and a brief synopsis of the variances follows:
CONDENSED STATEMENT OF NET ASSETS
(In thousands)
2006 2005 2004
Cash and cash equivalents $ 318,614 $ 126,278 $ 617,866
Accrued interest receivable 132,452 85,585 61,666
Capital assets 14,470 14,413 14,899
Investments held by Trustee 12,885 10,966 13,445
Other 10,078 11,965 10,267
Student loans receivable 5,238,174 4,370,105 3,807,517
Total assets $5,726,673 $4,619,312 $4,525,660
Current liabilities $ 743,021 $ 156,578 $ 23,898
Long-term liabilities 4,749,740 4,254,256 4,315,456
Total liabilities $5,492,761 $4,410,834 $4,339,354
Invested in capital assets $ 14,470 $ 14,413 $ 14,899
Restricted 129,839 112,310 113,523
Unrestricted 89,603 81,755 57,884
Total net assets $ 233,912 $ 208,478 $ 186,306
CONDENSED OPERATING RESULTS
(In thousands)
Interest on loans $ 196,990 $ 134,107 $ 113,564
Special allowances 101,101 51,178 21,820
Investment income 8,770 10,145 5,154
Total operating revenue 306,861 195,430 140,538
Bond expense 246,674 140,390 77,490
Administrative and general expense 38,089 33,180 29,712
Reduction of arbitrage rebate liability (3,336) (312) (2,221)
Total operating expense 281,427 173,258 104,981
Change in net assets $ 25,434 $ 22,172 $ 35,557

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HIGHER EDUCATION LOAN AUTHORITY
OF THE STATE OF MISSOURI
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
AS OF AND FOR THE YEAR ENDED JUNE 30, 2006
(UNAUDITED)
FINANCIAL ANALYSIS
Financial Position
Total assets increased $1,107 million compared to an increase in liabilities of $1,082 million resulting in an
increase to the Authority’s net assets of $25.4 million or 13%. This increase compares to an increase of
$22.2 million or 12% in fiscal 2005. The year to year increase is related to the growth of the portfolio and
relative increase in special allowance subsidy discussed later.
Cash and cash equivalents increased by 152% to $318.6 million from $126.3 million in fiscal 2005, as
compared to an 80% decrease from $617.9 million in fiscal 2004 to fiscal 2005. The current year increase in
cash, cash equivalents, and investments was due largely to the issuance of $126 million in Student Loan
Revenue Bonds late in June of 2006 resulting in a substantial increase in cash and cash equivalents at 2006
fiscal year end. Similarly, the prior year decrease in cash was attributable to the issuance of $700 million in
student loan revenue bonds in May of 2004 resulting in a substantial cash balance at 2004 fiscal year end.
These funds were used to purchase supplemental loans out of other existing bond funds to consolidate
supplemental loan financings into one fund. Cash generated in the other funds were depleted by loan purchase
activity by the first quarter of fiscal 2007.
Accrued interest receivable is up 55% over fiscal 2005 as compared to a 39% increase from fiscal 2004 to
fiscal 2005 and is a direct result of the continued growth in the student loan portfolio and the increase in
interest rates on student loans from fiscal 2004 to 2006.
Student Loans Receivable on loans outstanding increased 20% from $4,370 million in fiscal 2005 to
$5,238 million in fiscal 2006 as compared to a 15% increase from $3,808 million in fiscal 2004 to fiscal 2005
reflecting the net purchase activity less loan principal reductions during fiscal 2005 and fiscal 2006.
For fiscal 2006, current liabilities increased by $586 million due to the increased borrowing of the revolving
credit facility. Long term liabilities realized an increase of $495.5 million or 12%. The increase is the net
result of the issuance of $508.9 million in Student Loan Revenue Bonds, the timing of the maturity on certain
existing Student Loan Revenue Bonds (long-term to current, and retirement), and a decrease in arbitrage
rebate liability as a result of loan principal forgiveness.
For fiscal 2005, current liabilities increased by $132.7 million due largely to the timing of the maturity of
Student Loan Revenue Bonds and the revolving credit facility. Long term liabilities remained fairly static
with a decrease of $61.2 million or 1%. The decrease in long term liabilities is a result of the timing of the
maturity of Student Loan Revenue Bonds (long-term to current, and early retirement), and a decrease in
arbitrage rebate liability through loan principal forgiveness.
Operating Results
Operating income increased by $4.1 million from fiscal 2005, as compared to a decrease of $13.4 million
from fiscal 2004 to fiscal 2005. As indicated in detail below, significant increases in student loan interest and
special allowance subsidy relative to portfolio growth and the interest rate environment are the key
components for the current year increase. The decrease due to the reset in the student loan interest rates offset
by the increase in the commercial lending rates increase was the significant driver to the decrease in fiscal
2005.
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HIGHER EDUCATION LOAN AUTHORITY
OF THE STATE OF MISSOURI
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
AS OF AND FOR THE YEAR ENDED JUNE 30, 2006
(UNAUDITED)
Total operating revenue increased 57% from fiscal 2005 to fiscal 2006 as compared to a 39% increase from
fiscal 2004 to fiscal 2005. Continued gains in student loan interest and special allowance were realized as a
result of the increase in the spread between the student loan interest rate and the 91-day T-Bill rate and the
loan portfolio growth from fiscal 2004 to fiscal 2006.
For example, subsidized and unsubsidized Stafford loans made on or after July 1, 1998 that are in status other
than in-school, grace and deferment bear interest at a rate equivalent to the 91-day T-Bill rate plus 2.30%,
with a maximum rate of 8.25%. Loans made within the same period with in-school, grace, and deferment
status bear interest at a rate equivalent to the 91-day T-Bill rate plus 1.70%, with a maximum rate of 8.25%.
The rates are adjusted annually on July 1 based on the 91-day T-Bill rate on the last auction date in May.
During fiscal 2004 the rate on these loans set 3.42% and 2.82% respectively. The rate on the same loans
during fiscal 2005 was 3.37% and 2.77% respectively. The rate on the same loans during fiscal 2006 was
5.30% and 4.70% respectively.
PLUS Loans bear interest at a rate equivalent to the 91-day T-Bill rate plus 3.10%, with a maximum rate of
9%. The rates are adjusted annually on July 1 based on the 91-day T-Bill rate on the last auction date in May.
The T-Bill rate used for fiscal 2004 was 1.12% as compared to 1.07% for fiscal 2005 and 3.0% for fiscal
2006.
Consolidation Loans for which the application was received by an eligible lender on or after October 1, 1998
and prior to July 1, 2006, bear interest at a rate equal to the weighted average of the loans consolidated,
rounded to the nearest higher one-eighth of 1%, with a maximum rate of 8.25%.
The Authority realized significant gains in special allowance subsidy issued by the Department of Education
to lenders participating in the Federal Family Education Loan Program. As illustrated earlier, the increase is
related to the growing spread between student loan interest rates, which are relatively fixed for a year, and the
increase in commercial paper and 91-day T-Bill rates which rose incrementally during fiscal years 2004
through 2006. These gains helped offset increases in bond expenses related to debt service. Interest rates
related to bond debt service expenses increased the entire fiscal year ending approximately 2% higher than the
beginning of the year. The increase in debt service interest and the additional debt issued resulted in an
increase in bond related expense of 76% from fiscal 2005 to fiscal 2006 as compared to a 78% increase from
fiscal 2004 to fiscal 2005.
Total operating expense realized a 62% increase, or $108.2 million from fiscal 2005 to fiscal 2006 and a 65%
increase, or $68.3 million from fiscal 2004 to fiscal 2006. Administrative and general expenses increased by
13%, as compared to 12% in the prior year relative to the portfolio increase. Arbitrage liability is calculated
based upon the earnings of tax-exempt debt. The arbitrage liability is affected by increased bond earnings and
the reduction of those earnings through student borrower benefit programs. The increased participation in
borrower benefits through rate reduction and loan principal forgiveness contributed to the decrease in the
arbitrage liability for both fiscal years.
Continuing Developments
During fiscal 2006, members of the Authority approved a funding plan for the Lewis and Clark Discovery
Initiative (the “Initiative”) proposed by Missouri Governor Matt Blunt. The Initiative would provide a one-
time infusion of capital for building and related projects at state universities, fund scholarships to Missouri
students, match other endowments for the retention, recruitment of top professors and fund other projects.
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HIGHER EDUCATION LOAN AUTHORITY
OF THE STATE OF MISSOURI
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
AS OF AND FOR THE YEAR ENDED JUNE 30, 2006
(UNAUDITED)
Many of the details and the steps for execution of the funding plan remain to be determined and subject to
change. The Authority has engaged consultants, advisors, attorneys and others to assist the Authority in the
endeavor. However, it is not possible to predict with certainty whether or not the Initiative or the funding plan
will proceed, or if it does proceed, the impact it with have on the Authority.
On September 7, 2006, the Authority received official confirmation as an Exceptional Performer from the
U.S. Department of Education. The distinctive recognition is given to student loan lenders and servicers who
demonstrate outstanding performance in loan servicing within the FFELP. As one of only 18 lenders and
servicers recognized nationwide as an Exceptional Performer, the Authority qualifies by maintaining a
compliance performance rating of 97 percent or higher.
The Authority’s loan servicing is recognized in the following areas: converting federal loans to repayment,
collecting delinquent loans, and filing timely claims with guarantee agencies. The designation also provides
MOHELA with a 99 percent federal reimbursement on default claims, rather than the standard 97 percent.

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INDEPENDENT AUDITORS’ REPORT
To the Board of Directors of the
Higher Education Loan Authority
of the State of Missouri
Chesterfield, Missouri
We have audited the accompanying statements of net assets of the Higher Education Loan Authority of
the State of Missouri as of June 30, 2006 and 2005, and the related statements of revenues, expenses, and
changes in net assets and of cash flows for the years then ended. These financial statements are the
responsibility of the management of the Higher Education Loan Authority of the State of Missouri. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of
America and the standards applicable to financial audits contained in Government Auditing Standards,
issued by the Comptroller General of the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes consideration of internal control over financial reporting as a basis for
designing procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Higher Education Loan Authority of the State of Missouri’s internal
control over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of
the Higher Education Loan Authority of the State of Missouri, as of June 30, 2006 and 2005, and the
changes in net assets and its cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
The management’s discussion and analysis on pages 1–7 is not a required part of the basic financial
statements but is supplementary information required by the Governmental Accounting Standards Board.
This supplementary information is the responsibility of the Higher Education Loan Authority of the State
of Missouri’s management. We have applied certain limited procedures, which consisted principally of
inquiries of management regarding the methods of measurement and presentation of the supplementary
information. However, we did not audit such information and we do not express an opinion on it.
In accordance with Government Auditing Standards, we have also issued a report dated October 4, 2006,
on our consideration of the Higher Education Loan Authority of the State of Missouri’s internal control
over financial reporting and on our tests of its compliance with certain provisions of laws, regulations,
contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of
our testing of internal control over financial reporting and compliance and the results of that testing, and
not to provide an opinion on the internal control over financial reporting or on compliance. That report is
an integral part of an audit performed in accordance with Government Auditing Standards and should be
considered in assessing the results of our audit.
/s/ DELOITTE & TOUCHE LLP
St. Louis, Missouri
October 4, 2006