December 2005

One of Ted McPherson's Innovations in Serving America

As Under Secretary of Education appointed by President George W. Bush (Bush 43), The Honorable Edward R. (Ted) McPherson spoke candidly to senior Federal officials of the United States Department of Education during an executive retreat in December 2005 about effectively managing the operating and financial risks in America’s education industry — an area in which he led compellingly valuable impacts on behalf of students and taxpayers. Mr. McPherson’s work also originated the requirement from the White House’s Office of Budget and Management for similar systematic “management of risk” by other Federal departments that historically were primarily focused on formulating budgets and distributing taxpayer funds without effective recognition and governance of risk.

A portion of Mr. McPherson’s remarks prior to returning to the private sector after completing four years of National public service

“The value of the breakthrough results recently achieved from “acting as an owner” in managing the operating and financial risks in America’s education industry easily exceeds $25 billion on an annual basis on behalf of children and investing taxpayers.

The evidence of these results is provided from comments expressed directly by users of capital distributed by the Department of Education as directed by Congress, such as urban school superintendents, state secretaries of education, as well as borrowers and lenders of Federal Student Aid, mandatory and discretionary grant recipients, contractors, even officials of the Bureau of Indian Affairs.

The results from taking actions with these recipients are tangible and impressive. Results include, for example, changing cash management practices and funding application processes, improving information reporting, implementing third party handling of taxpayer funds thus eliminating massive fraud in delivering benefits for students, mitigating non-compliance by for-profit post secondary schools — including collecting a $9.8 million fine — and recovering defaulted loans.

Specifically, consider the merit, as was done, of reducing the default rate on $400 billion of student loans from 22% to 5%, a difference of 17% consisting of $68 billion of value, a large part of which would have likely resulted in significant losses of taxpayer cash.

In short, the productivity of the $384 million of new money and guarantees dispensed each day — $140 billion each year — by the United States Department of Education has been dramatically improved.

Said another way, debates about perfecting educational policy without sound investing do not change reality for individual students or enhance America’s competitiveness.

Eliminating ineffective use of taxpayer resources has huge scale, since many Federal Departments are simply financial services conduits wrapped in public policy, distributing massive amounts of cash through grants, loans, subsidies, insurance, and guarantees. Abusive users of these funds can be found in hundreds of local school districts, over or under spending by State legislatures, unethical earmarks and self-centered political behavior, inaccurate cost reimbursement schemes, improper payments, etc.

Certainly, there are many wonderful students, teachers, schools, and administrators in the $1 trillion education industry in which some would argue there is already adequate capital, although probably not optimally distributed. The fact remains the education industry is clearly a porous and permeable industry in using cash effectively.

So here is my counsel so as to continue capturing practical solutions as I return to the private sector:

1. Turn down into your work to get a clear, accurate, and continuous understanding of your concentrations of risk;
2. Know with whom you are doing business and the quality and trustworthiness of the responsible people in whom you are investing;
3. Have the discipline, will — and confidence — to take decisive, even bold and unorthodox effective action, as business as usual will not be sufficient to win the day — or at a minimum avoid disaster or scandal. There is more risk in not being bold enough than in being too bold!
4. Continue integrating your efforts and draw on the experience and knowledge of a growing number of practitioners with multiple repetitions in scale in achieving positive results;
5. While segmented accountability issues of separate Federal agencies (unqualified financial audits, human capital issues, modernization of information technology, etc.) are important competencies, these skills pale in comparison to external exposure from unsound investments of taxpayer cash provided to “customers”.

There is now, and for the foreseeable future, a clear differentiation in the operating and financial effectiveness of Federal Cabinet-level departments — some minimally acceptable, others totally inadequate — and all a work in progress requiring continuous improvement.”