In late November, the Board of Directors of the College Savings Plans of Mississippi met to discuss the future of the Mississippi Prepaid Affordable College Tuition Plan (better known as MPACT). Treasurer Lynn Fitch and the College Savings Board decided to temporarily close MPACT to new enrollees in September 2012. The Treasurer's office then hired an actuary to perform an audit, which raised serious questions about MPACT's sustainability.
MPACT is backed by the full faith and credit of the state of Mississippi. So current MPACT participants are guaranteed that the state will honor their contracts.
Basically, the way MPACT works is that a participant agrees to pay, in lump sum or over time, for a certain number of credit hours for use at the state's universities or community colleges. MPACT participants buy hours based on an average of today's tuition prices. When a child actually enrolls in college, MPACT then covers the cost of tomorrow's tuition.
Given the steady rise of tuition since MPACT started accepting contracts in 1997, MPACT has been a good investment for those participants, about 22,000 currently. But it becomes increasingly clear that MPACT is not such a good deal for the state. MPACT is currently underfunded by about $82 million dollars. And, if nothing is done to meet that shortfall, the program will run out of money around 2025.
Hence, the actuarial audit. And a lot of work by the Treasurer's office and the College Savings Board, both before and after I became a Board member in July 2013.
Some of the shortfall results from poor investment performance. Over most years, MPACT has failed to meet its assumed rate of return of 7.8% (which the Board lowered to 7.5% this summer). Performance really declined after the Panic of 2008, like everyone else's.
Over the last three years, MPACT's rate of return has substantially rebounded. This year, it is approaching 16%. Otherwise, the projected $82 million shortfall would be closer to $100 million.
However, much of the shortfall was "baked in the cake" when MPACT was created. Pricing of MPACT plans has proven unrealistic. No "risk premium" was built in to account for down years. In other words, MPACT's pricing supposes that there will be more up years than down ones, and assumed returns would on average be met or exceeded. Contracts did not build in adequate safeguards for the downside possibility.
The other problem with pricing is that, even though participants bought four years' worth of credit hours, those hours can be stretched into a fifth year or even longer. That costs MPACT higher tuition, while participants enjoy the benefits for the same cost. While more and more students take more than four years to finish college, MPACT pricing assumed only four years of cost.
Mississippi is not alone. In fact, almost every other state is moving away from prepaid tuition plans, some painfully so. Most states have concluded that plans like MPACT are unsustainable. Mississippi faces a decision.
The College Savings Board is studying every possible way to reopen MPACT, if we can do so in a fiscally prudent way. Earlier this summer, Board members (including this one) had expressed the hope that MPACT could be reopened by early 2014. We want to ensure ways for Mississippi kids to attain college education.
But consider this: before the plan was closed in September 2012, 248 new participants signed up for MPACT during that year. Those new contracts added a projected $211,000 to the shortfall. And, closing MPACT "as is" may raise shortfalls from $82 million to around $142 million. That's because without new participants, the investment portfolio will shrink as existing contracts are honored, yielding less returns over time.
We can't afford to reopen the plan, and we can't afford to close it.
It is not an easy decision, or a simple one.
However, as we grapple with the right way forward for MPACT, there is another solid option for college savings. The Mississippi Affordable College Savings (MACS) Program allows families to save for college expenses, tax-deductible and tax-deferred. The minimum MACS contribution is only $25, and contributions can be made at any time. Distributions from a MACS account can be used to pay for education expenses (room, board, books, tuition), free from federal and Mississippi income tax.
MACS only has about half the participants of MPACT, but it allows greater flexibility in both saving and spending for college. Given that those benefits come without the obligations the state faces with MPACT, MACS may well be the future of college savings in Mississippi.
Madison attorney Cory T. Wilson was nominated in 2013 by Gov. Bryant to serve a five-year term on the Board of Directors of the College Savings Plans of Mississippi. Contact Cory at cory@corywilson.ms.
Friday, January 3, 2014
Cory Wilson: MPACT update
Mr. Wilson purchased distribution rights for his column on Jackson Jambalaya.
Subscribe to:
Post Comments (Atom)
9 comments:
Transparency is needed.
The fact that public higher education costs are growing faster than the rate of return our investment professionals can garner is the real issue. Pre-paid tuition is such a simple concept, except that we can't reign in the spending.
The notion that MPACT and MACS are virtually equivalent is crap. MACS does not offer the same tax benefits as MPACT. Wilson's final two paragraphs are pure spin.
As is his bunk about no built-in "risk premium".
The issue with MPACT from the outset has always been about a flawed model and no regular reviews of contract pricing. The idiots who served as Treasurer before Fitch -- Bennett, Prospere and Reeves -- never used their pea brains to demand the adjustment of contract pricing for new contracts as 1] annual market performance did not meet plan, 2] when the imbecilic 7.8% rate of return repeatedly didn't materialize and 3] when tuition increases were regularly exceeding the assumptions in the model.
Just like PERS the problems with MPACT are a massive failure of leadership. But in the case of MPACT the failure of leadership is worse because the program lies wholly within the control of the Treasury office to manage and adjust.
Wilson needs to stick to being an attorney because he doesn't know shit about MPACT. Encouraging people to save for college is a good thing. MPACT as a concept can work but the asleep at the wheel "leaders" screwed the pooch on the program big time.
Actually, his first statement that "current MPACT participants are guaranteed that the state will honor their contracts" is incorrect. Full Faith and Credit is only extended to contract holders who are enrolled in college or are within 5 years of enrollment.
MS Code Sec. 35-155-25 states:
"In the event that the board determines the program to be financially infeasible, the board may discontinue the program. Any qualified beneficiary who has been accepted by and is enrolled or is within five (5) years of enrollment in an institution of higher learning or any in-state or out-of-state regionally accredited private four- or two-year college or an out-of-state regionally accredited, state-supported, nonprofit four- or two-year college or university shall be entitled to exercise the complete benefits for which he has contracted. All other contract holders shall receive a refund, pursuant to Section 37-155-9, of the amount paid in and an additional amount in the nature of interest at a rate that corresponds, at a minimum, to the prevailing interest rates for savings accounts provided by banks and savings and loan associations."
Give me a break! This is just another little "point of light" as to why we're 50th. The market will continue to rebound and with more money coming in, the program will be fine and goodness knows we need more people going to college in this state. But what does Fitch and this guy do? They cut off the revenue to the program right when the returns are, well, returning! This foul up probably doesn't make the Lynn Fitch Top 5 screw ups because of all the craziness she's hoisted upon the state since elected (can somebody tell me again how the hell that happened???) but it's close.
The other massive screw up here is these gubment types like Fitch and Cory now say to go buy MACS? Cory or Lynn, answer me this. You're a nice financial advisor living in say Brandon or hell anywhere in the state and your trying like hell to sale these 529 plans just like MACS. You are trying to keep a couple of ladies in the office employed, you're trying to pay taxes and contribute to your community and you sit back, cut on the TV and there is the STATE, Lynn Fitch selling what??? 529 plans called MACS. They've shut down the only program that made sense for the state to be in, prepaid tuition,and gone into direct competition with the private sector. And, by the way, their private money managers are paying for all the advertising!! Like I said, we are 50th because of these kind of people. That Republican Party sure figured out how to be the pigs in the farmhouse quick didn't they??
2:40, please don't tell me this stuff they are pushing is the same thing the private sector sales? Please say you're joking? Good heavens, these people have no shame.
So is his Tate's fault?
7:32,no, it is all Lynne's
Reeves did nothing to right the MPACT ship for eight years. NOTHING.
Post a Comment