Tuesday, October 27, 2009

More than 100,000 participants in Texas prepaid tuition plan offered refunds

More than 40 legislators question move attributed to tuition costs outpacing investment income.

By W. Gardner Selby
Monday, October 26, 2009

To an outcry, the state's original prepaid college tuition plan has changed its deal with its 108,000 customers, who must decide by December whether to quit the plan in order to get back their initial investment plus accumulated earnings.

Under the change, contract holders who pull out of the plan after Nov. 30 will no longer receive earnings, though they'll get back the money they put in less expense fees. And those who don't pull out will still receive the full benefit of the tuition and fees they purchased.

Even so, more than 40 legislators, mostly Democrats, have questioned the refund-policy change. One has asked for Attorney General Greg Abbott's review.

Last week, former state Comptroller John Sharp, who oversaw the program's start after proposing it to legislators in 1995, said the change should be reversed. Sharp, a Democrat running for the U.S. Senate seat that Kay Bailey Hutchison has said she'll give up, said: "You made an agreement with folks when they signed up for it. It's wrong" to back out.

The current state comptroller, Susan Combs, chairs the board that initiated the change May 12.

She's cast the change as a step toward shoring up the plan, which stopped accepting new enrollments when state lawmakers deregulated tuition in 2003.

Combs, a Republican, wasn't available for an interview, but aides defended the change, which occurred after Combs fielded advice that stated the plan would likely lack sufficient money to pay benefits as early as 2015. Until then, the plan, which had assets totaling $1.5 billion at the end of September, is projected to have enough money to cover benefits.

The forecast also states that unless investment circumstances improve, lawmakers will need to cover contracted tuition payments to universities totaling $65 million for 2015 and about $434 million in 2016-17 — an expectation that Combs shares.

A 2007 forecast had predicted the fund would be insolvent by 2020. The refund change, expected to save the plan $60 million during the next 10 to 15 years, "is not a scam at all," Combs' spokesman R. J. DeSilva said. "There's nothing fishy."

Rep. Jim McReynolds, who asked Abbott on Oct. 14 to weigh the legality of the refund change, noted that lawmakers were in session when the board acted, but board members didn't seek their guidance. "I promise you there would have been debate about this," McReynolds said.

Abbott usually answers letters seeking his legal opinion within 180 days, though McReynolds said last week he hopes to hear back before the Nov. 30 deadline for participants to request lump-sum refunds.

This summer, the Texas Prepaid Higher Education Tuition Board, which oversees the fund, published notice of the policy change in the Texas Register, drawing no comments.

But Combs' office got thousands of phone calls after letters describing the change went to participants in August. An Oct. 30 deadline for decisions was then pushed back.

The plan's earnings have long trailed bumps in college costs. Since sign-ups began in 1996, tuition has increased by an average 8.9 percent a year, while the plan's return on investment has averaged 4.4 percent, "creating a future financial strain for Texas taxpayers," participants were told in a September letter.

Although lawmakers have drawn fire for voting to leave tuition rates up to university boards, tuition and fees were already surging when they acted.

Since 2003, in-state tuition and mandatory fees at public universities have increased an average of 86 percent, to about $6,300 a year. In the previous six years, tuition and fees increased 75 percent.

About 3,600 contract holders have already requested refunds.

Thanks to a protective provision in plan contracts, 65,700 participants whose children are not yet 18 years old or high-school graduates are facing a one-time offer of a lump-sum payment equal to the present value of their investment, less administrative fees. Before the change in refund policy, such participants could recover only their initial investments, minus administrative fees.

A national expert said such beneficiaries might want to roll the offered refund into a 529 account, from which proceeds can be spent on college-related expenses.

Joe Hurley, a certified public accountant and CEO of the savingforcollege.com Web site, said the state's offer takes "certain participants from a very disadvantaged position into an incredibly generous opportunity ... that expires at the end of November to basically take ... winnings off the table."

Rep. Charlie Howard, R-Sugar Land, among objecting legislators, welcomed the delayed deadline but said he remains disturbed by the change.

"I still don't think this is fair," Howard said. The change "ought to be a legislative decision. ... When we sign a contract, when they sign a contract, we need to honor it."

McReynolds, D-Lufkin, wants Abbott to consider whether board members abused the law when they launched the fund.

The law states the board "shall determine the method by which the amount of the refund is calculated." But McReynolds, in his letter, says nothing in the law appears to permit the board to change how refunds are calculated for existing, as opposed to future, contracts.

In September, McReynolds joined Rep. Scott Hochberg of Houston and 41 other House Democrats urging Combs to reconsider. "To change the terms at this late date is to break faith with parents who put their trust in the state," they wrote. Separately, Hochberg said the state has ample money in its so-called rainy day fund to cover any of the plan's unfunded liabilities.

Kevin Deiters, the comptroller's director of educational opportunities and investments, said the board didn't need to confer with legislators. He noted that Combs has repeatedly warned lawmakers about the plan's financial future.

In 1995, House members debating the legislation to launch what was then called the Texas Tomorrow Fund scratched out language specifying that refunds include interest earnings. Rep. Richard Raymond, D-Laredo, who offered the amendment leaving refund details up to the board, said last week that lawmakers wanted to ensure that neither contract holders nor the state would be unfairly burdened by refund requests.

Raymond, lately among legislators urging Combs to reconsider the refund policy change, suggested the real issue now is that tuition deregulation "messed things up — including how refunds are now addressed."

The advisory report sent to Combs before the May action states that neither the plan's board, advisers or staff members are to blame for the looming shortfall, though past assumptions — such as an over-commitment to stocks and a belief that tuition inflation wouldn't be as severe as it's been — were faulty.

But the report, which Combs forwarded to Gov. Rick Perry, Lt. Gov. David Dewhurst and House Speaker Joe Straus in June, after the legislative session, suggests the Texas plan offered participants more than it could reasonably deliver from its start.

In the report, Dallas financial consultant Mark Hurley, chairman of the comptroller's advisory board for the plan, states the "fundamental flaw is in its design. Simply put, the cost of participating in the plan was under-priced relative to the value of the benefits provided," a point echoed in Combs' letter to state leaders.

"This mispricing has created the plan's deficit," Hurley said. "And because the full faith and credit of the state of Texas backs the plans' obligations, it now falls upon the Legislature to appropriate the necessary funds to pay them."

Sharp countered that actuaries signed off on the plan's design and early health. "The only reason it became mispriced had nothing to do with the original deal," Sharp said.

"When they deregulated tuition, as everybody on the planet knows, that's what caused the (plan) to go out of kilter."

wgselby@statesman.com; 445-3644

Additional material from staff writer Ralph Haurwitz.

One family's situation

Like other investors in the state's original tuition plan, my wife and I must decide whether to take a refund — including investment income — or stay in the plan mindful that we'll be guaranteed future tuition and fees.

We purchased contracts for our daughters in April and May 1998. At the time, our eldest was 6, our youngest was a newborn and college seemed far in the future.

For Maddy, who this fall started applying to colleges, we paid $11,382 to lock in four years of tuition and fees at a four-year Texas public university. For Grace, now in sixth grade, we ponied up $10,904.

According to the tuition plan's recent advisories, we have until Nov. 30 to cancel Maddy's contract in return for a payment of $27,735—which my cousin, a certified public accountant, tells me reflects an annual return of 6.7 percent on our initial investment. For Grace, we're being offered $25,144, reflecting an annual return of 6.2 percent.

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