Thursday, March 05, 2009 The Birmingham News.
Alabama legislative panel delays bill backed by critics of evolution. more
TimesDaily.com. Thursday March 12, 2009
PACT woes draw interest and criticism. more
Alabama PACT Program Demise Spells Doom for Gubernatorial Candidates
The recent revelations regarding the mismanagement of the funds received by the Prepaid Affordable College Tuition Program (PACT) is part of the ongoing saga in the management of taxpayer dollars given to state government by the hardworking citizens of our state. Now, we find some of our political leaders contenting that the PACT contracts were never guarantees as prepayment for college tuition and that the contracts could be voided. Christian Coalition was one of the first organizations to demand that those contracts held by over 48,000 Alabama families must be honored or otherwise rectified by the state. We recently held a news conference with Rep. Robert Bentley, who has shown exceptional leadership in working toward a solution to the problem facing the PACT program. He, along with Rep Richard Lindsey and Speaker Hammett have worked tirelessly to solve this dilemma.
As we have investigated this matter, we found it most disturbing that many of the members of the legislature or for that matter, the PACT board were unaware that the PACT guarantees the payment of 8 semesters of college tuition or up to 135 semester hours of undergraduate matriculation at Alabama’s centers of higher education or the equivalent payment to out of state universities. This was not a mutual fund that was subjected to the valuation swings of the stock market, it was an annuity product that guaranteed a set return on investment, in many cases, less that what could have been generated by other investment vehicles available to the public.
As recently as earlier this year, Kay Ivey, the state treasurer, was imploring Alabama families to invest in the PACT program as a vehicle to fund their children’s education. Now, Ms Ivey and others on the PACT board are deflecting attention from the gross misappropriation of these funds into vehicles that were of high risk, particularly the high percentage of these assets held in common stock. Not to be outdone, Bradley Bryne, another potential gubernatorial candidate and board member, suggested that college tuition payments be frozen for 3 years to save the PACT program potential exorbitant
withdrawals, that would further cripple their reserves. However, this would be only minimally helpful long term.
My children have benefited greatly from the PACT program. My wife and I took out contracts in the early 90’s to help fund their college education. My oldest son has graduated from college and my twin sons will soon finish college within the next year and have been received all but their last year of benefits. Two of my children graduated without having to use all the hours allowed through the program. At no time was my contract represented or construed as a traditional stock purchase program or 529 college plan. While it is true that there has been the initiation of a 529 educational investment program by the state, this program and similar programs that allow for increased investments for educational expenses by family members on behalf of children or grandchildren is not the same as the PACT program.
While there are serious problems with the valuation of the PACT program and those responsible must be held accountable, there are some sensible and reasonable solutions to the problem.
First, those under contract for the PACT program must be paid in full. If the total number of contracts is divided by the valuation of the program, it works out to approximately 10,000 dollars per contract at present. If that is true, then actuarially those enrolled in college presently, which is about 7,000, should be allowed to prepay those expenses to the college they are presently enrolled to attend and their proportion of the remaining value of those contracts paid to the universities as payment in full for their undergraduate tuition. One suggestion would be on a sliding scale, for example, 3500 per year for seniors, 3000 for juniors, 2500 for sophomores and 2000 for freshmen. While it would be a diminution of payment to the universities, they would be receiving payment up front (so for freshmen, PACT would pay $ 8,000 at one time for the 4 years of attendance), which would be an advantage to the universities to allow for investing this money on their own and secondly, would reduce the total obligation of PACT to the participating universities. This would be a reasonable concession by higher education since PACT students are only a small percentage of the total enrollment. This would also keep the payments below the average valuation of each contract holder at present.
The next group of students, those that are seniors in high school up to those 5 years from receiving benefits (presently 8th graders) would be given the option of rebating their payments with a one time income tax credit for the difference in the valuation of their contract and what they paid into the program or payment directly to the Commission on Higher Education to distribute the money (approx $7,500 per annuitant) to the schools within the state of Alabama based on a 5 year rolling average of PACT attendees. So, for example, if Auburn University had 10% of the total PACT contracts for the past 5 years, they would get 10% of the distribution of these contract payments. Those students who decided to matriculate outside the state of Alabama would be given a tuition tax credit equivalent to the PACT payments given to the universities for this group of students.
Those students between 5 and 10 years of receiving benefits under the PACT program would be given 2 options; one is a total rebate of the contract payments or a legacy prepayment of tuition to the center of higher education of their choice in the State of Alabama. This would require a choice of institution by these families and the acceptance of the contract by the universities. Ideally, this would again provide prepaid funds to the university to use at their discretion. These products would be negotiated by the universities themselves but would be required by all universities that have received PACT payments to make them available to Alabama residents.
Finally, those families that are greater than 10 years out from their children receiving benefits or from high school graduation, these would receive full payment of their contracts rebated to them with tuition tax credits available to them at the time of collegiate attendance equivalent to the difference in their initial PACT contract and the actual tuition at the time of the child’s enrollment. For example, if the family paid $22,000 for a PACT contract and the money was refunded to them and tuition costs 10 years later was $32,000 for 4 years of college, they would receive a tuition tax credit of $10,000.
We estimate that the total cost of amortizing this program over the next 15 years would be approximately 250,000,000 dollars, including tuition tax credits. The general fund nor the education trust fund could not totally compensate for the loss revenue these obligations would generate. Therefore, we are recommending that the state consider an increase in tobacco taxes in the range of 50 cents to $1.00 a pack to help fund this shortfall in revenue and provide additional resources for indigent health care in the state that is threatening the survival of many of our health care facilities. This is a reasonable proposal and one that I hope those on the PACT board, the legislature and higher education will seriously consider.
Randy Brinson, MD
Chair, Christian Coalition of Alabama