[originally posted 3/30/09 at havealittletalk. Comments can be found at that site.]
According to the Callan Associates, Alabama’s PACT advisors, last year:
The extreme market conditions spared no one and other public plans suffered significant losses as well. Some plans fared better than others depending on asset allocation and manager performance, but public plans in the top quartile still experienced 20+ percent losses. Most pension funds, and state prepaid plans, are now facing similar issues as the Prepaid Affordable College Tuition Plan, going from being close to or fully funded to an underfunded – in some cases, significant – status.
I offer a counter example: Florida.
Florida’s Prepaid Tuition Program isn’t about to fail. Its biggest problem, as reported in the Miami Herald, is
that the Senate Higher Education Appropriations Committee has been talking about borrowing from the Florida Prepaid College Board. The program has billions on hand.
An Ernst & Young analysis as of Jan. 31 shows the program with $8.8 billion in total assets, $8.3 billion in contract liabilities and an actuarial reserve of $468 million. The board touts a conservative investment strategy financially guaranteed by the state. Florida prepaid officials said they are reassuring concerned parents that the money is safe.
‘We’re telling them that there’s no legislation in place right now and we will continue to keep their plans’ safety and their contracts’ safety as our No. 1 priority,” said spokesman Kimberly Sirmans.
What went right in Florida?
Two things: One, conservative investments; two, keeping a lid on state schools’ tuition. The importance of containing costs is perhaps at least as critical as making good investment decisions. Consider this report from the Herald:
. . . The 80-year-old mastermind of the successful Florida Prepaid College Program says he is willing to spend a half-million dollars to fight proposed legislation that would allow universities to increase their own tuition, fearing it will kill the prepaid program by making it too expensive for parents.
Stanley G. Tate, a South Florida businessman who served as chairman of the Florida Prepaid board of directors for 18 years, is working . . . to begin a campaign against bills that would give six of Florida’s public universities the power to increase undergraduate residential tuition by up to 15 percent each year. . . .
“It’s going to cost a lot of money to do this, and I’ll spend as much as I need to because this is my legacy,” Tate said about the program, which in 2006 was renamed the Stanley G. Tate Florida Prepaid College Program. “People don’t understand, 20 years from now, what this will mean.”
Florida Prepaid sells contracts that allow parents to lock in today’s college prices for future tuition and fees. The plans can be paid for in one lump sum or monthly installments. More than 881,000 children have had plans purchased for them since the beginning of the program in 1988.
The program, which has assets of $8 billion, traditionally has invested conservatively with the assumption that tuition would increase on average between 6 percent and 6.5 percent annually.
But that restriction, and other factors, have pushed lawmakers to keep tuition low, and Florida university tuition and fees are now thousands of dollars below national averages. With state funding for higher education waning, school presidents have fought harder than ever to gain the ability to increase their own tuition above what is set each year by lawmakers. Current Florida tuition and fees for a 30-credit year range between $3,711 and $3,919, depending on the school.
Under the proposed legislation, tuition could increase to the national average, which now stands at about $6,585, according to the College Board.
Did you notice that the chairman of Florida’s Board is not a politician? Maybe that should be the third item on the list of what went right in Florida.
I didn’t realize until this PACT debacle how little control the Alabama State Legislature has over Alabama State-supported institutions of higher learning.
And I think that I’m likely not alone in having assumed, as a PACT buyer, that since the PACT program was created by the State, one reason it was a sure thing — that I was paying in advance for my kids’ tuition at a State school — was that the Treasury and the Legislature and the Boards of Trustees at these universities were all singing from the same hymn book.
Lesson learned: assume nothing when it comes to the Alabama kleptocracy.
Tuition at the two universities where most PACT buyers enroll is UA-Tuscaloosa, $6400 and Auburn, $5880.
Tuition at the University of Florida is $3790.
Go figure.
