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An INSTITUTION OF HIGHER LEARNING ...
or THE SCHOOL OF HARD KNOCKS  The photo was contributed by someone I'll call PACTDad. He owns two Alabama Prepaid (Oops, we're just kidding) Affordable College Tuition (PACT) contracts for his teenagers. Let it serve as a reminder to Kay Ivey, Bradley Byrne, Jim Folsom, Paul Hubbert, the rest of the PACT Board and the entire Legislature, not to mention the Alabama press and public, that in the end we're talking about the future of Alabama's children here, not the stock market or the next election. Will 50,000 or so young PACT beneficiaries get the college education their families thought they paid for or will they be forced to forego dreams of a higher education or end up deep in debt in order to earn a degree?
Back to PACTDad who sent the photo. In hindsight, the PACT purchase looks like a terrible decision. Why did he purchase a PACT contract for his kids instead of investing the money himself or putting it in a mutual fund or savings account? In the late 90's I was kicking myself as to why I purchased the PACT when my investments could have returned so much more. In the early 2000's I was thankful for the PACT because the tech bubble had burst. Bottom line, the PACT contract offered a guaranteed solution.......an insurance policy...... that I could always fall back on. I didn't have to worry about college tuition (I thought). My other investments could pay for housing and books. All investing inolves risk........which is why I purchased the PACT's.....to avoid the risk. They are now trying to say I purchased an investment vehicle with limited upside gain but maximum downside risk. Who in their right mind would purchase a traditional investment with such framework?
Note that PACTDad was sufficiently savvy to notice the PACT contract only covered the cost of tuition and fees for his children. Since 1994 he's been arranging his finances so the money would be there for the other costs of a college education: room and board, books and so forth. Lots of PACT parents are in the same boat. They planned ahead, bought their PACT contract, then saved toward the costs they knew PACT didn't cover. Little did they dream PACT might fail to deliver on the costs it did promise to cover. |
PACTDad also sent me these calculations for his situation. His children's PACT contracts were purchased in 1994 -- back when they were "guaranteed." No kidding. Based on the tuition inflation included in the board's presentation, here's some calculations regarding potential impacts on my kid's college finances:
From the official PACT website:
Rate per semester hour: $181.67
Qualified fees per semester: $108.65 (paid once per semester)
They cover 128 semester hours over the course of 8 semesters. This is an average of 32 semester hours annually. Based upon the assumption of a 7.25% tuition inflation index proposed by the auditors in the board presentation, listed below is the expectation of what PACT should pay for in the upcoming academic years.
2008-2009 $6,030.74
2009-2010 $6,467.97
2010-2011 $6,936.90
2011-2012 $7,439.82
2012-2013 $7,979.21
2013-2014 $8,557.70
2014-2015 $9,178.13
2015-2016 $9,843.55
Over the next 5 years the total benefit paid for my 1st child would be $30,913.63
Over the next 7 years the total benefit paid for 2nd child would be $35,558.59
Total benefit expected from the PACT contract signed in May 1994 = $66,472.22
Total contracted contribution to the PACT plan in May 1994 = approximately $10,650.00
Total shortfall to my beneficiaries if the PACT program is liquidated = $55,822.22
One potential “solution” on the table is to freeze the 2008-2009 tuition rate payouts for the life of the program. For obvious contractual reasons, this is not an acceptable solution:
8 years at the current tuition/fee rate of $6,030.74 = $48,245.92
Total shortfall to my beneficiaries if the current tuition/fees are frozen = $18,226.30
The first, $55,800 shortfall he calculated was for what the PACT Board called Option 1, the one they rejected. That option was to dissolve the PACT Program and give contract holders a refund of their initial investment. Period. Disaster for families who bought in when their kids were young and are now college age or nearly so. The Board was absolutely right to reject this and they ought to never bring it up again.
PACTDad is also concerned about the effects of what the PACT Board presentation called Option 2, Scenario 1: Funding Level Scenario #1
as of March 1, 2009
• Deficit: $ 481.3 million
• Assumptions:
–0% for March –September 2009
–8.21% return each year thereafter
–7.25% tuition increase each year
Scenario: Maintain tuition/fee payments at 2008/2009 level
for life of program, i.e. 2037
Resulting deficit = $176.6 million
Obviously, just freezing payments as per Scenario 1 is not a workable solution because it will also freeze some PACT beneficiaries out of a higher education. As a for instance, families who can't readily scrape up an extra $9 or $10 thousand per child. Option 2, Scenario 2 as presented at the March 24 Board meeting is somewhat better: Funding Level Scenario #2
as of March 1, 2009
• Deficit: $ 481.3 million
• Assumptions:
– 0% for March –September 2009
– 8.21% return each year thereafter
– 7.25% tuition increase each year
Scenario: Receive monies to fund tuition/fee payments for
PACT.
Resulting deficit:
• $35 million for 10 years = deficit of $233.6 million
• $45 million for 10 years = deficit of $162.9 million
The downside of Scenario 2, from the point of view of the Board, is that it requires an infusion of money from somewhere -- the Alabama Trust Fund or the Education Trust Fund, for example -- and that requires action on the part of the Legislature, the Governor and possibly the electorate. The upside, from the point of view of the beneficiaries is that they will be able to afford a higher education as advertised. In the end, we all win if these young folks become more productive citizens through higher education. Option 2, Scenario 3, as presented on March 24 combines the worst features of the previous two: Funding Level Scenario #3
as of March 1, 2009
• Deficit: $ 481.3 million
• Assumptions:
– 0% for March –September 2009
– 8.21% return each year thereafter
– 7.25% tuition increase each year
Scenario: Restructure tuition payments to be average of 4-
year Alabama universities as provided by Alabama
Commission on Higher Education.
Resulting deficit:
• $25 million for 10 years = deficit of $181.8 million
• $30 million for 10 years = deficit of $146.4 million
This one doesn't fully cover tuition and fees at some state universities (primarily Auburn University and the University of Alabama) but still requires significant funding from another source with all the difficulties that involves. No one goes away happy. The PACT fund has sustained large market losses in the last 18 months. So have many other investors. At this point, most of those losses are unrealized -- existing on paper only. The smart thing to do is hold onto the investments and wait for them to recover some or all of their previous value. If President Obama's new economic policies pan out, most of them will recover significant value. However, PACT is required to make tuition and fee payments several times a year. Why does that matter? Because without an influx of money from an outside source -- remember they indefinitely suspended new enrollments so there's no money coming in -- the PACT Program is forced to convert current investments into cash, thus locking in their losses for good. Very bad.
What is my point, you say? I have several: - PACT is about real Alabama kids, seeking an education for a more productive life.
- Reducing PACT payouts will price some young Alabamians out of a college education -- see PACTDad's calculations above.
- The Alabama PACT can't get from here to solvency just by cutting costs -- at least not without pricing a large number of beneficiaries out of an education. The Board had no choice but to ask the Legislature for help.
- The Legislature doesn't have a year or two to deal with this problem. The longer they delay an infusion of cash, the more assets the PACT is forced to sell off at bargain basement prices. Ironically, they are probably selling their best holdings because those have the most value left.
Doing nothing and letting Alabama's Prepaid (we hope) Affordable College Tuition Program fail is an unaffordable option. 50,000 promising young minds would be a terrible thing to waste.*
* Hat tip to the United Negro College Fund -- A mind is a terrible thing to waste. |
