Tag Archives: education

Red ink flows in state-run prepaid tuition programs

In three years the Prepaid Alabama College Tuition Program (PACT) will run dry. The State Treasurer reports PACT which pays $100 million in tuition a year, has $347 million in investments remaining. To fulfill its obligations to all 40,000 participants over the next 20 years, PACT needs an additional $843.9 million. The state Supreme Court recently struck down a potential solution put forth by the legislature: cap payouts to 2010 tuition levels and have beneficiaries make up the difference. The remedy didn’t pass scrutiny due to a 2010 law that promises PACT be 100 percent funded.

PACT worked for about 20 years until hit with the combination of unrelenting tuition inflation and a bear market which halved the plan’s investments.

Unfortunately, Alabama isn’t the only state with a prepaid program in the red. The Wall Street Journal reports South Carolina’s plan expects to run out of funds in 2017. Tennessee’s budget seeks an infusion of $15 million into its program. And West Virginia recently transferred funds from an unclaimed-property program to shore up its struggling prepaid plan.

In remarkably bad shape is IllinoisCrain’s Chicago Business finds that Illinois’ 12-year old $1.1 billion prepaid plan has the largest shortfall in the entire nation. Worse still, plan managers are making up for losses by embracing a huge amount of risk. In 2011, 47 percent of Illinois’ prepaid tuition plan was shifted into alternatives and investment expectations set at 8.75 percent. An expectation that far outstrips any other prepaid plan by a long-shot. (Florida has the country’s largest prepaid tuition plan and operates with an expected return of 4.3 percent on plan investments).

This year the agency that runs the prepaid program, the Illinois Student Assistance Commission ,has dropped that return assumption to 7.5 percent.  According to its actuarial report College Illinois! has enough money to pay out tuition for a few more years.

Prepaid plans are a type of 529 plan (the other is the college savings program) that allow parents to purchase contracts (or credits) for their children’s education.  The prepaid tuition plan locks-in tuition for the current year for eligible in-state colleges. Contributions are invested and benefits paid from those funds. To remain well-funded asset performance must track or exceed tuition increases. Given the rapid increase in college tuition which on average has increased 5.6 percent per year over the rate of inflation in just the past decade, it’s easy to see why so many plans have gone bust.

PACT participants who may not recoup their initial investments are understandably upset, “everything about the way the plan was promoted implied it was backed by the state.”

But, just how good is the state’s guarantee?

That is often in the fine-print. The WSJ finds three levels of guarantee in operation. 1) Full Faith and Credit – the state promises to pay for shortfalls if the fund goes dry. (Washington, Texas, Ohio, Mississippi and Florida)  2) Legislative appropriation – the legislature must consider an appropriation to cover shortfalls. (Illinois, Maryland, Virginia, South Carolina and West Virginia)  and 3) Fund Assets – the plan is solely backed by the assets in the plan. (Alabama, Michigan, Nevada, Pennsylvania, and Tennessee.)

Alabama’s PACT participants found they had little recourse in 2009.  Since the state doesn’t guarantee payment of tuition,they were technically out of luck. However, after a series of demonstrations and hearings in 2010 the Alabama legislature granted a $548 million bailout, tiding the plan over for the next three years. And then what? The state legislature filed a bill last week to tweak the previous solution to the court’s liking. It is again proposing to cap tuition payouts at 2010 levels.

Strangely, in spite of the risk present in pre-paid tuition plans they continue to provide a “flight to safety” for some investors. Last year growth in pre-paid plans outstripped growth in 529 college savings plans. The lure of higher returns attracts some who are banking on the ability of governments to keep their promise to pay it out regardless of market performance or the fine-print.

A “Can-kicking” budget deal in Minnesota.

A deal has been struck between Governor Mark Dayton (D) and Republican legislative leaders in Minnesota to end the government shutdown . Instead of “raising taxes on the rich” (the preferred strategy of the Governor) Republicans prefer deferrals. The GOP proposal includes $700 million borrowed against the state’s portion of the  Tobacco Settlement and $700 million in deferred school payments.  Both must be repaid in the next two years.  Fitch downgraded Minnesota from its AAA rating due to the state’s ongoing structural deficits, and the Tobacco Settlement bonds proposal. While Republicans say the compromise enables them to stop tax increases and a $500 million bond proposal, structural reforms are still lacking.

Spending has grown in Minnesota over the past several decades in particular in education and Medicaid as with most states. Pensions are undervalued and will require higher contributions.  Depending on your view Minnesota either has a revenue problem (in that it can’t support the growing costs associated with these programs), or it has a spending problem (in that these costs continue to grow and demand more revenues.) It is not unlike the fundamental philosophical divide at the center of the debt-ceiling debate: do we support growing costs with more debt or do we cut costs by rethinking and restructuring what government is providing?

Effectively, Minnesota’s budget has been balanced by not engaging this debate but by attempting to reconcile two different views on the size of government.  Spending growth can be supported by evasive techniques at least for awhile  and people may be lulled into thinking you can have it all – lots of services and low taxes.  But one-shots and short-term revenue sources eventually dry up leaving politicians with the uneviable choice of cutting programs or finding more revenues. Minnesota’s government has only purchased a little more time.

Why is the Department of Education in Wisconsin?

The Department of Education’s first seeds were planted in 1866 in a communique issued by the National Association of State and City School Superintendents. The following year Congress established the U.S. Office of Education. It had a staff of six and a budget of $13,000. It’s mission was to collect statistics. From there the idea grew.

As G. Gregory Moo notes, these 19th century petitioners for greater federal involvement in U.S. education, wanted, “what has never been and never can be – federal assistance without federal control.” They wanted Congress to create a bureau “without it being invested with any official control of the school authorities therein…Indeed, the highest value of such a bureau would be its quickening and informing, rather than its authoritative and direct control.”

In 1979, the teachers unions scored a coup with the creation of a cabinet-level agency to set education policy and advance the interests of its members, which includes collective bargaining.  For a thorough history read G. Gregory Moo’s book, and Myron Lieberman’s, The Teachers Unions.

A short answer to the question:

Why is the Department in Education in Wisconsin – a state which we might otherwise assume is free to set its own policies on this subject.

Because states and local school districts are intertwined with the National Education Association the Department of Education.  That explains the recent two-day summit held by Secretary of Education Arne Duncan. He’s  trying to find a way to bridge the growing labor-management divide in thousands of local school districts. That is, Mr. Duncan is cabinet-secretary-cum-labor negotiator who is going to “do everything [he] can to bring governors to the negotiating table.”

Race to the Top a Mixed Bag

After Delaware and Tennessee were awarded funds from the newest federal aid to education program, Race to the Top (RTTT), many states are still competing in an attempt to be awarded funds in the second round.

RTTT has several advantages over the former federal education program, No Child Left Behind, in that Race to the Top encourages innovation and competition at the state level rather than prescribing one top-down solution for all schools.

However, RTTT suffers from the problems that will plague any top-down education reform, in that it exponentially increases the bureaucracy of education. Because federal regulators do not have the local knowledge necessary to evaluate programs in individual schools, they must rely on statistics to evaluate school performance. A Washington Post blogger opines:

Part of the problem for D.C. may have been the trouble it has had in developing a data information system. Millions of dollars have been spent over the years but still no real system exists. And using “data” to drive reform is one of Duncan’s core principles, even though we all know that data is vulnerable to manipulation.

[…]

Duncan uses a lot of jargon too, but it is easy to understand what he is trying to do with education: expand charter schools, increase student standardized testing, link teacher pay to test scores and close down the nation’s lowest-performing schools.

Unfortunately, what is not easy to understand is why President Obama’s education secretary is pushing those initiatives. This administration was supposed to bring some reason back into education reform after the failed era of No Child Left Behind.

Furthermore, the lack of local knowledge regarding schools at the federal level forces federal officials to allocate RTTT funds based on metrics that may not reflect the actual quality of state and local education reforms. The lack of transparency behind the allocation of federal funds led Colorado Governor Bill Ritter to consider dropping out of the second round of the competition. The New York Times reports:

Colorado, which had hoped to win $377 million, ended in 14th place. Now Mr. Ritter says the scoring by anonymous judges seemed inscrutable, some Coloradans view the contest as federal intrusion and the governor has not decided whether to reapply for the second round.

“It was like the Olympic Games, and we were an American skater with a Soviet judge from the 1980s,” Mr. Ritter said.

Colorado is not the only state where the initial results of the Obama administration’s signature school improvement initiative, known as Race to the Top, have left a sour taste. Many states are questioning the criteria by which winners were chosen, wondering why there were only two that won and criticizing a last-minute cap on future awards.

RTTT’s emphasis on accountability and competition between schools offer some improvement over No Child Left Behind’s focus on multiple-choice standardized testing. However, RTTT’s failures so far demonstrate the reasons that education policy should not be managed at the federal level.