Meridian Star

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May 1, 2013

Higher prices could fix Miss. college tuition plan

JACKSON —  Mississippi's prepaid college tuition plan may be underfunded by more than $100 million, auditors from a private consultant told the board that oversees it Tuesday.

However, the actuaries say the plan can be at least partially fixed by charging more for future contracts. If the board doesn't make changes, either colleges or the Legislature would have to make up the deficit, the actuaries from Gabriel, Roeder, Smith & Co. warned in a Tuesday meeting of the board that governs the Mississippi Prepaid Affordable College Tuition Program.

State Treasurer Lynn Fitch, whose office administers the program, told board members she wants to overhaul the program and continue it.

"The bottom line is we want to reopen this program," the Republican said.

The board, at Fitch's request, blocked the sale of new contracts during last fall's enrollment period. Under the plan, parents or grandparents typically buy tuition contracts for children who expect to later attend college. Their money is invested by the plan to cover the cost of future attendance.

Although several board members said they want to reopen the program this fall, Fitch said 2014 is a more likely target.

Actuary Ken Alberts told board members that the current expectation of earning 7.8 percent a year in investments is unrealistic. His firm recommended lowering the investment target to 7 percent a year.

The fund currently has $278 million in assets. Under the current assumptions, it has 80 percent of the money it needs to pay future benefits, but has an unfunded liability of $80 million. At a lower investment return, the gap widens to $100 million, and the funding share falls below 26 percent. If no new contract holders sign up, the fund would run out of money by about 2024.

"If we continue along this process without making changes, we will destroy the program," Fitch said.

Actuaries proposed increasing the price of a contract by 17 percent to build reserves, cover administrative costs, and account for the fact that contract holders are more likely to attend the state's highest-priced colleges: the University of Mississippi, Mississippi State University and the University of Southern Mississippi.

Those changes could bring the program's funding ratio to 88 percent, actuaries estimated.

"We think this is a good program, we'd like to see it reopen, but we'd like to see the pricing fixed before you reopen it," Alberts said.

However, a combination of increasing the price for new contracts, lowering the expected investment return to 7 percent and assuming tuition will continue to climb at more than 6 percent a year could raise the price of new contracts by $4,000 or $5,000 over the current level of $25,886, driving down purchases from the historical average of 1,300 or so a year. That would be bad because the plan would count on new money to help cover the current deficit.

Other options to cover the current deficit include limiting tuition increases or having lawmakers subsidize the program. Actuaries said tuition would have to be limited to roughly a 1 percent annual increase to wipe out a $100 million deficit, compared to the 5 percent a year it's risen over the life of the plan. If tuition isn't limited, the state could have to kick in $5 million a year to bridge the gap.

Higher Education Commissioner Hank Bounds said he's uncomfortable forcing colleges and universities to absorb the gap, saying it would effectively make other students subsidize contract holders.

Contracts currently pay for 128 credit hours, even though only 124 are required in most cases to earn an undergraduate degree.

That means students could receive full-time tuition for as many as 10 semesters if they took 12 credit hours a semester. That level counts as a full-time student, but isn't high enough to earn a degree in four years. Bounds repeatedly expressed concern about that provision, and said he wanted the board to determine if it could legally change its guarantee for current contract holders to eight semesters of full-time tuition.

"I just wonder if we're paying for five years of college when we're promising them four." Bound said.

Treasury officials indicated they believed the state was legally bound to 128 credit hours for current contract owners.

 

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