Michael Brister of BPS&M presented on September 10, a report to the Board of Directors of Mississippi's Prepaid College Tuition Program, showing the program is 75% funded and faces an unfunded liability of $84.7 as of June 30,2010. The Legislature created the program in 1997 and it is administered by the Treasury Department.
The program assumes an annual rate of return of 7.8% on investments and an annual tuition rate increase of 6.5%, yielding a spread of 1.3%. There are 21,257 participants enrolled in the program. The 2009 report posted below shows the program was 95% funded with an unfunded liability of $13.5 million in 2007. The program was 85% funded with an unfunded liability of $48.6 million in 2008. The 2008 meltdown hit hard as the unfunded liability skyrocketed to $86.8 million in 2009 while funding dropped to a level of 72.7%. The funding level improved slightly to 75% as the program enjoyed a 12.87% return of investment last year as the markets recovered.
Treasurer Tate Reeves spoke to this correspondent about the report last week and provided some additonal details. (It should also be pointed out his office was very quick in responding to my public records request. They provided me with all reports requested within a few hours). The report states on page six the weighted average of the tuition increases has been consistently below the 6.5% assumption used in the models. Mr. Reeves was very explicit in stating the deficit is a projection and the funds paid by enrollees are safe.
The program currently holds $211,641,934 in assets, with projected tuition payments of $18,812,396, according to Appendix B on page ten of the 2010 report. It must be pointed out when reading this table the projections assume no further participants are enrolled in the program and thus does not include their future payments. Mr. Reeves said the program probably had $230 million in assets at this time. The assets decline as tuition payments more than doubles (the enrollees are just now becoming of college age) in two years to $38 million and stays above $30 million in annual tuition payments until 2025. The report projects the program will enter into an actual deficit of $26 million in 2024.
Mr. Reeves said as the markets recover, the rate of return will improve. He agreed with me that the reason for the high rate of return last year was due to the "dead cat bounce" the markets enjoyed as they recovered from the crash of 2008. He said 7.8% is a realistic goal over a long period of time such as thirty years, as shorter terms are subject to more variations in the rate of return, but they tend to be more stable over time. He said the program is invested in equities (62.1%), bonds (27.7%), cash equivalents which include short-term treasuries (7.4%), and real estate (2.8%). The report states a future rate of return of 12.33% is required to meet all future expenses and liabilities. State Representative Cecil Brown said he read the report and was going to seek a meeting with Mr. Reeves to discuss the report in greater detail.
Attempts to contact board member Carlton Reeves were unsuccessful.
Monday, November 1, 2010
Report says Mississippi Prepaid College Tuition Program is 75% funded, faces a projected $85 million deficit.
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30 comments:
They are about to take another hit when I withdraw my kid's money in December.
W O W !!
"He said 7.8% is a realistic goal over a long period of time such as thirty years, as shorter terms are subject to more variations in the rate of return, but they tend to be more stable over time."
That is a really naive statement for the state treasurer. Over the last 10 years the market has gone no where and many people expect it to be years before there is sustained growth in the market. 7.8% is the type of inflated projection that you would get from someone selling you something. Most people would lock in everything they've got if they could get 7.8% guaranteed for 30 years. But you can't get anything close to that guaranteed.
...guess "Baby Face" Tate is not such a good money manager.
I think you will hear all about this as the Rep Primary for Lt Gov starts warming up.
Actually, this all started with Marshall Bennett, but I don't think Tate Reeves has done much to help!
still a good deal for your kids if they're 12ish or so. the poop won't hit the fan until several years after they matriculate
True, it did start with Marshall Bennett and I'm starting to learn about some of the shenanigans that took place under his watch.
The "poop" could very well hit the fan, if these "investments" are in "bonds" which are crap, such as the Morgan Keegan bonds were, and all the funds which were really full of high-risk alternative crap. The value could drop up to 70%.
Wow. The US stock market has its two consecutive years of its worst performance ever and the MPACT funding status declined.
Shocking.
Did anyone REALLY think that something like this would turn out? It's just like SSA--a Ponzi scheme where payments on "investments" were made and "payouts" are higher--so they have to be paid for by more "incoming investments". I wouldn't be a bit surprised if the Legislature came along and closed it out and put the money in the general fund. You can't trust government to leave a pile of money like that alone.
Thank goodness that some people in this state have the planning foresight to pay in advance for these 21,257 college educations.
If the prices for the MPACT contracts need to be adjusted upwards to reflect our new economic realities then do that. By all means, get the funding mix corrected.
But this is a program that should be encouraged. Getting people to prepay for college educations is a good thing.
3:41: I don't think there is anything wrong with pointing out the program is underfunded when the report is issued very recently. No one is surprised by this, least of all me. Ignoring it doesn't make it go away. That is what Illinois, California, and New Jersey have done for a long time.
It is still a good deal for all MS children, if the fund is underwater when it is time to send the children to college, it is not a problem for the parents. The MPACT fund is guaranteed by the State of Mississippi. If State of Mississippi is insolvent when that time comes then we all will be in a BIG pile of poo poo.
The MPACT fund is guaranteed by the State of Mississippi. If State of Mississippi is insolvent when that time comes then we all will be in a BIG pile of poo poo.
You are right, but really, what guarantees do we have? Unlike a guarantee from the federal government, the state has limited resources. It doesn't print its own money. So, I have a four year old and have paid in full for two years of tuition at a four year institution through MPACT (this is true). 14 years from now if this program doesn't cover the costs we will have to a) force universities to accept what the state can pay (which will burden universities and lead to higher taxes to subsidize or cuts); b) breach the contract and force me to pay additional money (I'll sue the state, but I'm not optimistic); or c) rob peter to pay paul (use new money to pay my child's tuition). All of these options are unacceptable.
The fix (I think) is to increase the cost of the program and lower that 7-12% needed return rate to 3-5%.
The problem might be Pell Grant money for kids to go to college. Think beyond the immediate circumstance. When kids can go to college for "FREE", there is an undue burden placed on people that have to pay for college. When the number of kids going to college doubles, the square footage of classroom has to as well. That is a huge reason tuition has increased at greater than four percent per year for as long as I can remember.
The state has to conform to certain accounting rules, and making this projection is required. The rules are tedious at best and downright arcane at worst, and to try to go into any detail in the media is a sure snore inducer, but Tate knows what he's doing. The unfunded liability is a projection that's based on educated guesswork. No one knows what the rate of growth in tuition will be, nor do we know what the growth on the various investments will be, but they make their best stab at it and move on. There are a number of adjustments that can and will be made to cover the cost as the due date gets closer, so while I'd be happier if we didn't have an unfunded liability on the books, I'm not as worried about being in a deficit in 2024. Bill Billingsley
I'm not as worried about being in a deficit in 2024. Bill Billingsley
I'm worried, I have a four year old enrolled in this program.
According to what KF wrote (and I will read it all in greater detail), the expected rate or return is 7.8% and it will take 12.33% to meet all future expenses and liabilities. So I am not okay with them making their best stab and moving on. There is a problem and any proactive measure taken now is appreciated.
Let's all be taxed to make up for the difference! Novel idea? Where were the saviors of deserving kids when my parents had no help (back in the 80's) and no investment like the current "program" going broke?
This scheme reminds me of whole life insurance policies sold under the guise the returns would cover a child's college education. Class action lawsuits resulted. Of course, lawyers got the money, not the parents or the kids.
Got it Bill. Nothing to see here, move along.
Hmmm...we just had a child and were about to enroll in MPACT. This definitely makes me have second thoughts and reconsider starting a savings plan other than the state sponsored one. Of course we'll lose the tuition rate lock in which was the most attractive feature to me, but it might be worth it to avoid having to put additional faith in our state government.
I enrolled my son when the program first came out and he was in kindergarden. He is a senior this year and I'll let you know if we run into a problem...
Have a Soph @ USM using MPACT program we bought when she was in 4th grade. No problems at all. A great financial decision. Recommend highly.
Plus it is fully automated. USM AR system pings state computers each semester and the money is moved over without any intervention or hassle.
Our daughter will graduate with no college loan debt.
I purchased MPACT for my daughter in August. She is a senior in high school. When I called the MPACT office to inquire about the new rates coming in September, I was told that I could purchase the contract under the old rate. Very nice! Saved me a bundle!
Hasn't Reeves complained about the PERS assumption of 8% earnings annually? Why is it OK for one agency and not another?
9:23, must be that extra .2%.
It makes sense that current students are not having problems. It is the ones in the pipeline I am concerned about.
11/1, 10:54, take a look at the first part of my sentence that you quoted. I didn't mean to suggest that because I'm an old fart and won't have to worry about who's getting their MPACT funds in 2024. I believe that as we get closer to the date where the funds are needed that the state will have a way to make them available. Like Kaptain Kangaroo said much more concisely than I did, this is just something to report on a slow news day. BB
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