State college savings and prepaid tuition plans: A reappraisal and review

Journal of Law and Education, Oct 2003 by Olivas, Michael A

But my cynical side cannot help but characterize such programs as ones that rent-a-state, operating these programs as branch offices of a larger network of financial services institutions. TIAA-CREF, the immense insurance company/financial services company that recently lost its federal tax-exempt status due to congressional action, administers and operates over a dozen state plans.74 Again, I stress that there is nothing unethical or even suspicious, but state programs outsourced to private markets and operators cloud discussions about the proper role of states, state agencies, state regulations, state taxation, and state-ness. My late father was a certified public accountant in New Mexico, where he had several Indian tribes and gaming companies as clients. During the last years of his life (he died from a car accident in 1997), he told me several times that New Mexico's Indian tribes and gaming interests, who subcontracted tribal gambling and casino operations, but who did not build up or develop an infrastructure of Indian self-reliance or self-determination, were disserving pueblos.

Of course, Indian gaming interests (or another similar state program, state lotteries) may not be the perfect analogy, but there is a genuine public policy question of whether such a privatized infrastructure fully serves the state host interests. In the alternative, it diminishes arguments that these are truly state programs if they are turnkey operations, simply state-located. And closing a privatized program is clearly easier than would be closing a genuine state program. One has to wonder about the staying power of such operations.

While there are open questions concerning the state-ness of state prepaid and savings plans, there can be no doubt that there are state investments at play. Several states offer FF&C on their prepaid plans; most states offer tax exemptions or tax deductions in their plans, although details vary widely. These investments are both real and imagined, in the form of foregone tax revenue or credit guarantees, should the plans fail to meet their contractual obligations at some point. And even in states that do not offer the state-guaranteed FF&C, such as with the MET prepaid plan, state officials may maintain a "political FF&C" policy. When the MET was under attack by the IRS to render its operations taxable, then-Michigan governor John Engler publicly pledged to backstop the program's reserves, if need be, even without any legal requirement to do so.75 The New Jersey Better Educational Savings Trust (NJBEST), a savings plan rather than a prepaid plan, has a formal "Moral Obligation" provision that requires the NJBEST program to request legislative funds in the event of a shortfall.76 Other states also have ambiguous status for their prepaid plans, such as Pennsylvania's which is called the Guaranteed Savings Plan, but which does not have the state's backing of FF&C. The program, begun in 1993, has published a detailed, twenty-eight page booklet so that persons considering joining the $493 million fund are fully on notice that the plan, despite its name, is not actually "guaranteed."77 In 2002, Pennsylvania's plan had an actuarial shortfall of $26 million.78 A similar situation occurred in Colorado's Prepaid Tuition Fund, which required a $7.7 million infusion into the $62 million program in June, 2002, by the Fund's parent, the Colorado Student Obligation Bond Authority. Since that time, the Fund has allowed purchasers to opt out of the program without penalty.79 This cannot shore up purchasers' or investors' confidence.