By Lynn Fitch
The Board of Directors for the College Savings Plans of Mississippi voted Monday to reopen Mississippi’s Prepaid Affordable College Tuition program (MPACT) for new enrollees beginning in fall 2014.
In 2012, the Board decided to defer new enrollments so that an actuarial audit of the program could be performed, something that had never been done before. As opposed to annual financial audits, the actuarial audit was aimed at evaluating whether MPACT was sustainable over the long term based on existing pricing, contract terms, and investment and expense assumptions.
The results of the actuarial audit were presented to the Board in April 2013. The audit’s findings confirmed that the decision to defer MPACT enrollments was a sound one.
The auditors concluded that under current pricing, and based on actual investment performance over 15 years of MPACT’s existence, the tuition program faced serious shortfalls and ran the risk of running out of money within the next ten years. Based on the most recent numbers (and after a very solid year of investment returns), MPACT faces a shortfall of at least $82 million.
If the program were to remain closed to new enrollees, that shortfall would grow to an estimated $142 million. That increased shortfall would result from lower investment returns as funds currently invested are drawn down to pay the tuition of MPACT enrollees.
Once the actuarial audit and recommendations were received, the College Savings Board was faced with three options. The Board has narrow authority under statute to “liquidate” the program, but that would likely result in an immediate liability to the State of about $60 million. No Board member saw this as a desirable option.
The other options before the Board were to close MPACT permanently, managing only the roughly 20,000 existing accounts until they were used over the next twenty years, or to reopen the program to new enrollees. The Board, working with my office, has carefully studied the implications of these options over the last year.
The Board has been criticized for the time taken to evaluate the best option. But the Board has had to analyze a number of “moving parts” to make its decision, and that has entailed a lot of hard work and detailed study. A systematic look at MPACT’s past and future performance had never been undertaken before. That undertaking did not end with the results of the audit; in fact, the audit was just the beginning.
Given the funding shortfalls under either scenario, as well as the other findings in the actuarial audit, neither option is an easy one. Yet, there are some principles around which we have strong consensus.
First, income and expense assumptions have to be realistic. Last year, the Board voted to lower the assumed rate of return on investments to 7.3 percent. The rate had been 7.8 percent, even though MPACT’s investments have averaged only 5.4 percent over the life of the program. Lowering the assumed returns reflects a fiscally responsible, more conservative approach to forecasting taxpayers’ potential liability.
Second, new MPACT contracts must be streamlined and require more accurate pricing. Before MPACT was closed in 2012, there were 248 new enrollees that year. Those new contracts alone added an estimated $211,000 to the shortfall. We must correct that trend. Another example: under the old framework, MPACT allowed a mix of 11 different prepaid plans, with 54 payment options. Some of these options were seldom used. The Board is considering new rules that would provide a more manageable 6 plans, with “only” 22 payment options. We are eliminating a number of other “risk” factors that could otherwise end up costing taxpayers.
The projected funding shortfall is an issue the Legislature will have to weigh as well. In January, the Board sent a report to the legislative leadership highlighting MPACT’s challenges. The Board also asked
the Legislature to consider the policy decisions relating to both the shortfall and MPACT’s future. While the decision to reopen MPACT minimizes the projected shortfall, without well-above-average investment returns over the next decade, that shortfall will persist, implicating the State’s full faith and credit.
A lot of the audit’s recommendations take time to be implemented prudently. The Board’s decision this week puts us on a road to reopen MPACT in a fiscally responsible way. Both Mississippi’s taxpayers and our future college students will benefit from the enrollment deferral, the audit, and implementation of its findings.
Lynn Fitch serves as Mississippi’s State Treasurer. In her capacity as State Treasurer, Fitch also chairs the College Savings Plans Of Mississippi Board of Directors.