The firm state Treasurer Lynn Fitch hired to audit the Mississippi Prepaid Affordable College Tuition Program, or MPACT, identified 12 areas of concern, nine of which were related to the program’s pricing structure.
Fitch announced last fall that was suspending the state-backed college savings program, due to concerns she had over its financial condition. She hired Michigan-based Gabriel Roeder Smith and Co. shortly thereafter to audit it.
Fitch released the results, which she said made up Phase I, Friday morning, to go with her legislative agenda.
The first-term treasurer said GRS & Co. found the plan had a 43 percent of chance of reaching its 7.8 percent target rate or return. For fiscal year 2012, the rate of return was 1.10 percent. The estimated rate for fiscal year 2013, according to Fitch, is 4.98 percent. The plan, which has 22,000 enrollees and $274 million in trust, is currently is 76 percent funded. The last time it was 100 percent funded was 2000.
Auditors said that lowering the plan’s expected rate of return would drop the funding level into the low 70s, and increase the plan’s unfunded liability to more than $100 million.
Some of the preliminary recommendations auditors made were:
- Incorporate bias load into the pricing structure. For example, some participants pay a price based on average annual tuition at one institution, then attend an institution whose tuition is markedly higher, leaving a difference between what the participant paid in and what they received.
- Changing the way administrative expenses are paid in the pricing. Currently, administrative fees are captured by lowering the plan’s interest rate, which has contributed heavily, Fitch and auditors said, to its low rate of return.
- Allowing the plan to recover losses when the average price of tuition rises. Currently, there is no way to do that when tuition increases are higher than assumed over periods that are hover close to the participation period.
Fitch said the next phase of the audit would be completed within 90-120 days. “This will not be a quick turn. It will take some patience.” She said those already participating in the plan would receive their designated benefits.
Ten states have already permanently closed similar programs, something Fitch said “would be an option” for MPACT. “This is the fault of no one, “she said. “It’s strictly an economic issue.”
The highlight of Fitch’s legislative agenda was the implementation of a statewide financial literacy program, which would require high school sophomores, juniors and seniors to take a one-semester course that taught the particulars of using credit, budgeting, managing money and making wise financial decisions. The cost in the first year of the program, Fitch said, would be about $5 million. That would likely decrease over time, she said.