Here’s hoping Fitch has plan for paying for our children’s education future

October 5, 2012

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Nancy Anderson, MBJ contributing columnist

I was so excited when the State of Mississippi finally started offering a college savings plan. My daughter was 16 and on the edge of qualifying. I plunked down my money for the full four years. By the time “H” headed to college, tuition costs had spiked. It was a great return on my money.

Mississippi now has two college savings plans, MPACT and MACS. MPACT is the pre-paid tuition plan that lets parents purchase college in today’s dollars for tomorrow’s college student. While regular inflation has averaged 3%, education inflation is much higher. MPACT is a great way to get a jump on rising college costs.

Our new treasurer, Lynn Fitch, has put the kibosh on MPACT. The problem? With the rise in tuition costs, the fund needs to average 7.8% per year to honor the tuition obligations of participants. The plan has been in existence since 1996 and has earned an average of around 4%. Last year, the fund earned 0.6%.

Over the last 15 years, financial markets have experienced some rough years. The dot-com bubble and the Financial Crisis of 2008 have hit investors hard. MPACT is no exception. The plan is guaranteed by the State of Mississippi, so any underfunding must be covered from the general budget. That’s what has Fitch concerned.

From the beginning of 1996 through this year, the S&P 500 averaged 6.8% per year. That is still under the return required for MPACT, but it’s not a deal breaker considering the market conditions in the last 15 years.

PERS, Mississippi’s pension plan, averaged 7.38% from 1996 through the end of the fiscal year in 2011—still not the 7.8% required. Of course, the size of the fund allows them access to the best money managers in the country, but MPACT has over $300 million. That’s not chump change. Couldn’t they get better service?

MPACT is managed by TIAA-CREF, an old-line investment company. Their reputation is sound, but they are quite conservative. They haven’t produced stellar returns among their mutual funds. If I need to earn about 8% per year, I don’t need to be in a conservative fund. I need to be heavily invested in the stock market, and I need excellent money managers who can ride the waves of the stock market and still produce the needed returns over the long haul.

The sign-up period for MPACT is underway, but Fitch is not allowing new entrants. This makes me sad. I think this may be premature and short-sighted. Mississippi parents need options when it comes to saving for college, but we need to take a serious look at the plan.

Asset allocation and investment choice must consider the goals of the plan. While a long-term view is important, short-term performance should be reviewed in light of market conditions. Trustees should have a solid understanding of financial markets, and they should not be afraid to change managers if they are underperforming. Ultimately, we must consider the trends in college costs before we commit taxpayer money.

The future of our children’s education and the future of our state budget require us to be more vigilant. Fitch has issued a wake-up call, but can she address the problem without giving up on the plan?

Nancy Lottridge Anderson, Ph.D., CFA, is President of New Perspectives, Inc., in Ridgeland, 601-991-3158. She is also an Assistant Professor of Finance at Mississippi College. Her e-mail address is nanderson@newper.com, and her website is www.newper.com.

 

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One Response to “Here’s hoping Fitch has plan for paying for our children’s education future”

  1. Claire Whittington Says:

    Just wanted to give some clarification. TIAA-CREF does not manage the MPACT program. TIAA-CREF is the program manager for the MACS program. Thanks!

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