In late November, the Board of Directors of the College Savings Plans of Mississippi met to discuss the future of the Mississippi Prepaid Affordable College Tuition Plan (better known as MPACT). Treasurer Lynn Fitch and the College Savings Board decided to temporarily close MPACT to new enrollees in September 2012. The Treasurer’s office then hired an actuary to perform an audit, which raised serious questions about MPACT’s sustainability.
MPACT is backed by the full faith and credit of the state of Mississippi. So current MPACT participants are guaranteed that the state will honor their contracts.
Basically, the way MPACT works is that a participant agrees to pay, in lump sum or over time, for a certain number of credit hours for use at the state’s universities or community colleges. MPACT participants buy hours based on an average of today’s tuition prices. When a child actually enrolls in college, MPACT then covers the cost of tomorrow’s tuition.
Given the steady rise of tuition since MPACT started accepting contracts in 1997, MPACT has been a good investment for those participants, about 22,000 currently. But it becomes increasingly clear that MPACT is not such a good deal for the state. MPACT is currently underfunded by about $82 million dollars. And, if nothing is done to meet that shortfall, the program will run out of money around 2025.
Hence, the actuarial audit. And a lot of work by the Treasurer’s office and the College Savings Board, both before and after I became a Board member in July 2013.
Some of the shortfall results from poor investment performance. Over most years, MPACT has failed to meet its assumed rate of return of 7.8% (which the Board lowered to 7.5% this summer). Performance really declined after the Panic of 2008, like everyone else’s.
Over the last three years, MPACT’s rate of return has substantially rebounded. This year, it is approaching 16%. Otherwise, the projected $82 million shortfall would be closer to $100 million.
However, much of the shortfall was “baked in the cake” when MPACT was created. Pricing of MPACT plans has proven unrealistic. No “risk premium” was built in to account for down years. In other words, MPACT’s pricing supposes that there will be more up years than down ones, and assumed returns would on average be met or exceeded. Contracts did not build in adequate safeguards for the downside possibility.
The other problem with pricing is that, even though participants bought four years’ worth of credit hours, those hours can be stretched into a fifth year or even longer. That costs MPACT higher tuition, while participants enjoy the benefits for the same cost. While more and more students take more than four years to finish college, MPACT pricing assumed only four years of cost.
Mississippi is not alone. In fact, almost every other state is moving away from prepaid tuition plans, some painfully so. Most states have concluded that plans like MPACT are unsustainable. Mississippi faces a decision.
The College Savings Board is studying every possible way to reopen MPACT, if we can do so in a fiscally prudent way. Earlier this summer, Board members (including this one) had expressed the hope that MPACT could be reopened by early 2014. We want to ensure ways for Mississippi kids to attain college education.
But consider this: before the plan was closed in September 2012, 248 new participants signed up for MPACT during that year. Those new contracts added a projected $211,000 to the shortfall. And, closing MPACT “as is” may raise shortfalls from $82 million to around $142 million. That’s because without new participants, the investment portfolio will shrink as existing contracts are honored, yielding less returns over time.
We can’t afford to reopen the plan, and we can’t afford to close it.
It is not an easy decision, or a simple one.
However, as we grapple with the right way forward for MPACT, there is another solid option for college savings. The Mississippi Affordable College Savings (MACS) Program allows families to save for college expenses, tax-deductible and tax-deferred. The minimum MACS contribution is only $25, and contributions can be made at any time. Distributions from a MACS account can be used to pay for education expenses (room, board, books, tuition), free from federal and Mississippi income tax.
MACS only has about half the participants of MPACT, but it allows greater flexibility in both saving and spending for college. Given that those benefits come without the obligations the state faces with MPACT, MACS may well be the future of college savings in Mississippi.
Madison attorney Cory T. Wilson was nominated in 2013 by Governor Bryant to serve a five-year term on the Board of Directors of the College Savings Plans of Mississippi. Contact Cory at cory@corywilson.ms.
