I need your help.
There are financial problems with the Alabama Prepaid Affordable College Tuition (PACT) program run by the Alabama State Treasurer's office. They need a financial bailout.
I want to give you an unbiased and complete accounting of the program and its finances, based upon a recent Retirement Systems of Alabama (RSA) study so that you, the taxpayer, understand the financial obligations we are all facing. And I want your opinion on what to do.
The program, started in the early 1990s, is suppose to do what its name promises: investors like parents or grandparents pay a set amount into the program, and the program agrees to pay the future college tuition costs of the beneficiary, a prepaid tuition program. The PACT program entered into a contract with their participants. Through this program, thousands of Alabama's finest students have already attended college.
But in March the Alabama Treasurer's Office informed the existing 49,000 PACT participants it did not have the money to meet all of its future tuition obligations. The Treasurer's Office blamed the collapse on the stock market crash, a crash that caused the Alabama program to lose a staggering 48 percent of its investments.
At that point, the Alabama Treasurer asked the Legislature for a financial bailout. The bailout will cost Alabama taxpayers, according to the RSA study, between $642 million and $1 billion dollars. To put that in perspective, next year's total education allocation is less that $6 billion to fund all of our needs.
The RSA numbers shocked us. Even after the March stock market collapse nobody from the PACT program ever talked about a bailout price tag of $600 million to $1 billion dollars.
How did this happen? First, the stock market drop does not fully explain how Alabama's losses were one of the worse, if not the worse, in the nation, according to USA Today. Other states, seeing the same out-of-control tuition hikes, made substantial changes to their programs years ago. West Virginia closed its program to investors in 2003. Colorado closed its program to new investors in 2002, and in 2003 gave participants the opportunity to transfer to other plans, withdraw funds or leave funds in the program with the understanding that important modifications would take place in the program.
Alabama, on the other hand, did nothing.
So how do we fulfill our financial obligation to PACT participants? Here are the options outlined by the RSA study. First, if tuition continues to grow at a 7.25 percent rate, the PACT shortfall will be $642 million. That means next year Alabama will need to write a $642 million check to the PACT program.
Or second, the Legislature needs to find and allocate $100 million per year to PACT for the next 7.5 years, for a total bailout cost of $748.2 million. Third, the Legislature could commit to level funding of $52 million per year for the next 18 years, a bailout cost of $932.8 million. A fourth option by the RSA is the pay-as-you-go-option, a bailout plan that will cost more than $1 billion.
RSA also considered the cost of terminating the program. If PACT continues to pay for students already in college while refunding the rest, the bailout drops to just $60 million total to cover the refunds. However, if PACT refunds all participants and either stops paying for or substantially reduces the payments to students already in college, there would be no bailout: PACT has the assets to cover that cost.
If nothing is done, the PACT program runs out of money in 2015.
All of these options assume tuition rates rising at 7.25 percent per year. However, as the RSA points out, if Alabama universities could cap tuition increases to 3.75 percent for PACT students, the Legislature's allocation drops to $34 million per year for 18 years, a total bailout of $608 million. If Alabama universities froze tuition for PACT students for the entire 18-year period, the total bailout cost would drop to $355 million over the next 18 years, or $19.8 million per year. Freezing tuition could also mean spending $100 million per year for 2.5 years, a total cost of $256 million.
Now you see the financial options available for PACT, same as I do. Nothing hidden. It's time to hear from you. What should we do? Please click the issues button and fill out a feedback form click submit.