Legislature(1999 - 2000)

02/07/2000 01:50 PM House FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
HOUSE BILL NO. 268                                                                                                              
                                                                                                                                
An Act relating to the Alaska Higher Education Savings                                                                          
Trust; and providing for an effective date.                                                                                     
                                                                                                                                
REPRESENTATIVE LISA MURKOWSKI explained that Alaska, through                                                                    
the student loan program and the Advance College Tuition                                                                        
program has traditionally offered its residents seeking                                                                         
higher education, solid financial options.  HB 268 continues                                                                    
this trend and will allow residents and non-residents alike                                                                     
the ability to put money into a trust fund to be used for                                                                       
higher education expenses.  The bill will ensure that                                                                           
Alaskans will continue to have flexible and powerful                                                                            
financial options to utilize for their higher education.                                                                        
                                                                                                                                
Representative Murkowski continued that under IRS Code 26                                                                       
USC 529, commonly known as "Section 529", it is recorded                                                                        
that states are allowed to create "qualified State tuition                                                                      
programs".  Section 529 defines "qualified State tuition                                                                        
program" as a program established and maintained by a state                                                                     
or an agency under which a person may either purchase                                                                           
tuition credits or certificates on behalf of a designated                                                                       
beneficiary.  That then entitles the beneficiary to the                                                                         
waiver or payment of a qualified higher education expense                                                                       
for the beneficiary, or they may make contributions to an                                                                       
account that has been established for the purpose of meeting                                                                    
the qualified higher education expenses of that designated                                                                      
beneficiary.                                                                                                                    
                                                                                                                                
Representative Murkowski continued that HB 268 would                                                                            
establish a qualified State tuition program.  The program                                                                       
would be administered by the University of Alaska and would                                                                     
be known as the "Alaska Higher Education Savings Trust".                                                                        
The bill would also change the structure in order to conform                                                                    
to the new IRS codes and changing the name of the program to                                                                    
the Advance College Tuition Savings Fund.  In order to keep                                                                     
the overhead down and the record keeping and marketing costs                                                                    
to a minimum, HB 268 would place both programs under one                                                                        
administrative head. Representative Murkowski urged members                                                                     
to pass the bill from Committee.                                                                                                
                                                                                                                                
Co-Chair Therriault asked about "rolling" the program into                                                                      
the University services.                                                                                                        
                                                                                                                                
JIM LYNCH, INTERIM VICE PRESIDENT FOR FINANCE, UNIVERSITY OF                                                                    
ALASKA, FAIRBANKS, explained Section #529 and the federal                                                                       
regulations of that section.  He noted that in 1996, he had                                                                     
participated in the drafting of Section #529.  Mr. Lynch                                                                        
stated that he had argued the tax-exempt status to the                                                                          
University's Advanced College Tuition (ACT) program before                                                                      
the National Office of the Internal Revenue Service (IRS).                                                                      
He added that the University of Alaska administration is in                                                                     
support of the proposed legislation.  The institutions could                                                                    
use that are eligible for federal financial aid purposes.                                                                       
He added that the legislation would support education by                                                                        
subsidizing programs and making loans available.  He                                                                            
commented that the legislation would encourage prospective                                                                      
students to save in advance for college.                                                                                        
                                                                                                                                
Co-Chair Therriault asked if the bill would dismantle the                                                                       
current University program. Mr. Lynch explained that the                                                                        
legislation would add a higher education trust and would                                                                        
modify the ACT program from a tuition program to a savings                                                                      
program.                                                                                                                        
                                                                                                                                
Mr. Lynch provided background history regarding the                                                                             
legislation.  He noted that there are essentially two types                                                                     
of savings programs.  The first is a prepay program; the                                                                        
other is like a defined benefit pension plan.  Mr. Lynch                                                                        
pointed out that the first state program made available was                                                                     
in Michigan in the late 1980's.  Michigan established a                                                                         
prepaid tuition program and filed with the IRS for exempt                                                                       
status.  The IRS came back and told them that they were a                                                                       
taxable entity.  It took five to six years for the State of                                                                     
Michigan to win the appeal of the program.  The Alaska                                                                          
Program was started in 1991, and was designed to be tax                                                                         
exempt to accomplish some of the items listed in Section                                                                        
                                                                                                                                
Mr. Lynch spoke to the taxable criteria of the tuition                                                                          
costs.  He noted that there have been gift tax exemptions                                                                       
built in and tuition credits for the kids as a completed                                                                        
gift.  They would qualify for the $10,000 dollar gift tax                                                                       
exclusion.  He added that the program is deeply connected to                                                                    
the University, as it is an unrestricted liability of the                                                                       
University.  The intent of this was to make the organization                                                                    
exempt. The IRS never accepted any of the arguments                                                                             
maintaining that these were loans by citizens to the                                                                            
University and the increase in value was essentially                                                                            
interrupting income to those individuals.  At that time, the                                                                    
Alaska Program was running and the IRS lost its case against                                                                    
the State of Michigan.  Following that, various states got                                                                      
together and passed Section #529 in 1996.                                                                                       
                                                                                                                                
Mr. Lynch noted other events which had occurred regarding                                                                       
the concern.  In 1998, the Alaska Legislation passed the                                                                        
Alaska State Trust Act, which does provide a creditor                                                                           
protection vehicle to be associated with it.                                                                                    
                                                                                                                                
Mr. Lynch explained that Section #529 basically exempts                                                                         
State programs and that private entities would not be able                                                                      
to issue to them.  The earnings are tax deferred and the                                                                        
beneficiaries are the ones taxed on this money.  Mr. Lynch                                                                      
pointed out that there are a number of state tax break                                                                          
benefits that are associated with it. There is a special                                                                        
averaging provision which allows a person to put up to                                                                          
$50,000 into one of these accounts for a beneficiary and                                                                        
then take the exclusion for the next five years.  For a                                                                         
husband and wife, that means that they could put $100,000                                                                       
dollars aside for a child's education.                                                                                          
                                                                                                                                
Mr. Lynch added that there are some generational "skipping"                                                                     
provisions within Section #529, intending that no generation                                                                    
be skipped.   He stated that it is one of the few vehicles                                                                      
in which you can make a gift and continue to control it and                                                                     
then take it back from the beneficiary.  The other advantage                                                                    
to Section #529 is that there are no income limitations on                                                                      
who can put the money into the fund.  He pointed out that                                                                       
after Section #529 passed, there was an "explosion" in the                                                                      
number of college savings programs.                                                                                             
                                                                                                                                
Mr. Lynch advised that the bill would create one                                                                                
administrative structure within which to manage two                                                                             
programs.                                                                                                                       
                                                                                                                                
? The advanced college tuition program; and                                                                                     
? The higher education trust.                                                                                                   
                                                                                                                                
The bill would help to combine the benefits of Section #529                                                                     
with the creditor protection trust laws in Alaska.  It would                                                                    
help complete the transition of the ACT program from a                                                                          
prepaid to savings program.  Savings vehicles have special                                                                      
treatment in terms of determining what the taxable portion                                                                      
of the earnings are under those savings and the treatment                                                                       
for federal financial aid purposes.  Mr. Lynch pointed out                                                                      
that the bill would allow the two programs to develop on a                                                                      
complimentary basis, while at the same time, it would allow                                                                     
for one record keeper.                                                                                                          
                                                                                                                                
Co-Chair Mulder commented that the main advertisement was                                                                       
somewhat misleading, indicating that the money would be tax                                                                     
deferred.  Mr. Lynch replied that a person pays tax on the                                                                      
money when it goes into the account.  Co-Chair Mulder asked                                                                     
what would happen if the child decides that they are not                                                                        
going to school.    Mr. Lynch explained that in Alaska Plan,                                                                    
they could not get the funds out of the account unless they                                                                     
go to school and instead, the money would revert back to the                                                                    
grantor of the trust.  Mr. Lynch added that the granter of                                                                      
the trust could change the name of the child as long as it                                                                      
is a member of the family.                                                                                                      
                                                                                                                                
Co-Chair Therriault inquired if the funding would reflect on                                                                    
the child's assets for federal college assistance.  Mr.                                                                         
Lynch replied that at this point, that decision has not been                                                                    
made.  Many of those decisions will be left up to the                                                                           
individual.  He noted that they would receive better                                                                            
treatment than through the prepaid tuition.  Mr. Lynch                                                                          
testified that unfortunately, the financial aid rules do                                                                        
penalize for saving.  That can not be avoided at this time.                                                                     
He acknowledged that it is not clear how a savings program                                                                      
will be treated down the road.                                                                                                  
                                                                                                                                
(TAPE CHANGE, HFC 00 - 28, Side 1)                                                                                              
                                                                                                                                
Mr. Lynch noted that this would have to be limited to                                                                           
eligible institutions.  Eligible institutions are defined                                                                       
within code Section #529 as a "Group of institutions that                                                                       
qualify for federal financial aid as of the date the act was                                                                    
passed".  Co-Chair Mulder asked if Alaska Vocational                                                                            
Technical Center (AVTEC) would qualify.  My Lynch understood                                                                    
that the school in Seward did not initially qualify,                                                                            
however, they do now.                                                                                                           
                                                                                                                                
Vice Chair Bunde thought that the legislation would                                                                             
encourage more students to leave the State.  Mr. Lynch                                                                          
agreed that there needs to be more incentives to encourage                                                                      
students to go to college within the State of Alaska.                                                                           
                                                                                                                                
Mr. Lynch stated that through the Advanced College Tuition                                                                      
program, there is a guarantee that if you come to school at                                                                     
the University of Alaska, you would receive education at                                                                        
that equivalent, at some point in the future.  Vice Chair                                                                       
Bunde reiterated that the money from this program could be                                                                      
used for attendance of any school throughout the United                                                                         
States.  He believed that it would encourage more "brain                                                                        
drain" from Alaska.                                                                                                             
                                                                                                                                
Co-Chair Therriault pointed out that these funds are                                                                            
portable.  Mr. Lynch replied that it is difficult to get                                                                        
people to buy into a program isolated to the University of                                                                      
Alaska.  He emphasized that incentives need to be provided.                                                                     
                                                                                                                                
ANNE ALLEN, SENIOR COUNCIL, SECTION #529, GOVERNMENT                                                                            
RELATIONS DEPARTMENT, TIAA-CREF, New York, (TESTIFIED VIA                                                                       
TELECONFERENCE), offered to provide a resource of                                                                               
information to Committee members.  She encouraged Alaska to                                                                     
offer this program.  She stated that these are flexible                                                                         
programs and they can be used for any type of higher                                                                            
education including vocational schools, technical schools,                                                                      
and would cover the costs for room, board and books.  She                                                                       
noted that there are a wide variety of donations that can be                                                                    
make to this program.  The accounts act somewhat like a ROTH                                                                    
IRA and are affordable.                                                                                                         
                                                                                                                                
She stressed that it is important to encourage these                                                                            
programs and that a lot of states do have the tax deductions                                                                    
and incentives to attract people to their state program.                                                                        
She emphasized that Alaska would be carving out its own                                                                         
niche.  She explained that the age of the beneficiary would                                                                     
determine the investment risk and that various risk factors                                                                     
could be considered.  Ms. Allen pointed out that account                                                                        
owners can not move money around.                                                                                               
                                                                                                                                
Ms. Allen referred Page 2, pointing out language that                                                                           
indicates that there can be multiple investment managers to                                                                     
an account. She noted that at this time, there is only one                                                                      
state that has multiple mangers.  She noted that there has                                                                      
been negative testimony regarding the use of multiple                                                                           
managers.  She proposed that the multiple investor's concept                                                                    
could lead to increased costs to the participants.  Ms.                                                                         
Allen concluded that HB 268 is a good bill and urged the                                                                        
Committee's support.                                                                                                            
                                                                                                                                
Vice Chair Bunde asked if the main difference between HB 268                                                                    
and parents putting money into their own mutual fund would                                                                      
be that the earnings would be taxed deferred.  Ms. Allen                                                                        
agreed that it would be tax deferred on the federal level.                                                                      
She emphasized that whom ever opens the account, would have                                                                     
the assurance that this money would be used for education.                                                                      
Additionally, she noted that there is a "potential" to                                                                          
receive a higher investment at the state level.                                                                                 
                                                                                                                                
Representative Austerman questioned the fiscal note and the                                                                     
indicated interest earnings. Mr. Lynch replied that he had                                                                      
prepared the fiscal note for the University conceptually                                                                        
creating a business plan. The product must first be                                                                             
established. He added that the fiscal note would be                                                                             
providing for the child's education and plans for a future                                                                      
event.  The restrictions on Section #529 are that you only                                                                      
choose once.  He agreed with Ms. Allen that the cost would                                                                      
be the key point.                                                                                                               
                                                                                                                                
Mr. Lynch explained that initially, the State will need to                                                                      
adopt a business plan by undertaking an analysis of what                                                                        
other states have done.  Attorney fees will be accessed in                                                                      
establishing a complicated trust. Securities and Exchange                                                                       
Commission (SEC) will depend on how the program is marketed.                                                                    
The intent is to take the $25 million dollars in the ATC                                                                        
program and combine these two programs for record keeping                                                                       
and investment and then use today's program as a carrot for                                                                     
the providers.  He noted that what makes the program work is                                                                    
the volume and the earnings from that the program would be                                                                      
used to support it.                                                                                                             
                                                                                                                                
Co-Chair Therriault asked if the existing program would be                                                                      
converted.  Mr. Lynch explained that the bill would make a                                                                      
common administrative structure for the two programs.  Co-                                                                      
Chair Therriault asked if the programs would remain                                                                             
separate.  Mr. Lynch replied that they would.  One is a                                                                         
formal trust program and the other is a contract.                                                                               
                                                                                                                                
Representative Austerman assumed that the operating cost of                                                                     
$100 thousand dollars would cover the cost of one employee.                                                                     
Mr. Lynch replied that most of the costs would be out-                                                                          
sourced.  Otherwise, it would be contracted out with a major                                                                    
consolidator, as they know how much it will cost to manage                                                                      
the money.  After that, it is important to access what                                                                          
services you expect to receive from the provider.  The                                                                          
question is what the fee would be used for to determine the                                                                     
investment returns.                                                                                                             
                                                                                                                                
Co-Chair Therriault asked if this would be similar to the                                                                       
Supplemental Benefits System (SBS) portfolio.  Mr. Lynch                                                                        
explained that the investment program can not be changed.                                                                       
Most programs are set up based on the age of the                                                                                
participant.  This would be the same concept as the Alaska                                                                      
Target 2005, 2010, or 2015.  You would be required to choose                                                                    
the asset allocation and stick with it.                                                                                         
                                                                                                                                
Co-Chair Therriault asked at what age a child is no longer                                                                      
paying at the parent's rate of unearned income.                                                                                 
Representative Murkowski replied that was at age 14.  Mr.                                                                       
Lynch replied that the child would not be paying until the                                                                      
money is withdrawn.                                                                                                             
                                                                                                                                
Representative Austerman questioned how the program would                                                                       
work.  Mr. Lynch replied that the sponsor would receive a                                                                       
portion of the fund for the investment work.  He explained                                                                      
that you have to invest money to receive it.  The larger the                                                                    
fund becomes, the more will be received.  Co-Chair                                                                              
Therriault inquired who the sponsor would be.  Mr. Lynch                                                                        
replied that would be the State of Alaska or the University                                                                     
of Alaska.  He noted that there are a couple of ways that                                                                       
the fees come in.  The provider will set the fee amount for                                                                     
establishing the account.  He added that there are fee                                                                          
revenues associated with the plan.                                                                                              
                                                                                                                                
Representative Austerman pointed out that the income                                                                            
received back would be determined by how the market was                                                                         
doing.  Mr. Lynch replied that even if the mutual fund is                                                                       
loosing money, the manager would still be receiving their                                                                       
fees.  Representative Austerman questioned how the                                                                              
percentage fee would be determined.                                                                                             
                                                                                                                                
Mr. Lynch replied that this would be an account opened for                                                                      
the child through the sponsor.  Representative Austerman                                                                        
asked if the remaining amount, after the cost for running                                                                       
the program, would be issued to the participants.  Mr. Lynch                                                                    
replied that there is no guarantee that a specific amount                                                                       
would be received.  Mr. Lynch acknowledged that it will take                                                                    
a while to obtain the objective for the invested money.  If                                                                     
the fund is doubled, the program would pay for itself.                                                                          
Representative Austerman asked if the plan is not paying for                                                                    
itself, who is paying for it.  Mr. Lynch replied that the                                                                       
University would be subsidizing the program initially.                                                                          
                                                                                                                                
Vice Chair Bunde requested to see the revenue neutral.  He                                                                      
believed that the program would be subsidized by the State.                                                                     
He pointed out that manager fees will always be included.                                                                       
He added that there is a potential liability to be able to                                                                      
pay the managerial fees.  Mr. Lynch stated that the                                                                             
subsidized costs would not be to the managerial fees.  The                                                                      
upfront costs would be used for consulting and attorney                                                                         
costs to establish the program.                                                                                                 
                                                                                                                                
Mr. Lynch noted that the purpose of the Alaska Prepaid                                                                          
Tuition Program (APPTP) program is to help change the view                                                                      
of parents and children and to get them thinking about                                                                          
higher education.  Mr. Lynch stressed that program does have                                                                    
the potential to grow.  HB 268 recommends a defined benefit                                                                     
program that will go up with inflation and tuition and                                                                          
providing a guaranteed education program.                                                                                       
                                                                                                                                
Co-Chair Therriault noted that HB 268 would be HELD in                                                                          
Committee for further consideration.                                                                                            

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