Legislature(1999 - 2000)

02/09/2000 01:45 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.                                                                                
                                                                                                                                
BOB  MANLEY,  STATE  PLANNING  AND  TAX  ATTORNEY,  ANCHORAGE                                                                   
testified  via  teleconference  in  support  of  HB  268.  He                                                                   
observed that clients have sent  money out of Alaska to other                                                                   
state college savings plans. He  noted that section 529 plans                                                                   
are authorized  under IRS  Code 26  USC 529. Forbes  Magazine                                                                   
calls section  529 plans  the sleeper tax  break of  the 1997                                                                   
Tax Act. While each state can  setup its own plan there is no                                                                   
requirement that  the beneficiary use the funds  in the state                                                                   
in which the fund was setup. It  allows savings for education                                                                   
and works  like an IRA,  except that  there is not  an income                                                                   
tax deduction  at the  time of  contribution. Taxable  income                                                                   
from  the  plan is  deferred  at  accumulation. It  would  be                                                                   
subject  to income  tax  at the  time  of withdraw.  Students                                                                   
generally have a lower income  tax than the contributor does.                                                                   
Additionally,  there are  proposals  in  Congress that  would                                                                   
make section 529 funds totally  tax free, providing the funds                                                                   
are used for qualified higher education.                                                                                        
                                                                                                                                
Mr.  Manley further  noted  that section  529  plans allow  a                                                                   
contributor to make a completed  gift and still maintain some                                                                   
parental control. Completed gifts  are important because that                                                                   
is how  "you get your $10  thousand dollar per  recipient per                                                                   
year  exclusion  from  gift  taxes."   Five  years  worth  of                                                                   
exclusion can be  placed in one lump sum. Husbands  and wives                                                                   
can each  contribute. Money  put away  for a child's  college                                                                   
tuition  would be  out of  the contributor's  estate for  tax                                                                   
purposes.  The total  amount  of contribution  is  uncertain.                                                                   
Federal law provides that the  maximum amount of contribution                                                                   
should  be the  total  cost of  higher  education within  the                                                                   
state that sponsors  the program. States have  estimated this                                                                   
amount at $100  to $172 thousand dollars. He  reiterated that                                                                   
section 529  plans allow  participant control.  Beneficiaries                                                                   
within  a family  can be  changed  or withdrawn.  There is  a                                                                   
penalty for money that is not  used for higher education. The                                                                   
penalty  can be as  low as  10 percent  of the earnings.  The                                                                   
penalty goes back to the program.                                                                                               
                                                                                                                                
Mr.  Manley observed  other  advantages  of the  section  529                                                                   
plan.  Funds are  protected  from creditors.  The  university                                                                   
will  be able  to  receive fees  for the  administration  and                                                                   
management of the program. The  university would also receive                                                                   
penalties  from   funds  that   were  not  used   for  higher                                                                   
education. The program is also  good for non-Alaskans because                                                                   
it is  in competition  with other  states to  offer the  best                                                                   
program. The  more funds  in the  program the more  efficient                                                                   
the program will  be and the more benefit to  the university.                                                                   
Mr. Manley emphasized  that because of Alaska's  unique trust                                                                   
laws; Alaska  would offer  better credit  protection  to non-                                                                   
Alaskans. This would aid in marketing  the program outside of                                                                   
Alaska.  section  529  plans  can be  rolled  over  from  one                                                                   
program to another like an IRA.                                                                                                 
                                                                                                                                
Representative  J.  Davies  asked how  the  university  would                                                                   
benefit.  Mr.  Manley  explained that  the  university  would                                                                   
receive requests  for proposals from major  brokerage houses.                                                                   
A   brokerage   house   would  handle   the   marketing   and                                                                   
administration   expenses   and   give   the   university   a                                                                   
percentage. The university would  also receive penalties from                                                                   
funds that were not used for higher education.                                                                                  
                                                                                                                                
 Mr. Manley clarified that taxes would have already been                                                                        
 paid on the original funds. Income tax would have to be                                                                        
 paid on the earning increases when the funds are withdrawn.                                                                    
                                                                                                                                
 In response to  a question by  Vice Chair Bunde,  Mr. Manley                                                                   
 noted that the penalty could be as low  as 10 percent and as                                                                   
 high as the university  wanted to set it. He  suggested that                                                                   
 the university  would have  to consider  the penalty  with a                                                                   
 mind to make the program marketable.                                                                                           
                                                                                                                                
JIM LYNCH, INTERIM VICE PRESIDENT  FOR FINANCE, UNIVERSITY OF                                                                   
ALASKA, FAIRBANKS explained that  the Prepaid Tuition Program                                                                   
had  substantial   penalties  for  withdrawal.   The  savings                                                                   
programs that are  currently operating are mostly  set at the                                                                   
10  percent  level.  He  emphasized  that  the  market  would                                                                   
establish the rate.                                                                                                             
                                                                                                                                
Co-Chair Therriault questioned  what the contractor fee would                                                                   
be. Mr. Lynch explained  that the fee would be  set through a                                                                   
competitive  public  procurement  process.  He  stressed  the                                                                   
importance of  a low fee  structure. He estimated  that there                                                                   
will be  30 -  40 programs  competing in  the market  place a                                                                   
year from now. Fees could range  from one-half of one percent                                                                   
to one and a half percent of the  main program. New Hampshire                                                                   
charges one-eight  of one percent  for its section  529 plan.                                                                   
This is  the total  fee charge,  which includes  the cost  of                                                                   
administration and marketing.                                                                                                   
                                                                                                                                
Vice Chair  Bunde expressed  concern that  the university  is                                                                   
entering into the investment business.  He maintained that if                                                                   
the intent of  the legislation is for citizens  to save money                                                                   
and not  a fundraiser  for the university  that it  should be                                                                   
revenue neutral.                                                                                                                
                                                                                                                                
REPRESENTATIVE  LISA  MURKOWSKI  replied  that she  would  be                                                                   
happy to work  with Vice Chair Bunde to make  the legislation                                                                   
more revenue  neutral. She emphasized  that the intent  is to                                                                   
encourage savings.                                                                                                              
                                                                                                                                
Vice  Chair Bunde  asked what  the  program would  do to  the                                                                   
permanent fund check  off program. Mr. Lynch  stated that the                                                                   
university intends  to continue the permanent  fund check off                                                                   
program, Advance  College Tuition  Program (ACT).  The intent                                                                   
is to  build the  two programs  together. He emphasized  that                                                                   
they  serve different  purposes.  The ACT  program was  built                                                                   
with  graduation incentives.  If earnings  were greater  than                                                                   
the  cost  of the  program  they  would  be returned  to  the                                                                   
participant in  the form of graduation incentives.  There are                                                                   
over 11,000 participants in the  ACT program. This represents                                                                   
a  high level  of per  capita  participation. He  anticipated                                                                   
that the Higher  Education Savings Trust would  rapidly dwarf                                                                   
the ACT  program. Mr.  Lynch concluded  that the  legislation                                                                   
would make  a good  match to  the ACT  program and  would not                                                                   
compete with the private sector.                                                                                                
                                                                                                                                
Representative  Austerman assumed  that the ACT  participants                                                                   
could  roll their  funds into  the  Higher Education  Savings                                                                   
Trust. Mr. Lynch  noted that the intent is to  allow funds to                                                                   
be rolled over, but that it would  have to be approved by the                                                                   
IRS.                                                                                                                            
                                                                                                                                
Representative  Austerman  expressed  concern  that  the  ACT                                                                   
program is being subsidized by  general funds dollars running                                                                   
through the University  of Alaska. He considered  attaching a                                                                   
sunset  clause, but  indicated  that he  would  not attach  a                                                                   
sunset clause if the program were  revenue neutral. Mr. Lynch                                                                   
noted that  the intention is to  be revenue neutral  and that                                                                   
excess   earnings   would   be   used   as   incentives   for                                                                   
participants. He  stressed that the  excess could be  used to                                                                   
encourage graduation or to give an instate premium.                                                                             
                                                                                                                                
Co-Chair  Therriault  questioned why  there  is  an issue  of                                                                   
revenues  in   excess  of  costs.  Mr.  Lynch   observed  the                                                                   
difficulty of matching revenues to expenses.                                                                                    
                                                                                                                                
Co-Chair   Therriault  questioned   why   the  revenue   from                                                                   
interest, once  fees are subtracted,  does not accrue  to the                                                                   
accounts. Mr.  Lynch responded that the tax  advantage nature                                                                   
of the  program means that  higher fees  can be paid  and the                                                                   
account could  still be  better off. He  did not  think there                                                                   
would be large  excess. He pointed out that it  would take at                                                                   
least $100 million dollars for the program to break even.                                                                       
                                                                                                                                
Vice Chair  Bunde pointed  out that the  program could  be in                                                                   
place   for  20   -  50   years.  Mr.   Lynch  stressed   the                                                                   
responsibility to the participants.                                                                                             
                                                                                                                                
In response  to a  question by  Vice Chair  Bunde, Mr.  Lynch                                                                   
noted that if a student graduates  within 6 years the student                                                                   
would receive back an additional  percentage of the earnings,                                                                   
based  on  revenues,  to provide  an  incentive  to  graduate                                                                   
within a specified term.                                                                                                        
                                                                                                                                
Representative J.  Davies MOVED to report CSHB  268 (HES) out                                                                   
of Committee with the accompanying fiscal note.                                                                                 
                                                                                                                                
Representative Grussendorf pointed  out that participation is                                                                   
voluntary.                                                                                                                      
                                                                                                                                
There  being NO  OBJECTION,  CSHB 268  (HES)  was Moved  from                                                                   
Committee.                                                                                                                      
                                                                                                                                
CS HB  268 (HES)  was REPORTED  out of  Committee with  a "do                                                                   
pass"  recommendation  and with  fiscal  impact  note by  the                                                                   
University of Alaska.                                                                                                           

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