Legislature(1999 - 2000)
01/24/2000 01:35 PM Senate HES
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SB 186-COLLEGE TUITION SAVINGS PLAN
SENATOR TIM KELLY, sponsor of SSSB 186, introduced Jim Lynch,
Acting Vice President for Finance at the University of Alaska, and
informed committee members that Mr. Lynch has been instrumental in
the creation of the Alaska college tuition savings program which
began in 1970.
SENATOR KELLY explained the IRS passed a new tax bill in 1996 which
allows for more flexibility in tax-deferred education plans. SSSB
186 is an attempt to update Alaska's existing advanced college
tuition savings fund and institute a new Alaska Higher Education
Savings Trust that allows a more sophisticated investor to place
more money into a tax-deferred education fund for a beneficiary.
SSSB 186 also takes advantage of some of the creditor protections
available in the State of Alaska.
SENATOR KELLY asked that Bob Manley, an estate planning attorney in
Anchorage who helped to draft the legislation, testify first. He
also noted that committee members have a proposed committee
substitute before them labeled 1-LS1084\M.
SENATOR WILKEN moved to adopt CSSSSB 186(HES), with individual
recommendations, as the working document of the committee. There
being no objection, CHAIRMAN MILLER announced the motion carried.
SENATOR KELLY indicated the bill has two fiscal notes. The fiscal
note from the Department of Revenue does not apply to the committee
substitute as that version will have no fiscal impact on the
department. The costs in the University of Alaska fiscal note
should be borne out of program receipts.
Number 502
MR. ROBERT MANLEY made the following comments on his own behalf via
teleconference. He has been practicing as an estate planning and
tax attorney for about 25 years, and he works with an informal
group of other tax and estate planning attorneys who do pro bono
work in the area of legislation review. He became interested in
this legislation because some of his estate planning clients are
sending money outside of the State of Alaska to non-Alaska
programs. SB 186 sets up a program that is good for Alaskans and
good for the University of Alaska (UA). Internal Revenue Service
(IRS) Code Section 529 authorizes states to adopt programs of this
type. Forbes magazine calls Section 529 the "sleeper tax break of
the 1997 tax act." The use of this program for education is not
specific to the particular state it is set up in as long as the
money is spent on higher education expenses, therefore the state
that offers the best program for everyone will be the most
successful.
The program that would be created by CSSSSB 186(HES) is good for
Alaskans because it allows Alaskans to save for anticipated college
expenses. The program is set up similar to an IRA in that
contributions are income tax deferred until the money is withdrawn
by the student who is usually in a lower income tax bracket than
parents. Under a tax bill that is now pending, the withdrawal for
higher education expenses would be totally free of income tax.
One benefit from an estate gift tax point of view is that one could
contribute $10,000 with a gift tax exclusion and elect to take five
years of the exclusion at one time, which allows a contributor to
forward average and contribute $50,000 at one time.
MR. MANLEY continued. The program is flexible as it is not based
on income. One can contribute up too $100,000, or possibly more.
The State of Montana currently allows contributions of up to
$172,000, depending on anticipated education expenses. The most
favorable aspect of the program is participant control. The
beneficiary can be changed or the program can be canceled and the
money withdrawn. If the money is not used for higher education, a
penalty must be paid. That penalty would be collected by the UA,
not the IRS.
Another advantage for Alaskans is that the childrens' college
education funds would be protected from creditors. The UA will
benefit by receiving administrative and management fees, plus any
penalties. The program was purposely designed to attract non-
Alaskans because the UA will benefit from more participants. All
states are in competition for this investment money.
MR. MANLEY stated the program is good for non-Alaskans for the same
reason that the Alaska trusts are; it contains a spendthrift trust
protection provision which allows the participant to preserve the
assets if the participant went into bankruptcy or had financial
reverses outside of Alaska. Other states have similar creditor
protection provisions but they do not have the Alaska Trust Act so
they cannot offer that benefit to non-Alaskans. That economic
benefit is the reason the State of Delaware "copy-catted" Alaska's
trust laws. Last, this program will attract college savings money
invested by Alaskans into Alaska because accounts can be rolled
over from one state to another. He asked committee members to
support the legislation.
Number 908
SENATOR KELLY explained that the first five pages of CSSSSB
186(HES) create the new Alaska Higher Education Savings Trust and
the remainder of the bill amends the original Alaska advanced
college tuition payment fund to change it to a savings fund.
MR. JIM LYNCH, Interim Vice President for Finance for the
University of Alaska, and one of the founding board members for the
National Association of College Savings Plans (NACSP), and a
principal director of the Alaska advanced college tuition program,
gave the following background on the milestones of college savings
programs.
In the late 1980's, the State of Michigan was the first state to
implement a prepaid college savings program. That program worked
as an installment contract for the purchase of tuition. The State
of Michigan requested a revenue ruling from the IRS and received an
adverse ruling making the program was a taxable entity. Michigan
then filed suit against the IRS. It lost the case and filed an
appeal. During that time period, the states of Alaska, Florida,
Ohio, Alabama and Kentucky started programs. In the mid 1990's
Michigan prevailed against the IRS in appellate court. The IRS had
been holding the revenue ruling request for exempt status from the
other states. It then sent the states notices that it planned to
issue adverse rulings for all states except Florida and Ohio which
had guarantee provisions for full faith and credit of the state
which required voter approval. In 1996 the NACSP mustered support
in Congress to pass IRS Code Section 529 which provides tax exempt
status to all college savings programs. Since that time, there has
been a rush of money into the savings programs. Those programs
function much like a defined contribution pension plan. He
calculates as of July, a total of 32 programs are either open or in
the process of opening by the year 2001.
MR. LYNCH continued. When Section 529 was enacted, Alaska's
prepaid tuition program was modified to look more like a savings
program which has advantages in the calculation of taxable earnings
and in financial aid eligibility. The UA then looked at creating a
savings program but it did not have the trust concept built in as
Senator Kelly's bill does. They then got together to develop a
sensible program including the UA's prepaid tuition program and the
trust concept. CSSSSB 186(HES) will benefit the UA as well as
Alaskans and it will allow the UA to leverage its current prepaid
tuition program which contains about $25 million to make the new
program successful.
Number 1100
SENATOR KELLY asked how many participants are involved in the
prepaid tuition program.
MR. LYNCH replied it has approximately 11,300 participants and
8,500 beneficiaries.
SENATOR ELTON asked how much the UA would charge to administer the
contract with a private company. He said his experience is that
the UA charges a hefty overhead amount.
MR. LYNCH said it is the product of how the UA budgets its
services. The UA participates in a lot of activities, particularly
research activities, and recovers its direct costs plus a portion
of its indirect costs. The costs are high but they are not much
different than the costs charged by the private sector. Profit is
not built into UA's overhead cost. If a professional is hired to
do any service, one pays twice the cost of the salary. The UA
charges the cost of the professional's time, plus identifiable
costs, plus an overhead and that calculation is based on federal
standards.
SENATOR KELLY asked Mr. Lynch to elaborate on how the program would
work.
MR. LYNCH explained that the UA supports the administration of the
present program and costs are paid out of UA revenues, not from
program revenues. The UA has utilized some of the set up fees and
it has some transaction fees for people who change participants.
Other than those fees, the UA is not using funds from the program
to support it. The idea is to build up the fund to the point where
it is self sustaining. The initial period of one of these programs
is very difficult.
Number 1367
SENATOR ELTON said he intuitively believes the Department of
Revenue or Alaska Commission on Postsecondary Education could
administer the contracts less expensively.
SENATOR KELLY clarified that any agency will contract with an
investment company such as Fidelity to run the program. The
investment company will return a certain amount of basis points to
the UA as a licensing fee. The UA would not hire employees to do
the work on a day-to-day basis but instead it would contract with
one of the large, national financial managers who are looking for
states to make these agreements with so that they can market these
programs nationally. He added that the financial institutions are
looking for at least one state that they can contract with because
they need a state to allow for the non-taxable status.
MR. LYNCH agreed the UA does not intend to manage money as that is
not its area of expertise.
SENATOR WILKEN asked if the concept would be similar to Alaska's
Permanent Fund, which is administered by a board through different
managers with the cost being 17 basis points. The UA Board of
Regents would only come into play when they would entertain and
decide on the award. He noted the administrative fee should be
relatively small.
SENATOR KELLY said that is correct but a small basis percentage of
a large amount of money can be lucrative for the UA. He pointed
out that 15 basis points of $1 billion equals $15 million per year.
He indicated he hopes Alaska can attract investors from throughout
the nation.
MR. LYNCH added the UA's intent is to combine and outsource the
recordkeeping function which is the problematic part of these
programs. The UA cannot create the internal administrative systems
needed to manage the recordkeeping systems.
SENATOR KELLY explained that he got involved with the bill because
a proposed vendor came to him indirectly and proposed such a
program. As he looked into it, he learned that while the
guaranteed tuition program is a defined benefit program, it may or
may not be as profitable in the long run as an education trust,
depending on the stock market. The vendor was looking for a
vehicle to market nationally. He emphasized that there are some
big companies that want to use this program and the process will
help Alaska and its students, therefore given Alaska's unique
competitive position, it would be foolish not to go forward with
it.
Number 1609
SENATOR WILKEN referred to the word "may" on page 3, line 18, and
asked if that word should be changed to the word "shall" in
relation to line 24. He questioned whether it would be better to
say the board will require trust participants to pay administrative
fees.
MR. LYNCH explained that, eventually, the UA may outsource enough
of the program so that the revenues to the UA may not come in the
form of fees, they may come in the form of a license fee or a
commission from the fund provider so they decided they did not want
to be restricted to fees.
SENATOR KELLY indicated that the UA charges fees for the existing
program but he maintained that the word "may" was intended for
subsections (1) and (2). He believes it is clear there will be
administrative fees.
SENATOR WILKEN said what he is getting at is that a time may come
when the Board does not want the participants to pay the
administrative fees so it would derive those monies from some other
source. He maintained that using the word "will" would require the
fees to come out of the investment itself so that it would be a
burden upon that particular investment vehicle to carry its own
administrative costs.
MR. LYNCH stated it does not make sense to have two separate
administrations for two programs: the prepaid tuition program and
the Alaska Higher Education Savings Trust. He envisions a common
administrative system and a common marketing program to deal with
both but with that system it will be impossible to segregate the
costs for each fund.
SENATOR WILKEN asked if there will be only one fund named the
Alaska Higher Education Savings Trust.
MR. LYNCH explained there will be an overall umbrella program named
the Alaska Postsecondary Education Savings Program. Within that,
there will be the advanced college tuition savings fund, which is
not a trust - it is a fund within the UA, and the Alaska Higher
Education Savings Trust. The program will have different vehicles
within it and they are trying to create a good package that will
benefit Alaskans and one that will be marketable externally.
SENATOR WILKEN clarified he is concerned that some time in the
future, the fund costs $10 million to administer, the word "may"
would allow administrative costs to be paid with tuition, vending
fees, or general funds.
MR. LYNCH said he did not want the UA to be required to charge a
specific fee because it could come through licenses or commissions
as opposed to fees to participants. The recordkeeper must get the
money somewhere. Someone will take basis points off of the
investments or they will charge specific fees on a regular basis.
He said he never conceived of the UA using general fund support to
maintain a program for non-Alaskans. He noted that SB 186 requires
a commitment although the risk is very limited. It is similar to
a defined contribution pension plan and there is very low risk of
getting stuck on the administrative side because the cost should
come out first.
SENATOR WILKEN referred to page 4, line 4, and asked whether the UA
could take into account the fact that a person has $50,000
invested if the person applied for a scholarship based on need.
MR. LYNCH explained the intent of that provision is that it not
affect the issuance of scholarships.
SENATOR KELLY clarified that provision was included to allow
students in the top ten percent of their classes to continue to be
eligible for the scholars program even though they may have money
invested in the education fund.
MR. LYNCH pointed out the provision applies to state-funded
scholarships because, in general, scholarship donors determine the
criteria for scholarship eligibility.
SENATOR ELTON asked Mr. Lynch if both the prepaid tuition program
and the Alaska Higher Education Savings Trust will be placed under
one umbrella and, if so, whether one could transfer assets from one
fund to another.
MR. LYNCH replied that question requires a ruling from the IRS.
The UA hopes to allow participants a one-time opportunity to
transfer the funds. He believes the IRS will rule favorably
because those participants were not given a choice when they
originally got involved.
SENATOR KELLY added that participants will not have to transfer
funds.
MR. LYNCH pointed out the primary source of contributions for the
current program is from the permanent fund dividend.
Number 2084
SENATOR WILKEN asked if he put funds into the advanced college
tuition program in 1990 and now decided to put funds into the
trust, whether statements for each program would come from the same
financial institution.
MR. LYNCH replied he hopes the statements will come from one
source. From the perspective of the IRS, the programs will be
considered to be a single program for reporting purposes.
SENATOR KELLY asked Mr. Lynch to elaborate on the potential size of
the accounts.
MR. LYNCH explained that Section 529 requires a limit but the draft
regulations have never been adopted. According to those
regulations, the limit is the amount required to attend the highest
cost institution covered by the program. Other states allow the
cost of the highest institution in the country. He suggested most
programs have a limit of at least $100,000 because that amount
allows for the maximum gift tax benefit for a husband and wife.
Number 2199
ANN ALLEN, Senior Counsel with the Teachers' Insurance and Annuity
Association (TIAA), informed committee members TIAA is one of the
largest administrators of education investment programs in the
programs. She commended committee members for looking at this type
of legislation and she felt the committee has done a good job
looking at the issues involved. Regarding the discussion of the
cost of administrative fees, TIAA is relatively low-cost. TIAA
charges a basis-point fee which includes the state's administrative
cost. On average, TIAA charges around 65 basis points. That rate
can increase to up to 130 basis points depending on the marketing
plan used. The state would have to decide whether it wants to have
marketing directed toward state residents or out-of-state
residents. The federal government has wanted states to be involved
in these programs to ensure that the monies are used for
educational purposes. If Alaska decides to use its program for a
national program, the basis rate is usually a little higher.
MS. ALLEN said she was interested in the rollover language because
states can set up their own rollover plans between state plans,
however other types of accounts cannot be rolled into these plans
according to Section 529. The money from these accounts can be used
for room, board, and books, as well as tuition. Also, multiple
accounts can be set up for one beneficiary.
Number 2382
SENATOR ELTON asked Ms. Allen if the contractor usually absorbs the
cost of a national marketing program because the contractor will
benefit from a larger program or whether other trust participants
may be paying for the national marketing program.
MS. ALLEN replied if the vendor who is running the program is
trying to appeal to a national market, the cost is usually built in
to the basis point charge. Because marketing is very expensive,
she suggested asking the vendor for a breakdown of the cost and
what each basis point charge represents.
2353
CHAIRMAN MILLER asked Dana Owen to address the Department of
Revenue's fiscal note.
DANA OWEN, Special Assistant at the Department of Revenue, stated
the committee substitute removes the section in the bill that
mandated that the Department of Revenue act as the custodian of the
funds, therefore the department no longer has a role in the
program.
There being no further questions, testimony, or discussion, SENATOR
WILKEN moved CSSSSB 186(HES) out of committee with individual
recommendations and the University of Alaska fiscal note. There
being no objection, CHAIRMAN MILLER announced the motion carried.
| Document Name | Date/Time | Subjects |
|---|