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
+ teleconferenced
= bill was previously heard/scheduled
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.
| Document Name | Date/Time | Subjects |
|---|