04/28/1997 09:09 AM Senate HES

                                                                               
           SB 187 UNIVERSITY TUITION PAYMENT PROGRAM                          
                                                                              
  CHAIRMAN WILKEN  called the Senate Health, Education and Social              
 Services (HESS) Committee to order at 9:09 a.m. and announced                 
 SB 187  to be up for consideration.  Chairman Wilken, as prime                
 sponsor, he turned the gavel over to Vice-Chairman Leman and gave             
 a brief sponsor statement.                                                    
                                                                               
  CHAIRMAN WILKEN  said that in August 1996 Congress passed                    
 legislation that exempts qualified state prepaid tuition programs             
 from income taxes similar to exemptions provided other non-profit             
 activities.  Senate Bill 187 makes the necessary statutory changes            
 to conform the Advance College Tuition (ACT) payment plan with the            
 new federal law.                                                              
                                                                               
 The ACT plan offers an incentive for Alaskan residents to save for            
 college.  Under this plan one-half of a participating individual's            
 annual permanent fund dividend can be used to prepay college                  
 tuition credits at the current cost per credit.  The University of            
 Alaska guarantees that ACT credits can be used for tuition                    
 regardless of the amount paid for the ACT credit or the cost of               
 tuition at the time they are used.  Failure to comply with the new            
 tax law in a timely manner could result in retroactive taxation of            
 the program back to 1991 and destroy the financial viability of               
 this very worthwhile program.  Senator Wilken recommended passage             
 of SB 187.                                                                    
                                                                               
  WENDY REDMAN,  University of Alaska, explained that SB 187 will              
 bring the ACT program into compliance with federal regulations as             
 well as to provide some privacy protection for people who have been           
 in the program.  The program is tax exempt for the University of              
 Alaska and tax deferred for the people who participate in it.   JIM           
 LYNCH,  University of Alaska financial, agreed that was correct.              
                                                                               
  WENDY REDMAN    asked if the money was totally tax deferred until it         
 is taken out as a tuition credit.   JIM LYNCH  replied no; the                
 individual pays the tax just as though the individual had received            
 the dividend.                                                                 
                                                                               
  SENATOR L  EMAN  asked if there was any way to design the program so         
 the person does not have a tax liability until that credit is used.           
  JIM LYNCH  said that cannot be done within the program itself.               
 Congress is now trying to make contributions to this program                  
 exempt.   SENATOR LEMAN  asked if there was anything in this                  
 legislation that would delay or hinder that.   JIM LYNCH  replied no,         
 as long as the definition of a qualified state prepaid tuition                
 program is met.                                                               
                                                                               
  SENATOR LEMAN  recommended that the committee or the Legislature             
 encourage that change in law at the federal level.                            
                                                                               
  CHAIRMAN WILKEN  asked Mr. Lynch to send the committee wording to            
 that effect.   JIM LYNCH  agreed to do that.                                  
                                                                               
  CHAIRMAN WILKEN  asked if the tax is deferred on the increase in             
 tuition value.  JIM LYNCH  said that was correct.  Originally, the            
 IRS said that the plan was taxable and the earnings of the prepaid            
 tuition fund would be taxed as a corporation.  The increase in                
 value would also be taxed as a participant at the time the credits            
 were used.  The University now has an exemption for the program,              
 but the increase in value is still taxable to the individual at the           
 time the credits are used.                                                    
                                                                               
  SENATOR LEMAN  moved to pass SB 187 out of committee with individual         
 recommendations and a zero fiscal note.  There were no objections             
 and it was so ordered.