Legislature(1997 - 1998)
04/29/1997 03:12 PM House HES
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 254 - UNIVERSITY TUITION PAYMENT PROGRAM Number 1250 CHAIRMAN BUNDE announced the next item on the agenda was HB 254, "An Act relating to disclosure of public records identifying a participant in the advance college tuition payment program; relating to the composition and assets of the Alaska advance college tuition payment fund; relating to administration of the advance college tuition payment program; relating to advance college tuition payment contracts; and providing for an effective date." WENDY REDMAN, Vice President of University Relations, University of Alaska, said HB 254 is the Alaska advance college tuition payment fund. In 1990, the legislature created this fund to provide an incentive for people to purchase credits at the current rate to be redeemed in the future. At the time, Alaska was one of four states developing this type of program. Today there are close to 25 states which have a similar program and many more states are in the process of developing a program. MS. REDMAN said HB 254 makes some technical changes in the state law. These changes create conformity with federal requirements, allowing the program to remain tax-exempt in regards to the university. The bill also provides additional language on the tax deferral portion of the program for the participants. This would allow expenses other than just tuition to be utilized by the participant. The participant can use this money for books as well as room and board. MS. REDMAN stated that there were some time constraints involved. The university received the federal requirements in February and the changes to the program must be made by August of 1997. Number 1370 CHAIRMAN BUNDE commented that this program locks tuition in at today's rates. He asked, if this program exceeded beyond what was expected, then would it cause a situation in future years where the university system was having to produce outstanding education at discount prices. Number 1400 MS. REDMAN answered that this was a program created for the university system by the legislature. Number 1411 JIM LYNCH, Associate Vice President for Finance and Planning, University of Alaska, testified next via teleconference from Fairbanks. The major problem of the program, since its initiation, has been the tax issues related to it. The Internal Revenue Service (IRS) considered the program to be a taxable entity. The federal (indisc.) really changed that for state prepaid tuition programs as long as certain qualifications are met. This bill ensures that the current program meets all the federal requirements which will ensure that the university is tax-exempt. Number 1446 CHAIRMAN BUNDE clarified that he was testifying that this bill would allow the program to meet all the federal requirements. Number 1454 REPRESENTATIVE GREEN explained that credits can be prepaid. As inflation raises other universities' tuition, more students might stay in the state university system. He understood that if you prepay, based on current tuition, and the benefactor decides to go to some other university, then there is a credit, but it is credit on money rather than on units that they could take. Number 1500 MS. REDMAN answered that this scenario was correct. The participant's invested money would be returned. She explained that this is not a good savings program. If people are not going to go to the University of Alaska, then there are clearly better ways to save money. She suggested that even if you are planning to go to the University of Alaska, you would make more money by other mechanisms. The attractiveness of this program is that it is listed on the Permanent Fund check-off, so it is easy to do. This has created a high participation rate in the program. Program delays were implemented when some of the more astute students realized that they could buy credits one year and then cash them in the next. Currently there is a built-in delay in the program. MS. REDMAN referred to a question by the chair and said there has been difficulty in some states, specifically Michigan, where this type of program has effectively forced the state university to hold their tuition rates down to prevent bankruptcy. Hopefully, the University of Alaska has instituted a program which should level the tuition rate. She stated that the market has been good, allowing the investments to keep up with the rate of tuition. There will always be a financial pressure with this type of program. Number 1582 REPRESENTATIVE PORTER asked if the only way to take advantage of this program was through the permanent fund. Number 1591 MS. REDMAN answered that you can also purchase the credits. REPRESENTATIVE PORTER asked if the university was happy with this scheme. He commented that the last few years were a great investment period, but the future investments are uncertain. Number 1622 MS. REDMAN answered that the university is not unhappy with the program. The university is happy in the sense that this program has provided some good public relations. There is always a danger with this type of program that it could hurt the university financially in the future. Currently the Department of Revenue (DOR) invests this money for the university and as long as a good investment strategy can be continued then everything is fine. Number 1654 REPRESENTATIVE PORTER clarified that whatever the current tuition rate is, the same rate will be available whenever the participant decides to enter the program. He asked if it would be better to put a fail-safe on this program. Number 1674 MR. LYNCH explained that there are some fail-safe clauses in this program. The program can be discontinued if the situation gets to a point where it is intolerable and the increase in the redemption values can be limited. The long term future will depend on the investment markets as to how good the program will be for the participants. Number 1701 REPRESENTATIVE VEZEY asked for information on the financial risk to the university. Number 1706 MR. LYNCH stated that essentially there is a guarantee associated with the program that if you come to the University of Alaska, you will receive a future education based on the price of today's tuition. This program invests that money with the hope that the investment earnings, between now and whenever you attend the university, will be great enough to pay the current tuition. If the investment earnings are not enough, then the university is at risk for the difference of the redemption value of those credits and whatever the current tuition is. Number 1742 REPRESENTATIVE PORTER stated that he could start one of these funds for his grandson, who is a one-year-old, and pay into it every year. In 18 years his grandson could decide to go to the University of Alaska for the cost of a 1997 tuition. Number 1760 MR. LYNCH explained that the university will have invested those monies today and 18 years from now, they expect that the money put in will be great enough to pay the tuition. An actuarial analysis was done about a year ago on this program. This analysis concluded that if you can assume that tuition and inflation will be 7 percent a year and you can invest the money at 7 percent a year, then you can sell those tuition credits at today's price. The program will be viable and you can refund that money in the future. If those assumptions are wrong, then the price of the credits has to be adjusted. Number 1790 CHAIRMAN BUNDE commented that when he began teaching in the university system, a credit hour cost $20, and now an hour is $100. Number 1820 REPRESENTATIVE VEZEY said that it sounds as if the university is treating this program as if it were a trust. When the credits are redeemed, a certain amount is taken out of the trust. If what is in the trust doesn't cover the current rates, then the university loses money. He felt the university was still gaining from what that student paid. The university might not get as much as it might have. He referred to studies which say that the cost of education is rising faster than the rate of inflation in the long term. He did not know if this program was a good idea in terms of total cash flow, but the university does get the money as well as getting the student when it comes time for them to go to college. Number 1862 MR. LYNCH answered that this was correct. Number 1869 CHAIRMAN BUNDE stated that the volume of students was very important. Number 1878 REPRESENTATIVE GREEN noted that you could check off the untaxed portion of the PFD. He asked what would happen if you wanted to put in taxed dollars. Number 1902 MR. LYNCH stated that all money entering this program is taxed. Even though you check off your PFD to be put into this program, that money is still taxed to the original recipient. If the PFD is $1,000, you will pay taxes on that income on the year the dividend is declared. All money coming into the program is after tax dollars. MS. REDMAN explained that he meant taxed to the purchaser. MR. LYNCH referred to the savings account. The increase in value of the earnings is tax deferred until it is used by the student and is taxed to the student. There is no tax deduction at this point. Number 1939 MS. REDMAN stated that there is talk of allowing a tax deduction at the federal level. Number 1946 MS. REDMAN said that even if you check off the PFD to put money into this fund, you will still be taxed on the amount of the dividend. Number 1999 REPRESENTATIVE PORTER made a motion to move HB 254 with individual recommendations and zero fiscal notes. There being no objection, HB 254 moved from the House Health, Education and Social Services Standing Committee.
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