Plan for PACT

I created PACT almost two decades ago during my first term as State Treasurer – to help Alabama families send their children to college. PACT was designed to help middle and lower middle income families save for college tuition. My experience working in Higher Education for eight years prior to seeking the office of State Treasurer in 1986, gave me a unique perspective on what I came to believe was an injustice for hard working Alabama families. Need based programs such as Pell Grants and College Work Study were designated for the poor and less fortunate, and while we all agree with this conceptually, the formula designed in Washington left many middle income Alabama families unable to receive any assistance other than student loans. The very system that should have focused on assisting those who work, sacrifice and strive for excellence had failed them miserably. I realized the unfairness of this, and while seeking the office of State Treasurer, I learned of a new concept – prepaying future college tuition based on the current cost. Florida had started a program and we worked with them to develop legislation to create a program for Alabama. PACT was approved by the Alabama legislature.

For two decades, Alabama’s PACT Program served Alabama families well and was given an A – Plus by Money Magazine and rated one of the finest in the nation by USA Today when I left office.

The difficulties the PACT Program has experienced are well known. The stock market meltdown from 14,000 to 6500, higher than anticipated tuition increases, and the highest number of beneficiaries attending college during this same time caused Alabama’s Program to lose asset value far below the necessary level to fund future benefits. PACT was paying out benefits at a higher level than incoming cash, making it necessary to liquidate assets when the market was at low valuations. This caused the trust fund to drop to a level where it cannot meet future obligations without an infusion of cash. There is no basis for blaming any one for this problem because the program functioned as planned up until this point. I would also point out that all other funds experienced the same type of market losses during this time. Alabama’s Retirement System lost the same percentage as PACT, and we all know what happened to IRAs and 401Ks. It was a result of an aberration in the natural cycle of the markets that created the perfect storm.

It is now time for everyone to join together for a solution. The beneficiaries in PACT deserve the benefits for which their parents planned and saved. While this is a PACT problem and not a problem for the colleges and universities, it is in everyone’s best interest to work together for a solution. I believe that contract holders would be open to discuss possible solutions. Because state funds are limited, it will be very difficult to find funds for the next several years. However, there are several options that should be explored. They are as follows:

1. Stimulus Money – Alabama has 3 billion dollars coming in the next two years for various projects. Much of this funding is dedicated for educational purposes and clearly PACT is an educational purpose.
2. Unclaimed Property Division – This is a division in the State Treasurer’s Office that generates several million dollars a year.
3. Out of State fees of Participants in Alabama’s 529 Program (The College Counts 529 Fund)
4. Alabama Trust Fund – This is a sensitive area because the interest earnings from the Alabama Trust Fund natural gas leases are dedicated to Alabama’s General Fund which serves all non-educational functions of government. Utilizing a small portion of these funds for a limited time would not cause an undue burden and would help PACT survive.
5. Debt service monies freed up from Education Trust Fund Projects could be utilized to assist PACT as the markets improve.

The ideas for funding sources I had discussed for several months were options dedicated to not take vital funding from either the Alabama Education Trust Fund which funds all levels of education in Alabama, or our General which serves all non-educational functions of government. Both of these funds are in deep pro- ration, and the bills presently in the legislature conceptually address the need not to seek any funding from those vital state sources of revenue.

At this writing, the Alabama Legislature is debating a bill in the Senate sponsored by Senator Ted Little, Senator Lowell Barron and Senator Hinton Mitchem, SB 162.  The legislation would take freed up money from bonds being paid off through the Alabama Public School Authority, and allow $236 million dollars to assist the PACT fund. The payments would begin in the year 2014 and go through the year 2021.

In the House of Representatives, HB 228 sponsored by Representatives Ford and Taylor is a very similar Bill as the Senate version, and both bills would address the shortfall and begin to allow PACT to recover so contracts with purchasers can be honored.

In addition, certain program rules and guidelines could be reviewed going forward to reduce liabilities.

All of these options should be viewed as investments in a program that in so many ways gives back to our economy and adds to the richness of our culture.

PACT is worth saving. If the program is to have a future, the basic structure will have to change. Times have changed and the factors that were in place when the program started have also changed. Tuition continues to outpace inflation and the future of the markets is still uncertain.

When I view the success of PACT over almost two decades, there are some points I would like to share with you concerning the tremendous economic impact on Alabama PACT has had. When a parent, grandparent or other sponsor purchases a contract, they pay much less than they would pay years down the road. In doing this, they have more disposable income allowing them to purchase goods and services thus strengthening the economy. Then when the beneficiary graduates from college his/her earning capacity increases while paying taxes and purchasing goods and services. Through the M2 – multiplier principle these dollars multiply themselves many times in our economy. PACT has been a solid investment that is reaping great benefits for our state economically as well as enriching our culture by educating our young people and making them better citizens.

When a beneficiary graduates from college his/her earning capacity increases while paying taxes and purchasing goods and services. Through the M2 – multiplier principle, these dollars multiply themselves many times in our economy.   For example, a person makes one dollar at his or her job.  The dollar is taxed an estimated 20% in federal income tax as well as in state income tax.  That person takes the dollar and purchases an item at a place of business.  That dollar is taxed 8% in sales tax approximately.  The store receives that dollar and pays corporate tax on the dollar.  The employee at the store gets paid with that dollar and pays federal and state income tax on that dollar.  The employee then takes the dollar to another place of business and purchases an item and pays 8% sales tax on the item.  The cycle continues and repeats many times so both tax revenue on that dollar is collected multiple times and income for individuals is transferred many times.  Hence, an example of the M-2 multiplier going into action.  The more disposable income a person has and the more people who have a good income, the greater the effect of the M-2 multiplier.  More educated people make more money on average and therefore contribute at a greater rate to the M2 multiplier, thereby stimulating both the state and national economy.

Of all the attempts we have seen over time at the state and federal level to help people, PACT is one of the few programs that has a sterling history of success. PACT can be successful again and continue to help our people, but it will take a consensus among policy makers based upon the belief and understanding of the very positive impact this program has had on Alabama educationally and economically.

Let me speak briefly to the issue that is raised continually as I travel and speak to PACT Parent forums all across Alabama. Patti Lambert is the leader of Save Alabama’s Pact and can be reached at: savealabamapact.com Patti has established a solid organization across Alabama of PACT contract purchasers who are determined to see their contracts honored. The question that is repeatedly asked is: What is the obligation of the state of Alabama to PACT parents?

Clearly a contract was signed, an agreement made and money paid by the purchaser. Beyond the issues of contractual, legal and moral obligations, it is a matter of honor.

Alabama’s PACT Program has many positive aspects that have served our people well. I ask the members of the legislature to consider the tremendous economic and educational benefits of PACT. Alabama families made their PACT with the state of Alabama. PACT parents kept their end of the bargain, and now it is time for the state of Alabama to keep its end of the bargain.