The impact of the tuition cap in AL House PACT bill
The PACT bill that just passed the Alabama House, which I discussed earlier, includes a controversial tuition cap for PACT participants. I wondered just what the impact of the tuition cap would be, so I started researching and crunching the numbers. Two general observations:
- The PACT program is shockingly underfunded.
- The tuition cap would cost universities &/or non-PACT parents A LOT of money.
First the financial status of PACT, based on the 30 Sept. 2009 Actuarial Report. The program has a current deficit of $345,666,097 – over 1/3 of a billion dollars. It will run out of money in the 2016 fiscal year. If it keeps paying out tuition as promised then it will be over one billion dollars in the red by 2024. Yeah, we’re talking about a lot of money.
Now for the tuition cap…
I started to calculate the cost of tuition based on the varying estimates I’ve seen for things like enrollment, anticipated rate of increase in tuition, etc. Then I realized there is a much more direct way. The Actuarial Report includes a table that shows anticipated outlays for tuition by year assuming PACT students pay the same tuition as non PACT students. The PACT bill that just passed the House specifies how much money will come from the Education Trust Fund by year. The bill forces the difference to be absorbed by universities.
At the beginning of the 2014 fiscal year the PACT program will have $227.5 million in assets. It will have to pay out $765.4 million in tuition from 2014 to 2021. Only $235.5 million will be taken from the ETF. That means colleges and universities will take a $302.4 million hit. (Note: I’m neglecting the time value of money for the sake of simplicity)
If you’re the parent of a non-PACT child who plans on attending college during this period of time then this should really bother you. There are really only two ways universities can deal with this. One is to offer decreased services – i.e. a lower quality education (not a good option for anyone involved). The other is to defray the cost by passing it along to non-PACT students.
Based on the numbers provided in the PACT report there are about 150,000 total students at Alabama’s universities and two-year colleges. From 2014 to 2021 there will be an average of 7,738 PACT students each year. That means each of the 142,262 non-PACT students could pay a $265 per year penalty to prevent schools from cutting back on the quality of education.
That penalty will be on top of significantly higher tuition non-PACT students will pay. The bill freezes tuition at 2009 levels until 2021. It will be allowed to rise by no more than 2.5% per year if two criteria are met:
- Two consecutive years of growth of the PACT fund in excess of 5%
- The PACT does not fall below a funding level of 90%
To put it in more clear terms: PACT tuition will not rise under this bill. The program is currently funded at 62% and by 2014 it will be down to 23%. I would put the odds of the program miraculously getting back to 90% with only the ETF band-aid somewhere between zero and hell freezing over. Tuition tends to increase about 8% per year. So, for example, in 2021 non-PACT students will pay $17,436 per year for tuition at Auburn, while PACT students will only pay $6,924. Factor in the “PACT penalty” and non-PACT students will pay $10,777 more per year than PACT students. In the event hell does freeze over and the PACT tuition is allowed to increase 2.5% every year then non-PACT students will still pay $8,389 more per year.
This highlights the problem with tuition caps. Granted, if the legislature sees fit to bail out the PACT program then the money has to come from somewhere. But it would be best to spread that burden over a broad base of taxpayers to soften the blow. Shifting the costs to universities (actually non-PACT students) focuses the costs on a small group of people – people who had no culpability in the PACT problems.
Don’t get me wrong, I’m sympathetic to the plight of PACT holders. They’re victims of a Ponzi scheme. That really, really sucks. But I don’t think it is reasonable for non-PACT parents to pay for that misfortune.
Print This Post
Doesn’t it hit the public colleges and universities either way you frame it?
Either money is taken from the ETF which provides the state funding for higher education (which would drive up tuition through reduced state support) or the ETF doesn’t fund every penny and colleges and universities are left holding some of the bag (which also would drive up tuition). Of course one is much more direct that the other, but neither plan is a great option from the standpoint of the colleges and universities (which although you limit your realm of non-culpability to non-PACT students, these C’s & U’s hands are equally as clean).
On another point, besides mere political pressure, is there anything which guarantees the colleges and universities will cover the outstanding balance rather than charging the individual tuition. As Lucy Baxley indicated, there hasn’t been a guarantee on the plan since 1995.
First, there is no “good way” to bail out PACT. Just different bad ways.
The ETF pays for K-12 and universities and is collected from ten tax sources, which means it would spread the burden out more broadly.
I’ve heard mixed things about the legal obligation. I will say that early on the state at least seemed to be dead set on giving that impression. When I looked into it for my first child, though, I found it to be a less attractive option than an overtly investment based 529.
Personally, and I know this isn’t popular, I don’t think that taxpayers or non-PACT students should pay so that the PACT participants get a free ride. I’d be amenable to a compromise. Taxpayers cough up some money, but not enough to fully fund PACT. Contract holders have to scrape together the rest. Again, not a perfect solution, but there is no perfect solution.
I would say that their best bet might be a class action law suit, but only some might win (the ones with older contracts) or they might lose. Either way the lawyers would take their bite and who knows what would be left.
Greedy,
it only hits universities both ways if looking at only two options. I’m sorry, but don’t think PACT participants should get a complete 100% salvaged ride. I know some were mislead. Hate it. I chose to invest with the AL State’s 529, which significantly lost money just like everyone else. I’m not asking for a bailout or handout, but don’t believe PACT participants deserve one either. When you look at the ‘penalty’ other students/parents will bare, it becomes even less fair.
Bottom line, everyone is hurting; everyone lost investments/money; health care costs have double in past ten years and projected to double next ten…the ONLY other area that has had such dramatic increases in cost is the university systems. The state should be trying to curtail costs for everyone, not helping 8,000 future students get a HUGE unfair cost advantage while making their peers pay for it and continuing to allow large tuition increases even though they own multiple private planes and pay themselves MILLIONS in salary. I mean really, how hard is it to run a university…does that need a $1M plus salary? Really? What happen to ‘poor teachers that care’? Bring some of them back… :-)
#FAIL
As if universities haven’t raised their tuition and fees at rates significantly greater than inflation already. Fortunately I live close to two adjoining states offering competitive prices for out of state students. We have options . . .
I don’t think the number of non-PACT students will hold steady. If the universities raise tuition on non-PACT students to defray the cost of lower tuition for PACT students, then the vast majority of parents in Alabama will very quickly enroll their children in the PACT program. I think that the only outcome for this bill is a drastic reduction in quality of higher education in Alabama.