Tuition Prepayment Program Running Deficit

January 22, 2010

Investigative Reports

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The NerveThousands of South Carolinians have invested in a state-run college tuition prepayment program in order to pay less now than they would have to pay later.

But for the state’s public colleges and the legislators who fund them, the program has lapsed into a textbook case of an apt truism – pay me now or pay me later – and a painful lesson in unintended consequences of good intentions gone awry.

The situation can be summed up with one even more applicable word – bailout.

Owing to years of ginormous tuition increases and the stock market melting down in 2008, the South Carolina Tuition Prepayment Program was running a more than $64.3 million deficit as of June, according to an analysis of the program. Actuarial Resources Corp. near Atlanta conducted the review, which provides the most recent data available on the program.

For now, Tuition Prepayment has sufficient assets to cover its liabilities through 2016, the analysis says. But absent remedial action it is “projected to run out of assets in fiscal year 2017.”

With few exceptions, public colleges across the state have increased their tuition more than 100 percent in the past 10 years, sometimes upward of 200 percent, S.C. Commission on Higher Education data show.

On the heels of that trend, commission director Garrison Walters wrote in an Oct. 1 letter to Gov. Mark Sanford, “Last year, cuts experienced by the state’s colleges and universities were among the largest in the nation. Institutional core recurring funding was decreased by 24 percent – a drop of over $180 million – and recently by an additional 4 percent or $23 million.”

Higher ed took another hit in December as part of an across-the-board 5 percent state funding reduction.

Says the analysis of the Tuition Prepayment Program, “Our assumptions were guided by our observations of historic tuition increases, trends in postsecondary enrollment in South Carolina and the level of legislative appropriations for postsecondary schools in South Carolina.”

Translation: Pay me now or pay me later.

Trouble is, now or later for taxpayers might mean they are left holding the proverbial bag for enrollees in the program.

“To … bail out the rest of the group at the end of the term here, they’ll [legislators] have to use taxpayer dollars,” S.C. Treasurer Converse Chellis says in a report by WJBF-TV of Augusta, Ga.

In an Oct. 19 letter to Sanford, Chellis said he believes that the state “has a moral obligation to provide the financial resources” to meet the obligations of the program.

It already has received state funding, $20 million in 2007, to help keep it going.

Tuition Prepayment was created under state law in 1997 and made a part of the Treasurer’s Office. Limited to in-state students, the program was closed to new enrollees a couple of years ago because of the looming financial train wreck.

About 6,200 participants remain in the program. The way it works is, they entered into a contract and paid tuition at what it cost when they signed up. The program then invested the enrollees’ money with the expectation of earning a sizeable enough return on it to cover tuition at however much it will cost when their kids attend college.

The intent of the program is to “assist the citizens of South Carolina with the expense of college by providing an advanced payment program for tuition at a fixed and guaranteed level,” the analysis says, citing the law.

But a funny thing happened on the way to those good intentions – the aforementioned tuition hikes, Wall Street implosion and higher education funding reductions.

It is true even though lawmakers in 2008 capped tuition increases for participants in the program at 7 percent.

That, no doubt, was too little too late.

The deficit in the program has jumped significantly from 2008, when it stood at $37.6 million, the analysis says.

The market has rebounded, though, helping the program recoup as much as $10 million of its losses as of mid-October, according to Scott Malyerck, deputy state treasurer.

But that would still leave the program facing significant red ink.

The actuarial details several options for state government to offset the deficit:

  • Eliminate the program and repay enrollees their contributions, plus a required 4 percent in interest. (Class-action lawsuit, anyone?)
  • Allocate funding to the program annually beginning when it runs out of money.
  • Provide the program with a lump sum of $71.5 million in December 2010 or $105.1 million in July 2016.
  • Pump $12.5 million into the program per year from 2010 through 2016.

If you want to lay odds on what the state will do, at least for the time being, pick none of those alternatives.Instead, go with kick the can down the road.

Reach Ward at (803) 779-5022, ext. 117, or eric@scpolicycouncil.com.