One lawmaker calls it a "smokin' hot deal" — a state-run investment program that allows savvy parents to prepay for college tuition, locking in prices years before those first college-acceptance letters start arriving in the mail.
One lawmaker calls it a “smokin’ hot deal” — a state-run investment program that allows savvy parents to prepay for college tuition, locking in prices years before those first college-acceptance letters start arriving in the mail.
Trouble is, with tuition rising rapidly at the state’s public colleges and universities, some legislators believe the popular Guaranteed Education Tuition (GET) program may be too hot a deal.
Several legislators say they are considering bills that would change the GET formula to control costs, possibly paying lesser benefits for families who purchase GET units in the future.
If Washington changes its GET program, the state would be following a national trend. A number of other states that offer prepaid-tuition plans have closed their programs to new enrollments or changed the terms of the plan because tuition rates are growing too fast for the programs to keep up.
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GET is solvent today, but if every family enrolled in the program tried to cash in at the same time, it would only be able to pay out 86 percent of benefits, leaving a $255 million shortfall, according to one state study.
More than 120,000 families are enrolled, and the fund contains $1.4 billion in assets. The money is invested in stocks, bonds and other investments, much like a pension fund.
State officials are quick to note that families holding GET units today would not be shortchanged, even if there’s a shortfall or if a new GET program were introduced. The state guarantees that, if tuition increases outstrip the amount of money available in the current program, the Legislature must cover the shortfall.
GET program director Betty Lockner said the shortfall is just theoretical — the program could have some good investment years and tuition increases could moderate, erasing the funding gap.
But legislators say they don’t want to leave the state vulnerable to bailing out GET if the program can’t catch up on its losses.
Complicating the issue is pressure to increase tuition still more. Gov. Chris Gregoire’s proposed budget would increase UW and Washington State University tuition by 11 percent in 2011, and another 11 percent in 2012. Several bills already introduced this session would let the state’s colleges and universities set their tuition rates. Another big bump, or series of bumps, in tuition could exacerbate GET’s financial problems.
State Sen. Rodney Tom likened GET to a “poison pill” — the financial term that describes a corporation’s defensive tactic to prevent a takeover. In GET’s case, the program is “designed to keep tuition low in Washington state,” because the Legislature would be left paying the bill if tuition increases outstrip the state’s ability to pay for them through GET, he said.
“Whoever designed it was one of the cleverest legislators ever to hit Olympia,” said Tom, D-Bellevue, who heads the Senate’s Higher Education Committee.
The program was designed under the assumption that tuition would rise no more than 7 percent a year.
A bill to address the growing unfunded liability may come out of the Senate Ways and Means Committee in coming weeks, said state Sen. Ed Murray, D-Seattle, who chairs that committee.
On Tuesday, state Reps. Larry Seaquist and Reuven Carlyle introduced a bill that would give colleges and universities tuition-setting authority for four years.
A provision of the bill also would set up a committee to examine whether a second phase of the GET program — a GET II — should be created, with lesser benefits for people who buy into it.
“The current benefits are a smokin’ hot deal, and anyone who can save for their kids’ college under this program has really benefited,” said Carlyle, D-Seattle. Unfortunately, though, it’s “unsustainable at its current level.”
Lockner noted that GET funds were doing so well financially two years ago that the program was running a 17 percent surplus, and that the program’s directors were in a quandary about what to do with the extra.
But the recession hit, the stock market plunged and the Legislature approved tuition increases at the state’s most expensive schools, UW and WSU, of 14 percent two years in a row.
If the Legislature closes GET to new enrollees and creates a second, less generous tuition program, Lockner said, “you lock in the loss” because it’s not possible to make up for the shortfall without new contributions.
The state then would be on the hook to make up the gap for the original GET families.
“You have to keep putting money into the program,” Lockner said. “It’s more intuitive to say we need to shut it down, but it’s actually the opposite.”
One change that’s been discussed with a GET II program is to tie the payout to an average tuition at the state’s four-year institutions, rather than tying it to the highest tuition rate in the state, she said.
A November 2009 report on the financial solvency of GET, written by the Office of the State Actuary, concluded there was “a relatively small likelihood” that the state would have to bail out the program if GET remains open — but that if it did, under worst-case conditions, the dollar amount could be “quite significant.”
The report said that, if GET temporarily stopped accepting new enrollments, it would “greatly increase the risk” that the state would have to bail out the program.
If GET were terminated altogether — which is considered very unlikely — it “virtually locks in insolvency,” meaning the state would have to bail out the program, but at the lowest amount.
Under GET’s rules, if the program is terminated, college students already enrolled in GET at the time of termination, and those who are within four years of graduating from high school, could continue to use GET units. All others would be cashed out.
Many states have closed their programs to new investors, said Joe Hurley, president of JFH Innovative, which runs the national website Savingforcollege.com, a guide to college-savings plans.
Although Washington’s shortfall numbers are concerning, the program “has been carefully managed to prevent problems that other states have experienced,” Hurley said. Unlike some other states, Washington charges more for GET units than the current rate of college tuition — a more conservative approach.
Washington’s shortfall could disappear if tuition prices moderate and the state’s investments start doing well, he said.
Lockner noted that the Legislature itself created the funding problems for GET by cutting the state’s higher-education budget dramatically in the past two years, then increasing tuition by double-digit amounts.
GET only works if tuition grows at a predictable rate, and is not set too high — if GET units became too costly, the program won’t attract as many new buyers, she said.
She said GET has weathered uncertain times before: In 2003, there was a sharp increase in tuition and a falloff in the stock market. Much like today, families rushed to invest in GET, and legislators feared the program would cost the state money. But, Lockner said, “all of that money invested came back.”
Tom and Carlyle both said lawmakers needed to examine the program closely and decide if it should be changed.
“This country has closed its eyes before on financial matters that we knew would hurt us,” Tom said, “and look what happened.”
Katherine Long: 206-464-2219 or email@example.com