Democratic candidate for Treasurer, Jeremy Sherer, is offering a possible solution to the growing legislative impasse over bills to save Alabama’s Prepaid Affordable College Tuition Program (PACT): the state’s unclaimed property fund.

As I noted yesterday, the house-passed bill (HB228) has run into the immovable force that is Rules Committee Chair, Lowell Barron.

Barron objects to the tuition caps for PACT students that are included in the bill and won’t allow a Senate vote on any bill that includes caps.

Speaking to the Madison County Democratic Women in February, Sherer explained how PACT is just ONE of the Treasurer’s important responsibilities.  He also addressed the roots of the PACT crisis and the PACT board’s failure to act proactively.

In response to a question about where the money will come from to pay tuition contracts, Sherer suggested that his solution – tapping the state’s unclaimed property fund – is the most fair and least painful way to implement a short-term solution while the economy recovers – hopefully soon!

In an interview this week, Sherer stressed the importance of honoring PACT contracts:

PACT was flawed at its inception, due to its lack of tuition controls and lack of oversight from the Legislature. Ultimately, Alabama will spend millions of dollars due to the flawed structure of PACT, which resembled that of a pyramid scheme.

The priority of state leaders now must be to maintain control of PACT’s fate and its own legal liability by guaranteeing PACT contracts, and keeping PACT’s fate within the Legislature and out of the courtroom.

More information about how Shere’s proposed solution worked in Kentucky and more remarks from him on the flip.

Alabama has PACT and Kentucky has KAPT.

Both programs were underfunded as early as 2005, but the difference is that the Kentucky board of directors took steps to make the program solvent long before the stock market melted down in 2008.

KAPT directors won the right in 2005 to access the state’s unclaimed property fund to help pay prepaid tuition contracts.

In December 2004, the KAPT board approved the transfer of $13.7 million from the state Unclaimed Property Fund to the KAPT Program Fund to eliminate the program’s actuarial deficit.

Contrast that to Alabama PACT directors who were warned by both a parent and Democratic candidate for treasurer in 2004 that the PACT program was in trouble:

But instead of approaching the Legislature or other state leaders about the problem, the board kept quiet – publicly at least.  Treasurer Kay Ivey scoffed when her Democratic opponent criticized the PACT program as poorly-run and underfunded.  The board brushed off a request from PACT parent, Dale Goode, at the May 14, 2004 meeting to guarantee benefits, telling him that the board “was very conscientious about the program and believed that benefits would be paid…”

Why the public silence?  Maybe it had something to do with the $100,000 marketing campaign the board was using to sell more contracts.  If parents and grandparents thought the program was unsound, who would join?  The board discussed the need to sell more contracts to keep the program afloat and worried about the effect of declining sales.

In 2005, when an actuary told the board flat out that the program was “actuarially unsound,” the board still took no action – other than hiring the candidate who told a better story.

And now PACT contract holders in Alabama sit on pins and needles watching the legislative slap fight between AEA and higher education.

Are tuition caps the only solution?

Not according to Jeremy Sherer.  A Democrat running for his party’s nomination for Treasurer, Sherer continues to offer commonsense solutions to the PACT crisis.

From a post I did on this topic last fall:

In an open letter to PACT contract holders, he discussing the following issues and possible solutions:

• The State of Alabama must reassure parents and students that tuition will be paid. Sherer: “I say this because at the moment, tuition payments are only guaranteed by PACT through spring semester 2010. I firmly believe that PACT families deserve more certainty regarding their children’s college future than that.”
• Cut the administrative costs for PACT and make better investment decisions. We’re paying almost $2 million each year to these investment “manager” who advised the board to “stay the course” last year as the market bottomed out.  Countrycat’s side note: Our investment advisor moved us out of stocks last summer and we lost less than 10%.  And he charged a LOT less than $2 million/year!
• Don’t try to rush a solution. With the shaky economy and state budget crisis, we need to carefully design a long-term solution.
• The Oil & Gas Trust Fund shouldn’t be our first stop. It funds Medicaid, the general fund, and other state programs.  Sherer: “I do not believe that taking funds from the O&G TF is a moral or politically viable solution for PACT.”
• Alabama’s Unclaimed Property Fund. Sherer: “The Unclaimed Property Fund is now valued just short of $400 million. I believe we can siphon money from this fund, to help restore PACT investments.”
• Get some cooperation from state colleges. Sherer: “The best way this can be done is by the state legislature giving stable, predictable funding to our higher education institutions.”
• Flexibility is critical. Sherer: “…state leaders must also appreciate that the best source of revenue in 2012 might not be the best source of revenue in 2020.”

The unclaimed property fund solution worked for Kentucky, and their fund balance was less than $80 million.  Alabama’s balance is approximately $350 million, Sherer said in an interview this week:

“Due to current instability and deficiencies within state budgets, I recommend the state explore utilizing non-budgetary sources of monies in order to stabilize PACT finances. As is done by Kentucky’s prepaid college tuition program, Alabama could utilize a portion of monies located in the state’s Unclaimed Property Fund, which is presently valued at approximately $350 million. “

And nobody’s talking about draining the whole thing at one time.  As Sherer points out in the video, the fund has consistently held over $300 million over the last 10 years and he’s talking about usingsome of the money to help fund PACT contracts:

“PACT is currently solvent through the year 2016. Further, PACT’s annual expenditures of approximately $60 million represent roughly 0.02% of Alabama’s present, prorated budget. Through more efficient operations, and wise financial management, combined with the use of non-budgetary funds such as the Unclaimed Property Fund or retired bonded indebtedness, the effects on state budgets can be minimal if the formulation of any PACT solution is conducted in manner void of rashness and partisanship. “

The problem facing PACT now is that the board decided to liquidate most of their stock holdings last fall – just as the stock market started to recover – and put them in case to pay tuition.

This strategy of “buy high and sell low” dumbfounded our own professional investment adviser – and anyone else with even a tiny clue about investing.  But not Callan:

4. Alabama PACT investment strategy: Buy HIGH, Sell low. The Callan Associates’ (check out Have A Little Talk’s discussion of that particular organization) representative finally recommended a new investment strategy! 

Callan stubbornly advised the board for the past year and a half to “stay the course” and continue its approximately 70/30 stock and bond/cash investment.  That strategy involved a rather unique approach to market timing:  ride the market to the bottom, recover a bit of the loss, then SELL, SELL, SELL.  But hey, Callan gets paid whether they make money or not.

Transferring money from the unclaimed property fund is, as Sherer explained, “an off-budget solution” that doesn’t take money from the Alabama Trust Fund or the General Fund.  The idea is to put money into the PACT fund so investments can grow as the economy recovers.

“The PACT fund may have a shortfall of several hundred million dollars now,” Sherer said, “but all of that money isn’t needed immediately.”

This is a stopgap solution that gives the state time to create a stable funding source and assure PACT contract holders that tuition will be paid.

Using some money from the unclaimed property fund is a solution that worked for Kentucky. Perhaps it could work for Alabama as well.

At the very least, we need to look at the structure of the PACT board and program and make changes immediately, Sherer stressed:

“PACT must begin to operate as it should have been when it was created – with a financially sound, productive investment strategy that mimics current and upcoming financial market conditions.

Moreover, currently proposed legislation giving greater input from the Legislature and PACT contract holders should be implemented. It cannot be ignored that PACT’s present economic state did not happen overnight. PACT operated at a deficit for the previous seven years. Prior to recent events, had there existed greater oversight by the Legislature or contract holders concerning PACT’s liabilities and obligations, it is likely PACT’s fate would have been drastically different, while limiting the state’s financial exposure.”

Sherer has a good idea and it’s time the Legislature paid attention.