The billion-dollar Maryland Prepaid College Trust, which helps tens of thousands of state residents pay for higher education, has been underfunded by at least $25 million in four of the last five years.
The most recently released annual report shows that 2006 was the first time since 2001 when the trust did not operate at a deficit, which would have made it impossible to pay off all account holders if the need arose.
While the 2006 surplus came as a relief to administrators, the previous shortfalls point to the impact of rising tuitions on the fund many parents are counting on to send their children to college.
“It was definitely an unattractive situation to be in,” Carol Kaiser, the chief financial officer for the trust, told The Examiner. “But if you look at pension systems, it’s designed to be a long-term savings product. I was very confident that it would correct itself.”
The trust, which is in its 10th year, functions a lot like a pension system in that a third-party firm pools participants’ investments into one shared account that appreciates over time to help parents send their children to college.
Often referred to as Section 529 plans, prepaid college trusts are becoming increasingly popular nationwide because they allow parents to “lock in tomorrow’s tuition at today’s rate,” Kaiser said.
In the case of Maryland’s trust, parents must stay invested for at least three years. They can apply the savings to colleges and universities either in or out of the state. Either way, the amount applied is the average public school tuition price in Maryland at the time.
The two main problems that led to the severe underfunding, according to Kaiser, were that the trust’s board completely underestimated the large tuition increases that would be incurred in those years and the negative state of the stock market as a whole.
However, at the time the board of directors included a number of big names in state education, including state Superintendent Nancy S. Grasmick and Secretary of Higher Education Calvin W. Burnett, who were very involved in tuition discussions.
Despite their presences on the board of directors, Kaiser said without Maryland’s chancellor involved, tuition projections were off. That’s why Chancellor William Kirwan was added to the group last year.
“We got good information from the Board of Regents, but there are three tracks of conversations going on, and the chancellor is in on all of them,” she said.
Regents spokesman John Buettner said he couldn’t comment on the tuition projections and was unsure why it took so long to involvethe chancellor in the trust.
According to trust information, as of June 2006, total invested assets in the plan came to $1.4 billion.
That year, the trust had a surplus of $16 million, which is vastly different from the four previous years. In 2005, the prepaid trust was at a $26.5 million deficit. As of June 2004, the deficit was $75 million, and in 2003 and 2002, the deficit amounts were $69.9 million and $31.4 million.
In 2000, the Maryland General Assembly passed a law that created a cushion for the trust, meaning that if the trust officials did not have enough funds to pay off benefits, the governor would allocate funds to do just that.
“That safety net meant it was not an imminent threat,” Kaiser said.
In the enrollment period for the trust, which ended two months ago, about 2,000 new participants signed up.
According to John Trader, public relations and marketing manager for the trust, that’s about 91 percent of the goal amount of approximately 2,200 new enrollees.
Kaiser said the next analysis and independent audit of the trust will be conducted throughout the summer and released by the end of October.
Participating in U.Md.’s Prepaid College Trust
By top participating counties
» 35 percent of new enrollees hail from Montgomery County, 14 percent from Howard, 10 percent from Anne Arundel, 9 percent from Baltimore
By age
» the average age of new enrollees is 7, but the number of infants is quickly growing
By destination
» 51 percent of the students choose to go on to private Maryland colleges or out-of-state universities, while the remaining 49 percent go to Maryland public schools or community colleges
