At its February 25, 2004 meeting, the Alabama PACT board learned that the program was funded at 92.7% and had an actuarial deficit of $51.8 million. The board “discussed the need to regain a fully funded status.”
At the PACT board’s August 25, 2004 meeting, Alabama Commission on Higher Education director, Dr. Mike Malone, gave the board what turned out to be a prescient warning:
Dr. Malone briefly discussed the reauthorization of the Higher Education Act and his expectation of massive unfunded mandates. He expressed concern about the affordability of higher education, stating that federal initiatives such as this would only exacerbate the problem.
While it’s good to know that the PACT board was on top of the problem – at least a little bit – their two-fold attempt to solve the problem by making riskier and riskier investments and embarking on an aggressive marketing campaign wasn’t, in retrospect, the best solution.
The marketing campaign, in particular, seems more than a little deceptive. At almost every board meeting from 2004 on, the board discussed the need for more contracts and higher investment returns. They grew increasingly nervous about poor performance by investment managers, even getting rebuked in 2005 by a Callan representative who told them they couldn’t “can’t just fire managers every six months”
But instead of approaching the Legislature or other state leades 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.
The new marketing campaign launched in 2007 (page 16) included a new tag line: “Prepay A Child’s Tuition.” Prepaid? There’s that pesky word again….
First, let’s review what the board knew and when….
In 2004, Jay Kloepfer of Callan,
“reiterated, in conclusion, that a 9% investment return was a heroic assumption and higher than the expected case return for even the most aggressive asset mix examined in the study. […] All results were dependent on selling 2000 contracts per year…”
In 2005, actuary Dan Sherman informed the board (page 18):
“This year, for the first time, you actually paid out more in contract benefits than you received in contributions through contract payments.”
Program funding and deficit numbers have been an issue for most of this decade:
2002: 90% funded.
2003: 92.7% funded.
2004: 91.4% funded – $51.8 million deficit.
2005: 91.5% funded – $65.2 million deficit.
2006: 92.7% funded – $70 million deficit
2007: 97.6% funded – $19.7 million deficit
So I’m sure that the PACT board thought they’d turned the corner when the auditor, Bob Crompton, gave them the good news at the February 25, 2008 meeting that the program was 97.6% funded.
2007 was a good year for PACT, but trouble would come soon in 2008.
By the May 2008 meeting, the board learned that the PACT trust fund had lost $55 million in the first quarter. The August meeting had similar bad news: “with all major assets in negative territory.” It was at this point that the PACT board decided on some new investment options: hedge funds and private commercial real estate(page 18). Market timing done backwards, perhaps?
By the November 19 meeting, the news was grim and getting worse every day…
1. Only 279 new contracts had been sold. A major issue since the investment study the board received in 2004 required that 2000 new contracts to be sold each year. The PACT program had never met that goal, with slightly over 1000 sold in 2005 & 2006. The 2007 numbers were 38 1-year and 238 4 year contracts.
2. Investment return for the 1st three quarters of the year was -19.16%. And everyone could just watch CNN and see that the market was continuing to drop.
It was at this point that Bradley Bryne weighed in. He wasn’t at the meeting (and hadn’t attended any meetings that year – neither had Lt. Governor Folsom), but sent a message: (the typos are in the minutes; they aren’t mine!)
Chairman Ivey informed the Board that she had received’a request from Chancellor Bradley Byrnes concerning his analysis of the current manasers. He had expressed concern that most of our managers were underperforming their indices and that there should be managers who consistently outperformr Ms. West explained that all managers were hired because of their good performance and that no manager outperforms every quarter. She explained that it is more prudent to look at returns over rolling periods of 3 to 5 years.
That’s true – unless you’re going to need to cash out some of those investments in just a year or two. And I recall Treasurer Ivey saying at the March 2009 board meeting (and in media interviews) that part of the problem was that PACT had a huge number of contract holders in college now and scheduled to enter college within a few years. There’s not a lot of running room to hold on for long-term gains!
But the worst news was still to come…
3. Auditor Bob Crompton (who by now was surely wishing that Bill Reimert had gotten the job instead) expressed concern that “the fund would have lost somewhere over $200 million this past year.”
Holy deficit, Batman!
After this bombshell, the board calmly talked some more about real estate and securities lending (another investment segment recommended by Callan in 2005 as a way to pump up returns), and adjourned.
They weren’t heard from again until the news broke in late February of this year that the PACT fund had lost not $200 million in 2008, but over $400 million (45% of the total fund)! This news caught the general public totally by surprise – especially since Kay Ivey continued her PACT boosting road trip even in January of 2009, encouraging parents in Andalusia to enroll their kids in the program.
Sell, Sell, Sell! Not investments – just more contracts
Now, this behavior isn’t that shocking when you consider her propensity for denial – this is the woman who, after all, is running for a governor and touting her financial management background as a qualification!
However, it borders on the criminal. The PACT board has known for years that the program had problems, yet continuted to aggressively market it to Alabama citizens. Indeed, selling more contracts was one of the ways to prop up the program and keep paying tuition.
At the April 14, 2005 special meeting, the long range planning committee recommended an “aggressive marketing plan for the PACT program in 2005.”
The $95,000 budget included new brochures, radio ads during Alabama and Auburn football games, cable TV ads, and a continued push for “free media.” The board was encouraged to write op/eds and do speaking engagements in their communities.
But, as we saw, contract sales continued to drop. So at the August 30, 2007 PACT board meeting, Kay Ivey introduced Jennifer Culotta from Blue Olive consulting. It was marketing firm assisting PACT.
Mrs. Culotta gave an overview of the marketing plan, including a discusiono f the target market which is females age 25 to 49, and males and females age 50 and over. She then dicussed the advertising plan, along wiht a display of the new PACT logo. She explained that a new tag line, “Prepay A Child’s Tuition” would be used as well as visuals of a “hand” which is also used in the logo. She stated that the goals of the marketing plan were to increase contract sales by 20%, create awareness of the new one-year contract, ad track the marketing efforts for future planning.
Now, as I noted in a previous post,: “What Do Parents Think They’re Buying?” the PACT staff and board was well aware in 2005 that parents thought they were prepaying tuition. That it was a simple contract: we pay now and the PACT board pays later.
The PACT board updated the disclosure statement in 2005 to state in bold, right up front, that this wasn’t the case. Rather than prepaid tuition, parents were tossing money into a fund that had unlimited downside and an upside limited to tuition payments.
Yet, with enrollment dropping, just 2 years later, the board approved a marketing campaign that had this tag line as its centerpiece: “Prepay A Child’s Tuition.”
Review the minutes (at least those since 2004, which is all that’s available at this point) for yourself. Does it seem that the board has acted reasonably and honestly with PACT contract holders and Alabama citizens?
It doesn’t to me.