BILL ANALYSIS Ó
SENATE COMMITTEE ON EDUCATION
Senator Carol Liu, Chair
2015 - 2016 Regular
Bill No: AB 1463
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|Author: |Gatto |
|-----------+-----------------------------------------------------|
|Version: |June 23, 2016 Hearing |
| |Date: August 3, 2016 |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|Olgalilia Ramirez |
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Subject: Student financial aid: California Covenants Program:
tuition certificates: gross income exclusion
NOTE: This bill has been referred to the Committees on
Education and Governance and Finance. A "do pass" motion
should include referral to the Committee on Governance and
Finance.
NOTE: This bill has been amended to replace its contents and
this is the first time the bill is being heard in its
current form.
SUMMARY
This bill, an urgency measure, establishes, under the
administration of the Treasurer, a prepaid college tuition
program by which an individual may purchase a fixed percentage
of the tuition for an academic year of full-time enrollment at
the California State University (CSU), University of California
(UC), or an independent institution of higher education. This
bill requires the CSU, and requests UC and an independent
institution of higher education in California to participate in
the program.
BACKGROUND
1) Existing law establishes the CSU, under the
administration of the Trustees of the CSU, as one of the
segments of public postsecondary education in this state.
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The CSU comprises 23 institutions of higher education, each
of which is headed by a president who is appointed by the
trustees. (Education Code § 66600)
2) The California Constitution establishes the UC, a public
trust to be administered by the Regents of the UC and
grants the Regents full powers of organization and
government, subject only to such legislative control as may
be necessary to insure security of its funds, compliance
with the terms of its endowments, statutory requirements
around competitive bidding and contracts, sales of property
and the purchase of materials, goods and services.
(Article IX, Section (9)(a) of the California Constitution)
3) Existing law defines independent institutions of higher
education as those nonpublic higher education institutions
that grant undergraduate degrees, graduate degrees, or
both, and that are formed as nonprofit corporations in this
state and are accredited by an agency recognized by the
United States Department of Education. (EC § 66010 (b))
4) Existing law establishes the Golden State ScholarShare
Trust Program, administered by the State Treasurer's
Office, which offers California families a tax-advantaged
college tuition savings plan of investment and savings for
a college education with state tax-deferred and federal
tax-free benefits. Under this program, a participant opens
an account on behalf of a designated named beneficiary.
The money contributed by the participant to the account is
placed in a trust, and invested in special investment
portfolios designed to meet the needs of beneficiaries
based on age, and different kinds of investments. The
program offers federal and California income tax-free
treatment for qualified withdrawals from a ScholarShare
account. A qualified withdrawal is one that is used to pay
for qualified higher education expenses at any eligible
postsecondary educational institution throughout the U.S.
(and even some outside the U.S.) including many vocational
schools. (EC § 69980, et seq.)
ANALYSIS
This bill:
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1) Establishes the California Covenants program under the
administration of the Treasurer for the purpose of creating
a prepaid college tuition program for undergraduate
education at California State University (CSU), University
of California (UC) and independent institutions of higher
education.
2) Requires the Treasurer to issue tuition certificates for a
prepaid purchase of a
fixed percentage of tuition and mandatory systemwide fees
(fees) for an academic year of full-time enrollment as an
undergraduate at a campus of the CSU, the UC, or an
independent institution of higher education and:
a) Authorizes the Treasurer to determine the cost of
the fixed percent of
tuition and fees for participating institutions and to
periodically adjust that cost as a result of changes
in the economy of the state, cost of living, and
tuition and fees charged by the participating
segments.
b) Requires that the tuition certificate specify the
percentage of tuition and
fees that have been purchased.
c) Specifies that the tuition certificate cover
annual tuition and fee increases
of 7.5 percent or less.
d) Sets the minimum amount of tuition certificates
that an individual may
purchase to $300 in a calendar year and limits the
window of time for purchase to May 1st through June
30th commencing in 2018.
e) Requires the beneficiary to be either a
California resident or a student who
is exempt from nonresident tuition, as defined, at the
time a tuition certificate is used.
f) Requires the purchaser of a tuition certificate
to specify its intended
beneficiary who may be anyone who has not yet
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commenced grade 11.
g) Requires that the tuition certificate be valid
for up to 30 years from the
purchased date.
h) Limits the use of tuition certificates
to undergraduate tuition and fees at the California
State University (CSU), the University of California
(UC), or independent institutions of higher education.
i) Prohibits tuition certificates from being used to
cover the cost of textbook,
supplies, or living expenses, including, but not
necessarily limited to, food, housing, and
transportation.
j) Provides for the initial investment to be
returned to the individual who
purchased the certificate, with interest and prohibits
the returned investment from being subject to a tax
penalty, if the intended beneficiary of a tuition
certificate is unable to, or chooses not to, attend
the institution issuing the certificate.
3) Establishes a separate fund within the State Treasury for
the California Covenants Program and:
a) Specifies that moneys received by the Treasurer
from the sale of tuition
certificates and bonds be deposited into that fund.
b) Authorizes the Treasurer to issue bonds backed by
the tuition certificate
revenues and specifies that bond proceeds be deposited
in the program fund.
c) Authorizes the Treasurer, upon appropriation in
the
Annual Budget Act, to allocate moneys in the fund to
CSU, UC and
participating independent institutions of higher
education to cover tuition
and fees of beneficiaries of the program during that
AB 1463 (Gatto) Page 5
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fiscal year.
4) Requires the Director of Finance to determine each fiscal
year whether there are sufficient funds to implement the
program in that year and communicate this determination to
the Treasurer in a timely manner.
5) Specifies that for taxable years beginning on or after
January 1, 2018, gross income does not include:
a) Moneys invested by the taxpayer,
including interest accrued by that investment, in the
California Covenants Program.
b) Disbursements to the taxpayer from the California
Covenants Program for
use by a beneficiary at an educational institution
that participates in the
program.
c) Tax, additions to tax, and penalties shall not
apply to an amount disbursed
to a taxpayer where the beneficiary does not attend an
educational
institution that participates in the California Covenants
Program if the full
amount, including interest, is returned to the taxpayer.
6) Requires the California State University (CSU), and
requests the University of California (UC) and independent
institutions to comply with the provisions of the bill.
7) Authorizes the Treasurer, in collaboration with the CSU
Trustees and UC Regents to establish administrative
guidelines and other requirements for purposes of
implementing the provisions of the bill.
8) Makes the bill an urgency measure in order to immediately
address heightened concerns about the rising costs of
obtaining a postsecondary degree in this state.
STAFF COMMENTS
1) Rationale for the bill. This bill emerges out of a concern
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regarding the cost of college tuition. According to the
author from 2004 to 2013, the average tuition at UC and CSU
more than doubled and tuition increases have heightened
concerns about the affordability of a college education.
The author asserts that this bill would help families save
for college by allowing the purchase of tuition
certificates at today's rates which then could be redeemed
in future years at participating colleges.
2) Recent gut and amend. This bill was recently gutted and
amended to address a topic that has not been heard by any
previous policy committee. This bill establishes a program
that could effectively create a tax shelter for those
purchasers who have their initial investment returned. The
invested amount will not be subject to any tax treatment at
the time of investment nor at the time that the initial
investment is returned. Further, the Treasurer would be
required to return the initial investment with interest.
The bill raises a number of complex policy questions
regarding tax treatment and administration of financial
aid. The Committee may wish to consider whether a bill that
raises such a multitude of serious policy questions would
be better addressed through the regular legislative
timelines. This bill was gutted and amended on June 23; the
Legislature was subsequently in recess from July 1 to
August 1.
3) Is another tuition assistance program necessary? This bill
limits the use of tuition certificates to the cost of
tuition while the existing ScholarShare program allows
savings to be used for numerous educationally-related
expenses. Further, between existing state, federal and
institutional aid programs, many families with financial
need pay no tuition at CSU and UC. These programs include
all of the following:
a) Cal Grant program. The Cal Grant program
provides grants to financially needy students to
attend college at the California Community Colleges,
CSU and UC, Private Non-Profit Independent Colleges
and Universities, and eligible Private For-Profit
Colleges. Cal Grants cover up to $12,240 annually for
up to four years of assistance with tuition and
system-wide fees and eligibility is based upon
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financial need. Under the Cal Grant program a student
who is exempt from nonresident tuition as referenced
in the bill qualify for California Dream Act Aid.
b) Middle Class Scholarship Program. The Middle
Class Scholarship will provide up to 40% of statewide
fees and tuition at the University of California (UC)
and the California State University (CSU) campuses for
families with assets and income up to $150,000 that do
not qualify for other financial aid programs.
c) Federal Pell Grant program. Currently, the Pell
Grant covers up to $5,775 annually depending on
financial need. The grant can be used toward the cost
of attendance including tuition and fees; room and
board; and books, supplies and transportation.
d) Institutional aid. Institutional aid policies at
each campus of the CSU and UC and independent
institutions offer tuition assistance directly to
students.
e) Savings program. The Golden State ScholarShare
Trust Program, administered by the State Treasurer's
Office, which offers California families a
tax-advantaged college tuition savings plan of
investment and savings for a college education with
state tax-deferred and federal tax-free benefits. The
money contributed by the participant to the account is
placed in a trust, and invested in special investment
portfolios. The program offers federal and California
income tax-free treatment for qualified withdrawals
from a ScholarShare account. A qualified withdrawal
is one that is used to pay for higher education
expenses including but not limited tuition, fees,
books or supplies at public and private institutions
and certain proprietary schools throughout the
country.
4) Who pays the difference between the value of a tuition
certificate and actual cost of tuition? The tuition
certificate appears to work like a voucher where an
individual can purchase a certificate at $300 increments
that would go towards a percentage of tuition. For example,
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$300 would purchase a certain percentage of tuition at
2018-19 rates. The certificate would cover annual tuition
and fee increases of 7.5% or less. The tuition certificate
is valid for up to 30 years from the purchased date and the
gap between the actual cost of tuition and the value of the
certificate could grow exponentially. As tuition fluctuates
over time, it is unclear whether institutions, the state,
tax payers or the purchaser would make up the difference,
should tuition increase beyond the 7.5%.
How would funds be invested to produce the returns needed to
cover the 7.5% annual increases?
Could the state be responsible for the investment risk if
tuition growth out paces the 7.5% growth that is required of the
tuition certificate?
Would the state reimburse institutions based on tuition
increases of 7.5% or less?
5) What has been the experience in other states? There are 17
states currently operating prepaid tuition plans, four
structured by unit price and 13 by tuition contracts which
resemble the model represented by this bill. Several of
these programs have experienced some fiscal difficulty
leading to closure for new purchasers, limitations on
purchases, and/or significantly increased premiums. Of the
four structured by unit purchase, three are closed to new
purchases (Ohio, Washington and Texas). Of the 13
structured by contract, six are closed to new purchases
(Alabama, Kentucky, Mississippi, South Carolina, Texas and
West Virginia). It is unclear when or if any of the 17
states will reopen their program as many of the programs
have been closed since 2004. In addition, at least two
other states (New Mexico and Tennessee) previously operated
prepaid tuition plans but recently terminated their
programs. Tennessee for example, shut down the program due
to weak investment earnings and steep tuition increases.
Staff notes that California has never offered a prepaid
college savings plan.
6) Could this program create a false sense of security for
certificate beneficiaries? Investment in a prepaid tuition
program can provide families with peace of mind regarding
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their ability to meet future fee increases and enroll in an
institution of their choice, to the extent the student is
hoping to attend a California State University (CSU),
University of California (UC) or an independent
institution. However, this may not be the case since CSU is
required to comply but participation for UC and independent
institutions is voluntary under the provisions of the bill.
In addition, the actual price of attendance at any of these
institutions is greater than the amount of fees and
includes books, supplies and other living expenses not
covered by the tuition certificate proposed by this bill.
Funding for this program is based on participation and requires
the Director of Finance to each fiscal year determine whether
there are sufficient funds to implement the program in that
year. What assurances do families have that the program will be
funded every year?
7) Cart before the horse. Since the 1996 sunset of the
Maddy-Dills Act, the state has lacked a clear policy on
higher education fees. The Maddy-Dills Act previously
required fees to be (1) gradual, moderate and predictable,
(2) limited fee increases to not more than 10 percent a
year, and (3) fixed at least ten months prior to the fall
term in which they were to become effective. The policy
also required sufficient financial aid to offset fee
increases. However, flexibility was provided when the state
faced serious budgetary challenges in order to provide
relief to institutions suffering from a lack of state
General Fund support.
Historically, fees have fluctuated in response to the
State's fiscal condition and the stated needs of UC and
CSU, as negotiated in the budget deliberations. The charts
below illustrate the fluctuation in fees at the UC and the
CSU over the last several years.
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--------------------------------------------
| CSU |
| Mandatory Systemwide |
| Student Fees |
| Resident Undergraduates |
--------------------------------------------
|--------------+--------------+--------------|
| | | |
| Year | Fee Amount | Percent |
| | | Change from |
| | | Prior year |
|--------------+--------------+--------------|
| 1997-98 | $1584 | N/A |
|--------------+--------------+--------------|
| 1998-99 | $1,506 | -4.9% |
|--------------+--------------+--------------|
| 1999-00 | $1,428 | -5.2 % |
|--------------+--------------+--------------|
| 2000-01 | $1,428 | 0.0% |
|--------------+--------------+--------------|
| 2001-02 | $1,428 | 0.0% |
|--------------+--------------+--------------|
| 2002-03 | $1,500 | 5.0% |
|--------------+--------------+--------------|
| 2003-04 | $2,046 | 36.4% |
|--------------+--------------+--------------|
| 2004-05 | $2,334 | 14.1% |
|--------------+--------------+--------------|
| 2005-06 | $2,520 | 8.0% |
|--------------+--------------+--------------|
| 2006-07 | $2,520 | 0.0% |
|--------------+--------------+--------------|
| 2007-08 | $2,772 | 10.0% |
|--------------+--------------+--------------|
| 2008-09 | $3,048 | 10.0% |
|--------------+--------------+--------------|
| 2009-10 | $4,026 | 32.1% |
|--------------+--------------+--------------|
| 2010-11 | $4,429 | 10.0% |
|--------------+--------------+--------------|
| 2011-12 | $5,472 | 23.5% |
|--------------+--------------+--------------|
| 2012-13 | $5,472 | 0% |
|--------------+--------------+--------------|
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| 2013-14 | $5,472 | 0% |
|--------------+--------------+--------------|
| 2014-15 | $5,472 | 0% |
|--------------+--------------+--------------|
| 2015-16 | $5,472 |0% |
| | | |
--------------------------------------------
--------------------------------------------
| UC |
| Mandatory Systemwide |
| Student Fees |
| Resident Undergraduates |
--------------------------------------------
|--------------+--------------+--------------|
| | | |
| Year | Fee Amount | Percent |
| | | Change from |
| | | Prior year |
|--------------+--------------+--------------|
| 1997-98 | $3,799 | N/A |
|--------------+--------------+--------------|
| 1998-99 | $3,609 | -5.0% |
|--------------+--------------+--------------|
| 1999-00 | $3,429 | -5.0% |
|--------------+--------------+--------------|
| 2000-01 | $3,429 | 0.0% |
|--------------+--------------+--------------|
| 2001-02 | $3,429 | 0.0% |
|--------------+--------------+--------------|
| 2002-03 | $3,834 | 11.8% |
|--------------+--------------+--------------|
| 2003-04 | $4,984 | 30.0% |
|--------------+--------------+--------------|
| 2004-05 | $5,684 | 14.0% |
|--------------+--------------+--------------|
| 2005-06 | $6,141 | 8.0% |
|--------------+--------------+--------------|
| 2006-07 | $6,141 | 0.0% |
|--------------+--------------+--------------|
| 2007-08 | $6,636 | 8.1% |
|--------------+--------------+--------------|
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| 2008-09 | $7,126 | 7.4% |
|--------------+--------------+--------------|
| 2009-10 | $8,958 | 25.7% |
|--------------+--------------+--------------|
| 2010-11 | $10,302 | 15.0% |
|--------------+--------------+--------------|
| 2011-12 | $12,192 | 18.3% |
|--------------+--------------+--------------|
| 2012-13 | $12,192 | 0% |
|--------------+--------------+--------------|
| 2013-14 | $12,192 | 0% |
|--------------+--------------+--------------|
| 2014-15 | $12,192 | 0% |
|--------------+--------------+--------------|
| 2015-16 | $12,240 |5% |
| | | |
--------------------------------------------
To date, the state has no long-term policy regarding the way in
which mandatory student fees are determined. In the absence of
such a policy, should the state adopt a prepaid tuition program
when the cost of tuition going into the future cannot be
predicted?
8) Other policy alternatives. The Committee may wish to
consider whether families would be better served through
enhanced state aid programs or the ScholarShare 529 savings
plan rather than establishing a new program that could pass
investment risks to public institutions or the state.
Additionally, the Committee may want to consider:
If state and federal assistance programs
currently cover tuition for needy families and because
the certificate solely covers tuition, who would
benefit from this program?
Would this program primarily benefit upper
income individuals who have the ability to purchase
tuition certificates?
If the intent is to serve financially needy
students, is a new tuition program necessary or could
students be better served by enhancing existing aid
programs to cover the total cost of attendance such as
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increasing the Cal Grant B access award?
Could this bill result in transferring
investment risk to a public institution or to the
state to cover the difference between the amount
invested and the cost of tuition at the time of
attendance for individuals who may not be financially
needy?
Should public funds be used to subsidize tax
liability for individuals who have their initial
investment returned?
1) Double referral. This bill contains provisions that allow
purchasers to recover their initial investment including
interest accrued without tax penalty. Without a penalty for
not using funds for tuition (intended purpose), is there
potential for abuse? Should they be exempted from tax
penalties? This bill has been double referred where these
questions can be better assessed by the Committee on
Governance and Finance.
SUPPORT
None received.
OPPOSITION
None received.
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