Sarah and Gwen: the Two-Headed Monster

This blog is about everything involving Lexington, KY or anything else we feel like yapping about.

Thursday, March 31, 2005

Alice Forgy Kerr's Letter on KAPT

Below is a copy of one of the letters State Senator, Alice Forgy Kerr is sending out in response to the overwhelming disapproval Kentucky citizens have voiced over the senate raid of the KAPT funds. I post the entire letter because I think it is important to keep remarks in the context of the writer's intent. I disagree with the senator on several points and will go into the areas of disagreement in later posts. However, for the moment I give the forum to Senator Kerr:

I appreciate the time you have taken to contact me and to express your concern about the Kentucky Affordable Prepaid Tuition program (KAPT). Let me assure you that neither the full General Assembly nor the Senate has ever transferred private investment funds out of the KAPT program into the state budget. To be frank, I'm astounded by the misinformation that State
Treasurer Jonathan Miller has been circulating.

As I'm sure you're aware, in 2000 the General Assembly created the KAPT program to provide Kentucky families with the ability to invest in future college credits. The program was to be funded by combining the contributions of all participants to maximize benefits from institutional investment activities. According to the KAPT Web site, the tuition guarantee is contingent upon the fund consistently meeting its investment targets.

What Kentuckians may not realize is that, in the event of a major downturn in the market, KAPT is supposed to be "backed" by 75 percent of the State Treasurer's Unclaimed Property Fund. The problem is that a separate State Treasurer's Unclaimed Property Fund account does not exist. The unclaimed property fund is really part of the larger General Fund that state
government uses to pay its bills. This ultimately makes the state's General Fund the "guarantor" of the KAPT program.

With this fact in mind, the legislature closed new enrollment to the KAPT program from 2002 to 2004 due to concerns regarding its potential drain on the state's General Fund. KAPT investments were not keeping pace with double-digit increases in college tuition. When the law enacting the moratorium ended the Senate and the Governor advocated for continuing the
moratorium even though the bill (2004 budget bill) that included the moratorium language wasn't passed.

After the adjournment of the 2004 Regular Session, KAPT's governing board chose to ignore our requests to continue the moratorium and began enrolling new members into the program. The board took advantage of the absence of a law barring enrollment and opened the General Fund to further liability.

As tuition increased and KAPT enrollment continued to outpace the KAPT investment growth, the June 2004 actuarial analysis showed the expected value of liabilities as $103,664,716 and the value of assets as $89,964,665 for a difference of $13,700,051 or -13.2% of liabilities. Consequently, before the General Assembly began its budget deliberations this year,
Treasurer Miller and the KAPT board attempted to transfer $13.7 million from the General Fund to the KAPT reserve to cover the program's unfunded liabilities. While the infusion of the $13.7 million from the General Fund certainly bolstered the actuarial outlook for KAPT, opening the program to new enrollees last summer simply served to further increase the unfunded
liabilities of the program - an avoidable error by the board.

In February, the Senate transferred the $13.7 million back to the General Fund in its version of the state budget. The House agreed to the transfer. The widely misreported $13.7 million "raid" of the KAPT fund was merely the General Assembly transferring its funds back from the KAPT program's reserves. These were not private funds invested by Kentucky families in
the pre-paid tuition program.

I certainly appreciate your concerns about the actuarial soundness of the KAPT program and the reversal of the General Fund transfer to KAPT. Nonetheless, it is important to fully understand the context in which these actions occurred and to know that the funds recouped in the final version of the current budget bill are not, and have never been, private funds but are
the state's General Fund dollars.

Regarding current enrollees of the KAPT program, the goal of the entire General Assembly is to ensure that the program is fiscally sound now and in the future. However, the college education of young Kentuckians and the health of the general fund should not be placed into jeopardy simply to provide Jonathan Miller with a way to promote his political ambitions. As
an aside, Miller's unfounded attack on the Senate is made all the worse because he has actually used investment income from KAPT to pay for television ads promoting his political future.

Thank you again for taking the time to contact me regarding the KAPT program. I hope this information has been helpful to you. Please feel free to contact me anytime regarding this issue or any others that may arise.

Best regards,
Alice Forgy Kerr
State Senator


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