Did Nevada’s most powerful legislators, sitting as the Interim Finance Committee last year, illegally plunder millions from a college savings program serving almost 10,000 Nevada families?
Chaired by Senate Majority Leader Steven Horsford, the IFC on July 21, 2010, took $4.2 million out of the Nevada College Savings Plans’ endowment fund and used it to fill a growing hole in the state’s Millennium Scholarship program.
Problem was, the endowment funds are under the legal authority of the College Savings Board — a point acknowledged by Horsford just a month earlier — and board trustees had never given their permission.
Moreover, the trustees — to deal with an at-least $16.3 million deficit in Nevada’s Prepaid Tuition Program, for which they have fiduciary responsibility — had already, three months earlier, committed nearly all of those endowment funds.
Unanimously, at the trustees’ April 28 meeting, trustees had voted to transfer at least $1.32 million per year, over the coming 10 years — as recommended by the program’s actuary — from the endowment fund into the Prepaid program’s trust fund. For the first year, 2010, the payment was to be even higher, at $1.75 million.
The program’s full name is the Nevada Higher Education Prepaid Tuition Program. It was established by the state under the federal IRS code and NRS Chapter 353B as a tax-advantaged way for Nevada parents, grandparents and others to lock in future college tuition rates at today’s prices, years in advance of when the beneficiary students enter college. Contract purchasers can choose from:
- Plans from one to four years’ length,
- Plans with varying payments schedules, and
- Plans for different kinds of schools — in-state or out-of-state schools, public or private.
As of a year ago, 9,933 Nevadans owned contracts for prepaid tuition with the College Savings Board, according to its actuary. Those contracts are not backed by the State of Nevada, however, but solely by the fiduciary relationship between board trustees and the investors.
Those Nevadans — according to a nationally experienced securities attorney consulted by Nevada Journal — may now have legal grounds to sue the College Savings Board, demanding that it seek to recover the $4.2 million taken by the IFC.
Because the Prepaid Tuition program was damaged by the IFC action — made financially weaker than it otherwise would have been — investors in the program would have legal standing against the program, said the attorney, who was consulted on a confidential basis.
While the investors cannot sue the state directly, as they themselves have not yet been personally damaged by the IFC taking of the savings endowment moneys, they can sue the College Savings Board to compel it to perform its fiduciary responsibility in behalf of the Prepaid Tuition program’s trust fund, according to the attorney.
Possible targets for legal action by the College Savings Board could include the board’s auditors and the board’s actuary — both of whom missed the significance of the taking in their reports — and the State of Nevada, given the IFC action.
During the June 24, 2010, meeting of the IFC, Chairman Steven Horsford asked about, and was informed of, purposes for which the College Savings Board had already committed the endowment-fund monies. And although the board had approved a transfer of $200,000 to help the Millennium Scholarship program, Horsford wanted much more.
According to minutes, Horsford “speculated that at the time the board made the decisions, the commitments to new programs made sense. However, with a decline in tobacco revenue funds, Senator Horsford thought it made sense to reconsider those decisions in order to honor the first commitment, which was to students and their families for scholarships.”
Steve George, chief of staff for the Treasurer’s office, “explained that the Treasurer’s office did not make those decisions; they were made by the College Savings Board, of which the Treasurer was one of five members….”
“Cochair Horsford remarked the use of the funds was at the discretion of the College Savings Board. [But he] suggested the Committee approve an amount to increase the reserve transfer for a total of $2.8 million … and ask[ed] the College Savings Board to return to IFC, should there be an additional shortfall projected for the remainder of fiscal year 2010, with any additional requests, some of which may include reconsideration of some of the marketing, outreach and financial literacy programs originally planned.”
John Oceguera, then the incoming speaker of the Assembly, said he “agreed that marketing, financial literacy and fund stabilization were worthwhile areas [for the College Savings Board] to fund,” but he wanted the Treasurer’s office to bring him “more information on the computer upgrade and the financial monitoring of the accounts.”
Senior Deputy Treasurer Karen Duddlesten “replied that the College Savings Board considered the financial monitoring and Prepaid Tuition computer system to be critical and necessary to protect the state’s interests.”
Sen. Bill Raggio said he was concerned to hear suggestions “to transfer more from the College Savings Program to the Millennium Scholarship Program.” He emphasized the difference between a trust program, which was funded by voluntary payments on behalf of students, and the scholarship program.
“Such a transfer could be a violation of the trust,” said Raggio, according to meeting minutes. He added that he “feared further withdrawals from the College Savings Program could put that program in jeopardy.”
It was legislation passed by Nevada lawmakers in 2009, however, that had set the stage for what Raggio saw as possible damage to the Prepaid Tuition trust. Senate Bill 63 had moved the college savings endowment fund — which receives its moneys from fees paid by firms that manage investments for three other college savings plans — out from under the clear authority of the College Savings Board and made it instead part of the state General Fund. By that action, legislators implicitly subordinated the highest standard of care at equity and law to a lower one. They made the fiduciary relationship between College Savings trustees and the parents and grandparents who invest in the tuition plans something secondary to the political goals and relationships of the lawmakers themselves.
By the July IFC meeting, the effort to take the money had gathered full momentum. Behind the scenes, IFC staffers had requested and received information on the state of the endowment fund from the Treasurer’s office. They appeared to be following a road map originally laid out by Treasurer Kate Marshall and her staff.
In March, Marshall had proposed the College Savings Board take $2 million out of its endowment fund to help fill the growing hole in the Millennium Scholarship kitty. But a College Savings Board majority proceeded to reject Marshall’s proposal, offering $200,000 instead.
Now the IFC was after much more, and the Treasurer’s chief of staff, Steve George, was encouraging them. Just 21 days earlier the auditor’s report had showed the Prepaid Tuition trust had a $9,708,161 deficit. However, George was boasting to the committee that “the Prepaid Tuition Program was currently funded at approximately 100 percent.”
He went further. The IFC was implementing, he said, “the decision that Treasurer Marshall has been looking at all along from when this first came up,” namely, “how can we get the funding” for the Millennium Scholarship program.
“I can say for Treasurer Marshall,” continued George, “I’m very pleased with what is going on here today.
“It will not adversely affect College Savings. It will not adversely affect Nevada Prepaid, and it will fund the Millennium Scholarship through this next year…. So I think it is a good decision you’re making today.”
The IFC then proceeded to confiscate essentially all the money in the endowment account. In so doing, the committee not only killed the board’s effort to directly address the Prepaid Tuition Program’s deficit, but also its plan to increase program marketing. More contract sales, actuary Alan Perry had told the board, would be an exceptionally effective way to strengthen the program.
Had the behind-the-scenes cooperation behind IFC staff and the Treasurer’s office gone beyond the requirements of law, circumventing the position adopted by the College Savings Board? A statement by Sen. Bob Coffin appeared to suggest as much.
“I’d like to thank Treasurer Marshall and the staff — Steve [George] — for working with us and our staff to arrive at slicing this baby without killing both ends,” he said. “It’s not easy.”
A bit later Coffin added: “I was reluctant to support any transfer … but … looking at the way it’s been worked out between the Treasurer’s office and staff,” he found it acceptable.
Perhaps another piece of evidence was a paradoxically loud silence — by lawmakers, legislative staff and committee witnesses — on the important question left resonating after June’s IFC meeting: Had or had not the College Savings Board actually agreed to Sen. Horsford’s “request” that it kick in more dollars from the endowment fund?
The fact than no member of the IFC or witness before it even brought up the question during the entire meeting clearly suggests that all the players had been informed exactly what was going on.
Yet one more factor could have played a part in the public “unmentionability” of the board’s refusal to acquiesce to Horsford’s demand. A massive audience of Millennium Scholarship recipients and college student politicians from all around the state were attending the IFC meeting by teleconference. Approximately half of the roughly hour-long meeting was devoted to hearing the students’ entreaties to get somebody’s money, somewhere, to fill the hole in the Millennium Scholarship coffers.
It was clear that few people understood why the Nevada College Savings trustees had resisted offering up the endowment funds to fill the Millennium Scholarship hole. Even the IFC’s legislative counsel staffers, according to minutes of the April 19, 2010 College Savings Board meeting, had been asking Treasurer Marshall why the Prepaid program “had to be funded at 120 percent, or even at 100 percent,” and why it could not, like the state’s pension plans, be underfunded.
The reasons were several, according to board minutes and trustees’ statements. One was the recommendation of the actuary firm, Milliman, hired to advise the board on such matters. Given recent pronounced market volatility, said Milliman’s Alan Perry, “he would prefer to see the program well above 100 percent, possibly at 120 percent funded.” That meant a reserve of 15 to 20 percent.
Another important reason for caution was the very real risk that the Prepaid plans’ investments would not achieve the highly optimistic rate of expected return that the actuaries had projected for the Prepaid fund — 7.25 percent. That was the rate of return needed to be able to pay out the contracted future tuitions that Nevadans had purchased.
And the Board had genuine reason for concern, since the returns between October 2007 and June 30, 2010 had approximated a negative 1.7 percent, as the trustees would soon learn at their August 30, 2010 meeting.
A unique challenge facing the Prepaid Savings program was that it had to cope with not just one unknown, many years in advance — the future rate of return the trust fund would be receiving — but yet a second unknown: the level of tuition that colleges would be charging, years in the future when the prepaid contracts would be cashed in. While the Nevada System of Higher Education was insisting that its tuition rates would not be going up, it was clear to realists on the board that the rates would — as indeed happened.
For all those reasons, minutes show, trustees Michael Leonard and Bill Hartman frequently made the point that their clear, primary fiduciary responsibility, under the law, was to ensure so far as possible the health and viability of the Prepaid tuition program. The Millennium Scholarship program was the state’s responsibility.
So, the IFC ignored their concerns and transferred — possibly breaking the law by doing so — $4.2 million to the Millennium Scholarship program. And even if the IFC’s actions are ultimately held to have been legal, they did damage the Prepaid Savings program and thus also to the parents and grandparents who had invested money for their young family members’ education.
Sen. Horsford did not return repeated calls for comment.
Steven Miller is the managing editor of Nevada Journal, a publication of the Nevada Policy Research Institute.