The Michigan Education Trust: A Political Economy Perspective

I. Introduction

On December 23, 1986, the Michigan Education Trust (MET) was signed into law, making Michigan the first state to implement such a financing program for higher education. Ten other states subsequently passed guaranteed tuition bills, although only two – Florida and Wyoming – have operational programs. As a prototype for prepaid tuition plans, Michigan represents the test case for programs that promise to "guarantee tomorrow's college tuition costs at today's prices."

MET "guarantees in-state ... undergraduate tuition and mandatory fees" at Michigan colleges and universities "for the number of credit hours purchased." The logic behind the program is basically simple. "Parents, grandparents, businesses and others" may "prepurchase and guarantee college tuition for a Michigan child at any of Michigan's public colleges or universities." MET "will then use the funds and investment earnings to pay the respective college tuition and mandatory fees for each student, after he or she is accepted by and enters the college of his or her choice." [1]

State Treasurer Robert Bowman, widely credited as MET's architect, describes the trust as an insurance program for higher education, similar to the Federal Deposit Insurance Corporation (FDIC). "This is insurance – you buy insurance to protect against the best of times and the worst of times," Mr. Bowman has stated. [2] "It's flexibility and peace of mind that your child can attend the university he or she wants." [3] Promotional literature states, "MET provides peace of mind to parents, and hope and incentive to children." [4]

MET's stated purpose is to address the problem of rising tuition costs for Michigan's middle class. "Although great progress has been made during the past several years to stem the rising tide of tuition increases in Michigan," MET literature states, "it is unrealistic to believe that inflation, declining federal support, an uncertain international economy and other factors won't continue to push tuition upward." Mr. Bowman contends MET appeals to the mass of individuals who "don't have financial planners and don't read The Wall Street Journal." [5]

Much has been written about MET's actuarial soundness and the fund's much-discussed guarantee, but the program has not been studied from a political economy perspective. What of the economic assumptions underlying the program, or the probable consequences on institutions of higher learning and taxpayers? This study proposes filling that gap by analyzing MET from the perspective of the economic theory of politics and by reviewing the program's claims and consequences.

II. The National Trend Away From College Prepaid Tuition

Before analyzing MET, it is instructive to examine the performance of college prepaid tuition programs in other states. State Treasurer Bowman has characterized MET as a national prototype, a solution to the problem of rising college tuition costs for the middle class. "(Mr.) Bowman proudly notes," reports The New Republic, one of the nation's leading newsweeklies, "that many states have followed Michigan's lead" in establishing prepaid tuition plans. [6]

MET promotional literature states, "Michigan is the first state to adopt such a program based or. Governor Blanchard's insistence that state government work harder and smarter to meet the needs of Michigan's citizens. However, nine other states ... have adopted similar programs." [7]

A review of other states' programs, however, reveals that as of late 1989, only two have operational prepaid tuition plans patterned, in part, after MET, while 13 states have operational savings bond programs. Eleven states, including Michigan, have passed guaranteed tuition bills, while 21 states have passed savings bond programs. The evidence suggests that savings bond programs, not prepaid tuition plans, have emerged as the trend nationwide at the public policy level. [8]

Further proof of this national trend away from prepaid tuition plans is the fact that since April 1988, five states have approved MET-style programs (one which is operational), while 18 states have passed savings bond bills. States that have passed guaranteed tuition bills are Michigan (December 1986); Wyoming (February 1987); Tennessee (May 1987); Maine (June 1987); Florida and Indiana (July 1987); Missouri (June 1988); Oklahoma and West Virginia (July 1988); Alabama (May 1989); and Louisiana (June 1989). States that have passed savings bond bills are North Carolina (July 1987); Illinois (September 1987); Washington (March 1988); Colorado, Kentucky, Minnesota, North Dakota and Virginia (April 1988); Iowa and Oregon (May 1988); Missouri and Rhode Island (June 1988); Connecticut, Delaware and West Virginia (July 1988); Hawaii (November 1988); Arkansas (March 1989); Tennessee (April 1989); Louisiana and New Hampshire (June 1989); Ohio and Oregon (July 1989); and Wisconsin (September 1989). [9]

National interest in prepaid tuition programs began to wane in 1988 after Duquesne University in Pittsburgh, Pennsylvania, dismantled its own prepaid program. Economic analysis determined that Duquesne would have to realize annual earnings of at least 14 percent to keep pace with annual increases in higher education costs. [10] It is interesting to note that -MET must obtain a similar pre-tax rate of return of approximately 14 percent because of an unfavorable Internal Revenue Service ruling. Duquesne officials concluded their plan could net be justified on economic grounds; Michigan officials decided otherwise, and continue to endorse MET despite the IRS rulinq, which found that earnings from the fund would be liable for a federal trust tax, and that beneficiaries would have to pay taxes on the earnings of the contract in the year it was redeemed.

Officials in other states have not shared this enthusiasm, given the IRS ruling. "...It appears that legislation providing for college savings plans is gaining greater favor overall than prepaid tuition plans," researchers for the Education Commission of the States concluded in a 1988 national study. The IRS ruling, along with the Duquesne episode, is described as "further cooling the enthusiasm for tuition pre-payment plans...." [11]

Indiana's experience is typical of states which have established college prepaid tuition programs patterned after MET. Founded in 1987, Indiana's Baccalaureate Education System Trust (BEST) became inactive after two state panels concluded the plan could not be justified economically, given the IRS ruling. "They (the panels) didn't think the state could get the necessary rate of return without IRS tax exempt status," said Deputy Commissioner Henry Hector of the Indiana Commission for Higher Education. "There was also concern that the program was a bad investment for consumers." Officials of public universities, Hector added, opposed BEST because the program would have limited their independence, a concern voiced by Michigan educators. [12]

Maine's Student Educational Enhancement Deposit (SEED) program was ruled unconstitutional by the state Attorney General, who concluded the state would be forced to assume a moral obligation and cover all debts if the plan failed. Maine's Attorney General declined to request an IRS ruling for SEED because the program was patterned after MET, which had already been denied federal tax-exempt status.

The IRS ruling affected Missouri's program, which is "in limbo," according to Dinae Stieferman of the Missouri Office of Administration. Missouri officials are rewriting the Missouri Access to Higher Education Act (MAHE), which requires a favorable IRS ruling before any contracts are sold. The Missouri program, patterned after MET, has also had problems with securities laws in the state. Stieferman predicts the program will not be implemented given these considerations.

Oklahoma's Tuition Trust Act (OTTA) has also been affected by the IRS ruling. Implementation of the program, patterned after MET, is contingent upon the receipt of a favorable ruling from the IRS, which has not been forthcoming.

Tennessee adopted the Baccalaureate Education System Trust Act (BEST), but officials altered the program to a college savings bend system because of tax considerations, including the IRS ruling. This development occurred after the state treasurer's office raised concerns about the program's ability to pay administrative costs while keeping pace with tuition increases. Tennessee officials assumed a five percent increase, but tuition has gone up eight to 15 percent, a pattern similar to Michigan, where officials assumed 7.3 percent annual increases, a rate yet to be achieved. Although Tennessee's BEST board had been appointed, they asked the governor to be abolished. The panel also proposed a savings bond program, subsequently adopted.

The West Virginia Higher Education Tuition Trust Act was approved contingent upon a ruling from the IRS that it would be tax-exempt. In light of the IRS' ruling regarding MET, the plan has not been implemented.

Florida and Wyoming have programs that are patterned, in part, after MET. Unlike Michigan, Florida's legislature agreed to guarantee the Florida Prepaid Postsecondary Education Expense Program with general revenue funds in case the fund encounters a shortfall. Thus, the Florida plan provides a legal, rather than rhetorical guarantee, though at the expense of taxpayers. Wyoming's Advance Payment of Higher Education Costs Act differs from MET because it is active at only one school, the University of Wyoming. [13]

"The lure of (prepaid tuition) plans is obvious – the plans are perceived to be like an insurance policy that gives parents the security of paid-up tuition in a decade when the costs of college are escalating at twice the rate of the consumer price index," researchers for the Education Commission of the States noted in a 1989 study. "However, from the state's perspective, policymakers have to ask themselves whether or not such plans merely shift the risk of unknown inflationary costs from the parent to the state. And, if the state cannot invest the -funds to generate after-tax earnings that at least meet the inflationary costs of higher education, who pays the difference? Will the state subsidize the pre-paid contracts through general revenues or tuition increases paid by current students? Or, will states renege on the so-called 'guarantee' by paying beneficiaries less than the full tuition cost when the contract comes due? As these plans are not backed up by the full faith and credit of the state, the status of the 'guarantee' in these prepay plans is subject to dispute. In judging the merit and value of these plans, these are the kinds of questions policymakers are facing." [14]

A. College Savings Bond Programs

Widespread skepticism about prepaid tuition plans patterned after MET emerged in 1988, when states "largely began to prefer the college savings bond concept engineered by Illinois," researchers Aims McGuinness, Jr. , and Christine Paulson note in their 1989 survey for the Education Commission of the States. [15] Subsequently, Illinois' Baccalaureate Savings Act has emerged as the model for college savings bond programs nationwide. In January 1988, $90 million worth of bonds were sold in the first program's first sale, with demand possibly as high as $270 million. During the second sale, in September 1988, $255 million worth of bonds were sold, with demand as high as $400 million. Future sales are planned for the bands, which may be used for anything, including non-educational purposes.

Marketed as zero-coupon bonds that cost approximately $935 to $3,700, the Illinois program offers a $5,000 maturity over a five-to-20-year period. The Illinois zeros pay a rate of return that varies from 6.9 percent short-term to eight percent long-term, and a four percent annual bonus if they are used for tuition at in-state institutions of higher education. The bonus amounts to $20 per year per bond. Added incentives are the denomination, which is smaller than regular Illinois general obligation bonds. Another important aspect of the program is the educational and marketing effort required to inform parents about the options available for financing a higher education and the need to save money in advance. Finally, the bonds are tax-free and offer flexibility because they can also be used to pay for tuition at private colleges.

College savings bonds hold a more immediate, financial interest for states, in addition to the benefits of encouraging families to save for college. Unlike general obligation bonds, states issuing zero-coupon bonds are not liable for any interest until maturity because the interest is imputed at issuance. By comparison, general obligation bonds earn interest payable to bondholders every six months.

Researchers McGuinness and Paulson note that college savings bonds do not "pose any special risk to states in terms of an unknown financial liability. Unlike tuition pre-payment plans, college savings bond programs do not pretend to promise that the return on the security will keep pace with the cost of higher education ...Primarily because of the fewer risks involved, states in 1988 and 1989 have been more prone to adopt the college savings bond model."

One criticism of college savings bonds, McGuinness and Paulson note, is that "this sort of state involvement tends to give the appearance of official approval or license to a college savings program that may or may not be better than other alternatives. However, state officials generally say they are most interested in promoting college savings, rather than the bonds themselves." [17]

III. Security And Simplicity

A. Purpose of MET

State officials contend that MET offers security and simplicity to middle-class families affected by rising college tuition costs. [18] According to State Treasurer Bowman, "This (MET) is truly a savings program for the average family of Michigan." [19] Mr. Bowman has likened MET to an insurance policy, rather than an investment: "If you have homeowner's insurance and your house doesn't burn down, do you feel cheated? That's the nature of an insurance program like MET." [20]

Section 3 of the legislation establishing MET (PA 315 of 1986) sets forth the program's intended purposes:

To encourage education and the means of education.
To maintain state institutions of higher learning by helping to provide a stable financial base to these institutions.
To provide wide and affordable access to state institutions of higher education for the residents of this state.
To encourage attendance at state institutions of higher education.
To provide students and their parents economic protection against rising tuition costs.
To provide students and their parents financing assistance for postsecondary education at a Michigan institution of higher education of their choice.
To help provide the benefits of higher education to the people of this state.
To encourage elementary and secondary students in this state to achieve high standards of performance.

MET promises to increase educational access by reducing the financial burden of higher education. The economist's task is to examine whether the state's chosen means are the most effective for achieving these stated goals. What we must ask ourselves is whether MET is the most effective way to accomplish the goal of increasing educational access for the middle-class.

B. An Overview of The Assumptions

MET is operating under certain well-specified assumptions concerning tuition increases, future market conditions and rates of return on the fund. Parents of children enrolled in MET are operating under an additional assumption – that the program is a future "guarantee" for college tuition.

Officials have stressed this "guarantee" aspect, although the trust is not fully backed by the "full faith and credit" of the State of Michigan. "MET," promotional literature states, "guarantees in-state or in-district undergraduate tuition and mandatory fees" at state public colleges and universities "for the number of credit hours purchased. Parents may guarantee the number of credit hours required for a standard four-year undergraduate degree at any Michigan public college or university. Purchasers may also guarantee less than four years of tuition." [21]

Ultimately, MET is a political, rather than an economic guarantee. Officials understand that defaulting on MET would be prohibitively costly because the program's middle and upper-income enrollees would never tolerate such a default. State Treasurer Bowman has conceded as much, stating, "Let's say that something does go wrong with the program, and the state government does step up to it, although as you've both already pointed out, quite correctly, it's not the full faith and credit of the state. It's the full faith and credit of the trust. If we do step up, obviously we're not going to seek a tax increase to step up...what we'll be doing is dedicating more and more of our state revenues to college education from some other budget. (emphasis added). Frankly, I don't see a problem with dedicating more and more of our budget toward education, either K-12 or college education ...if it does (go belly up) we spend more money on college education, I don't think that's so bad." [22] Faced with a MET shortfall, officials would have to allocate money from other state funds, cut other state programs, or, in a worst case scenario, raise taxes.

Turning to the economic assumptions underlying MET, one is faced with a different dilemma: present value analysis reveals that MET is a questionable investment for students at most state universities. Under the MET economic model, tuition increases are expected to average only 7.3 percent per year, the annual rate of return on the pooled resources in the fund is assumed to be 9.75 percent and Michigan economic conditions are generally assumed to continue along a stable path of growth.

The economist can judge the economic wisdom of MET as an investment using present value analysis. Economic theory and common sense suggests that if the cost of a project exceeds the discounted value of the future return then the project is questionable, at least on economic grounds.

Appendix 1 illustrates that MET cannot be justified on economic grounds at 13 of 15 major Michigan public universities: Central Michigan, Eastern Michigan, Ferris State, Grand Valley State, Lake Superior State, Michigan Tech, Northern Michigan, Oakland University, Saginaw Valley, U of M Dearborn, U of M Flint, Wayne State and Western Michigan. MET can be justified on economic grounds using present value analysis only at U of M-Ann Arbor and Michigan State University.

1. Investment Results

One of the most important changes within the MET economic model has been the unfavorable ruling by the IRS with regard to the fund's tax status. To receive an after-tax rate of return of 9.75 percent, MET would have to achieve pre-tax return rates of 14.7 percent, given the federal corporate tax rate of 34 percent: .0975/(1 - .34) = .147 or 14.7%

MET proponents note that the state's money managers have accomplished a rate of return of 15 percent on their funds since 1981. Promotional literature states, "The Treasury Department averaged nearly a 15% compounded annual rate of return since 1981." [23] Treasury's money managers are paid on a performance basis, a feature that allows the state to remain competitive with private money managers in this area.

Given stable economic growth and low inflation, Mr. Bowman notes that the state's money managers have achieved an average 15 percent rate of return in the 1980s. A strong, bull market has undoubtedly helped, but how would slow economic growth, high inflation and/or a weak, bear market affect the ability of the state's money managers to achieve an average 15 percent rate of return? One cannot compare the performance of the state's money managers during bull market periods with bear market periods because they were not allowed to invest in high return securities until the 1980s. MET's managers have never been tested during a bear market. Therefore, a comparison is not possible. A few private money managers have obtained an average 15 percent rate of return over an 18-year cycle, although such an accomplishment is not typical.

The issue of MET actuarial soundness is also worth noting. Treasury Department spokesman Robert Kolt has stated that MET is overfunded by $1.4 million. [24] Interestingly, this figure is similar to the sum of money generated by the most recent increase in MET's enrollment cost. Between the Oct. 2-6, application period, and later that month, when contracts were forwarded to applicants, the state increased MET's cost $176, from $7,664 to $7,840 for newborns. The increase was not announced publicly, and MET applicants learned of it only after receiving their contracts in the mail. Of the original 15,476 applicants, 8,864 enrolled in the program, generating an extra $1,560,064 for the MET fund: $8,864 X $176 = $1,560,064.

Proponents correctly note that enrollment hikes have maintained the fiscal stability of the MET fund. They fail, however, to dwell on the detrimental effect such increases have on MET's access to the middle-class.

2. Enrollment And Tuition Costs

Last year's price hike was not the first for the MET program. In fact, the cost of enrolling in MET has increased dramatically since the program was unveiled in 1986. Initially, MET's cost was estimated at $2,400, [25] but by the time the program got underway in 1988, enrollment was pegged at $6,756, a 182 percent increase.

In August 1989, officials announced that MET's enrollment cost would be increased another 13 percent, from $6,756 to $7,664 for a newborn. As was noted, MET's enrollment cost was increased another $176, an extra three percent from the original 1989 cost, in October.

The public policy implications of these price increases are fairly obvious. To the extent that MET's enrollment cost is increased access for lower-income and middle-class residents is reduced. Rising MET charges are making it more difficult for the program to address the problem of ever-higher tuition costs for Michigan's middle income families.

Officials attribute these price hikes to higher than anticipated tuition increases at state universities. Recall that one of MET's crucial assumptions is that tuition will increase at an average annual rate of only 7.3 percent. If tuition increases at a greater rate than the rate assumed by state officials, they must increase MET's enrollment cost or achieve a greater rate of return to maintain the program's solvency.

How accurate have officials been at estimating tuition? In 1988, MET's first year, tuition increases at Michigan's 15 major public universities averaged 10.02 percent, ranging from 7.8 to 12.94 percent. [26] In 1989, tuition increases at those schools exceeded MET projections for a second consecutive year. Tuition rose at rates of 8.9-9.3 percent at the 15 schools, averaging about 9.1 percent. [27]

Tuition increased at an average annual rate of 8.9 percent during the 10-year period ending in 1987. [28] In each of these three examples, tuition increased at a percentage rate greater than the MET projection of 7.3 percent.

At the same time, Michigan college tuition costs have increased at a percentage rate greater thanthe nation's inflation rate. This period, however, coincides with a sustained period of low inflation. [29]

Table 1

Year	Tuition Increase	CPI

1978	8%	8%
1979	9%	12%
1980	10%	13%
1981	15%	11%
1982	17%	5%
1983	15%	3%
1984	9%	4%
1985	0%	3%
1986	1%	2%
1987	5%	4%

Historically, the MET assumption of an average 7.3 percent increase in tuition costs appears implausible, given periods of low or high inflation.

3. Inter-generational Transfers

Under state law, the MET fund will be analyzed annually for actuarial soundness. The exact language of the legislation establishing the program states:

"The trust board shall annually evaluate and cause to be evaluated by a nationally recognized actuary the actuarial soundness of the trust and determine the additional assets needed, if any, to defray the obligations of the trust. If there are not funds sufficient to ensure the actuarial soundness of the trust as determined by the nationally recognized actuary, the trust shall adjust payments of subsequent purchasers to ensure its actuarial soundness. If there are insufficient numbers of new purchasers to ensure the actuarial soundness of a plan of the trust, the available assets of the trust attributable to the plan shall be immediately prorated among the then existing contracts, and these shares shall be applied, at the option of the person to whom the refund is payable or would be payable under the contract upon termination of the contract, either towards the purposes of the contract for a qualified beneficiary or disbursed to the person to whom the refund is payable or would be payable under the contract upon termination of the contract." [30]

Under this arrangement, each new generation of MET enrollees would bear the cost to keep the system operational, unless the required rate of return was achieved. Given such a scenario, MET resembles a scheme for the intergenerational transfer of income from new participants to those already enjoying the system's benefits. At least one proponent has argued as much, stating, "As a practical matter, tuition increases beyond the projected seven percent won't affect existing MET contract holders; those increases will be covered by later contract purchases." [31]

IV. The Consequences Of MET

A. Income Distribution And MET

MET's redistributive aspects are documented in Table 2. Only 17 percent of MET enrollees are families with an income level of less than $20,000, the group presumably the most in need of assistance to put their children through college. However, 19 percent of MET contracts are held by families earning more than $80,000.

Table 2

Income Distribution Of MET Families
$0 – 20,000	17%
$20,000 – 40,000	18%
$40,000 – 60,000	27%
$60,000 – 80,000	19%
$80,000 – plus	19%

Source: Michigan Department of Treasury (February 1989).

Thirty-eight percent of MET families, nearly one in every four participants, earn more than $60,000 annually. Nearly one in every five participants earn more than $80,000 annually. Most significantly, nearly two-thirds of MET families earn more than $40,000 annually.

Clearly the state needs to be less concerned about the access of families earning more than the Michigan median family income of $40,105, than with the access of families earning more than that amount. Yet state records suggest MET is not addressing the problem it was established to solve: guaranteeing educational access for the middle class. On the other hand if MET was designed to alleviate the concerns of upper-income parents about the rising costs of tuition then the program could be said to have succeeded admirably.

State officials have proposed making MET more accessible to the middle-class by allowing enrollees to purchase contracts on a monthly installment basis. Currently, enrollees must buy MET contracts in a single payment, and many families have been forced to take out loans, including second mortgages on homes, to pay for the cost of enrolling in the program.

Florida's pre-paid tuition plan has developed along similar lines, emerging as a program that is serving the interests of upscale, rather than middle-class families. Miami businessman Stanley Tate, the program's chairman, noted recently that the plan has failed to attract many low-income families or blacks. "It's too bad that a large number of blue-collar or low-income people are not aware enough of the program to take advantage of it," Tate said. "We anticipated a much greater response." Although the program's intent was to offer affordable college rates, fewer than one-fifth of the purchasers who reported their incomes made less than $39,000 annually. A majority of purchasers reported incomes of more than $50,000 per year, Florida records show. [32]

Present value analysis, in fact, shows that prepaid plans like MET make perfect sense for families who intend to send their children to the most expensive public schools in their state. This, in large part, explains the redistributive aspects of programs like MET. Wealthy parents who instill educational values in their children are, in a sense, "betting" that they will have a good chance of getting accepted at schools like LT of M-Ann Arbor or MSU.

Not surprisingly, 72 percent of the first group of MET students attending_ state schools are enrolled at U of M-Ann Arbor and MSU. [33] Eighty-eight college freshmen whose parents or grandparents prepaid all or part of their college tuition through MET in 1988 began school during the fall of 1989. Thirty-six students – 41 percent – are attending U of M, and 27 students – 31 percent – are enrolled at MSU. The other 25 students are enrolled at 16 other state universities. [34]

Given problems with MET, state lawmakers would be in a position to develop a new political constituency. To satisfy MET participants, lawmakers would be likely to raid other state funds, or tax state residents to maintain the plan. That is the political appeal of MET and why the program is so flawed from any view of fairness.

Consider Oakland County, which has the highest per capita income of Michigan's 88 counties, and includes communities like Bloomfield Hills, one of the wealthiest in the entire country. [35] In 1988, 10,224 Oakland County families, 25 percent of MET participants, enrolled in the program. (See Appendix 2) [36] Given current trends, and the state's own assumptions, more than 30,000 Oakland County families will be enrolled in MET by the end of the decade. If problems emerged with MET, one could expect Oakland County lawmakers, whether Democratic or Republican, to seek a political solution.

Economists have long noted this trend within government programs of transferring public funds to the wealthy. Gordon Tullock, one of the most influential figures in the economic theory of politics, has argued that income distribution and social policy in general leads to "welfare for the well-to-do." The evidence suggests that while the least advantaged in society are the targets of government programs they receive only a small fraction of the billions of dollars that go into the program. Instead, the lion's share of public funds are spent on special interest groups that have the political influence necessary to use the government for private gain. [37]

B. University Independence And MET

Another consequence of MET is the loss of political independence that state universities could suffer. MET's assumption that tuition costs will increase only 7.3 percent annually means political pressure may be placed on the state's public universities to restrict future price hikes to that amount. The state, however, will have to purchase university agreement with greater budget allocations which means reduced spending in other areas or increased taxes for residents.

MET raises the prospect that the state's allocation for higher education could become even more politicized. Will the major university constituencies (U of M, Michigan State and Wayne State University) put up with tuition constraints unless they are offset by increased budget allocations from the state? What happens to the state's other universities, such as Central, Eastern and Western Michigan? Schools may face pressure to cut back their programs unless they develop a well-organized constituency that makes it politically costly for the state to ignore their budgetary needs. Schools could be expected to increase their lobbying of Lansing for special consideration. In economic terms this is viewed as increasing the "rent-seeking" costs within the economy. Research in economics has demonstrated the negative effect of this "directly unproductive activity" on economic efficiency and the satisfaction of consumer demand. [38] Ultimately, the state would have to choose between limiting tuition increases and fewer programs, or maintaining the same level of programs and spending for education. This is not a desired outcome of public policy initiated to increase and guarantee access to higher education for Michigan's children.

V. Recommendations

Tax credits (educational IRA-type system).

Under current law, METenrollees receive a tax credit from the state. Tax law favors MET enrollees and discriminates against families and students not participating in the program. The existing system should be expanded to benefit all state residents, including middle-class families and private school students. An educational IRA system would provide an incentive for families and students to save for college. The conceptual goal of such proposals, which already have bi-partisan support in Washington, should be to increase access to higher education for middle-class children.

The primary beneficiaries of any tax credit system should be children from families earning less than the state median income, along with students from all income groups who are working to pay for the costs of college. Working students especially deserve to be rewarded for their hard work and dedication, whatever their families' income level. The state's current system discriminates against all working students, whatever their families' income level, by taxing them to pay for the education of other students.

Savings bond programs, not prepaid tuition plans like MET, have emerged as the trend at the policy level. Problems have emerged, however, with bond programs in other states. The largest group participating in Illinois' program have been persons 55 or older. "Are they buying bonds for their grandchildren," one Illinois official asked, "or is that money being rolled over into IRAs?" The same official notes that Illinois' savings bond program has not been utilized by the middle-class to the extent that officials had originally hoped.

The goal of any program should be to increase middle-class access to education without adding to the burden on taxpayers. A tax credit system would help the middle-class access without exposing taxpayers to the possibility of a government bailout.

Consumer protection.

Families considering METdeserve complete and accurate information about the program from the state. The state's recent unannounced MET price increase is an example of how not to protect consumers. Between the Oct. 2-6 application period and later that month when contracts were forwarded to applicants, the state increased MET's cost $176, an additional three percent. The increase was not announced publicly, and nearly 7,000 state residents spent $25 apiece to apply for MET, but did not enroll following the price hike. Future developments about MET should be announced publicly to protect consumers.

VI. Summary

Pre-paid tuition plans have been abandoned by policymakers, both free market and liberal. In the words of Brookings Institute educational expert Arthur Hauptman, "States have to be crazy to implement these tuition guarantee plans." [39]

Savings bond programs have emerged as a national trend. Eleven states have passed prepaid tuition plans patterned after MET, while 21 states have passed bond programs. Prepaid plans in three states are operational; bond programs are operating in 13 states.

MET is operating under certain well-specified assumptions concerning tuition increases, future market conditions and rates of return on the fund. Historically, the state's assumption of an average 7.3 percent increase in tuition appears implausible, given periods of high or low inflation. An unfavorable ruling by the IRS with regard to MET's tax status means the fund must achieve an average pre-tax rate of return of about 15 percent. The assumption that MET can achieve an average 15 percent rate of return has never been tested during a bear market.

Ultimately, MET is a political, rather than economic guarantee. Officials understand that defaulting on MET would be prohibitively costly because the program's middle and upper-income enrollees would never tolerate such a default. State Treasurer Robert Bowman, MET's architect, has acknowledged that officials would have to allocate money from other state funds given a MET shortfall. Other possible consequences are cuts in other state programs, or, in a worst case scenario, a tax hike and the loss of programs and independence at universities.

Present value analysis reveals that MET cannot be justified on economic grounds at 13 of 15 major Michigan public universities. MET can only be justified as an investment at U of M-Ann Arbor and Michigan State – the state's two most expensive public schools.

State records suggest MET is not addressing the problem it was established to solve: guaranteeing educational access for the middle class. Approximately one-third of MET enrollees are families with an income level of less than $40,000. Nearly two-thirds of MET enrollees are families with an income level of more than $40,000. The Michigan median family income is $40,105, according to the U.S. Census Bureau.

The existing tax credit system should be expanded to benefit all state residents, not only MET enrollees. The goal of any program should be to increase middle-class access to education without adding to the burden on taxpayers. MET information should be released publicly to protect consumers.

Appendix 1 - THE ECONOMICS OF MET: A PRESENT VALUE ANALYSIS

MET is operating under certain well-specified assumptions concerning tuition increases, future market conditions and rates of return on the fund. Under the MET economic model, tuition increases are expected to be only 7.3 percent annually, the annual rate of return on the pooled resources in the fund is assumed to be 9.75 percent, and Michigan economic conditions are generally assumed to continue along a stable path of growth.

Tuition costs for a four-year education beginning in 2006 are valued at $31,991. This figure is derived by taking the current average $9,000 tuition cost of a four-year education at 15 state public universities, and assuming that 7.3 percent annual tuition increases continue: $9,000 x (1.073)18 = $31,991

If the fund earns a 9.75 percent rate of return the present value of the investment can be determined as $5,994: (PV = $31,991/(1 + .0975)18. The present value of $5,994 is less than the $6,756 needed to invest in MET in 1988, and the $7,664 required last year. At $6,756 and a 9.75 percent rate of return, the investment would be economically justified only if the future receipt was at least $36,055. At $7,664 the future return would have to be at least $40,901. The investment's current cost exceeds the discounted present value of the future receipt, leading the economist to conclude that MET cannot be justified as an investment on economic grounds.

Present value analysis shows that MET cannot be justified on economic grounds at Central Michigan Eastern Michigan, Ferris State, Grand Valley State Lake Superior State Michigan Tech Northern Michigan, Oakland University Saginaw Valley, U of M-Dearborn, U of M-Flint Wayne State and Western Michigan. MET can be justified on economic grounds using present value analysis only at U of M-Ann Arbor and Michigan State University.

In-State Undergraduate Tuition and Fee Rates At Michigan Public Universities
	1985-86	1986-87	1987-88	1988-89	1989-90
Central Michigan	1507	1569	1662	1828	2005
Eastern Michigan	1501	1563	1656	1820	1994
Ferris State	1671	1671	1749	1947	2133
Grand Valley	1502	1566	1632	1794	2016
Lake Superior	1455	1517	1608	1767	1920
Michigan State	2133	2273	2737	3017	3258
Michigan Tech	1797	1869	1996	2193	2391
Northern Michigan	1447	1513	1576	1729	1881
Oakland	1705	1767	1883	2065	2212
Saginaw Valley	1628	1697	1783	1959	2131
U of M-Ann Arbor	2409	2662	2883	3170	3463
U of M-Dearborn	1757	1841	1995	2190	2404
U of M-Flint	1472	1548	1700	1920	2104
Wayne State	1971	1996	2123	2289	2526
Western Michigan	1613	1679	1934	2104	2292

*As of August 16, 1989
Source: Department of Management and Budget

Central Michigan:
$8,020 X (1.073)18 = $28,508
PV = $28,508/(1.0975)18 = $5,342 < $7,664 required for MET

Eastern Michigan:
$7,976 X (1.073)18 = $28,351
PV = $28,351/(1.0975)18 = $5,312 < $7,664 required for MET

Ferris State:
$8,532 X (1.073)18 = $30,328
PV = $30,328/(1.0975)18 = $5,683 < $7,664 required for MET

Grand Valley:
$8,064 X (1.073)18 = $28,664
PV = $28,664/(1.0975)18 = $5,371 < $7,664 required for MET

Lake Superior:
$7,680 X (1.073)18 = $27,299
PV = $27,299/(1.0975)18 = $5,115 < $7,664 required for MET

Michigan State:
$13,032 X (1.073)18 = $46,324
PV = $46,324/(1.0975)18 = $8,680 > $7,664 required for MET

Michigan Tech:
$9,564 X (1.073)18 = $33,996
PV = $33,996/(1.0975)18 = $6,370 < $7,664 required for MET

Northern Michigan:
$7,524 X (1.073)18 = $26,745
PV = $26,745/(1.0975)18 = $5,011 < $7,664 required for MET

Oakland University:
$8,848 X (1.073)18 = $31,451
PV = $31,451/(1.0975)18 = $5,893 < $7,664 required for MET

Saginaw Valley:
$8,524 X (1.073)18 = $30,299
PV = $30,299/(1.0975)18 = $5,677 < $7,664 required for MET

U of M-Ann Arbor:
$13,852 X (1.073)18 = $49,238
PV = $49,238/(1.0975)18 = $9,226 > $7,664 required for MET

U of M-Dearborn:
$9,616 X (1.073)18 = $34,181
PV = $34,181/(1.0975)18 = $6,405 < $7,664 required for MET

U of M-Flint:
$8,416 X (1.073)18 = $29,915
PV = $29,915/(1.0975)18 = $5,605 < $7,664 required for MET

Wayne State:
$10,104 X (1.073)18 = $35,916
PV = $35,916/(1.0975)18 = $6,730 < $7,664 required for MET

Western Michigan:
$9,168 X (1.073)18 = $32,589
PV = $32,589/(1.0975)18 = $6,106 < $7,664 required for MET

Appendix 2

MET Enrollment By County, 1988

County	Number of Contracts	Percentage of Total
Alcona	18	.05
Alger	19	.05
Allegan	213	.53
Alpena	91	.23
Antrim	39	.10
Arenac	29	.07
Baraga	14	.03
Barry	71	.18
Bay	246	.61
Benzie	24	.06
Berrien	443	1.10
Branch	67	.17
Calhoun	376	.93
Cass	39	.10
Charlevoix	58	.14
Cheboygan	57	.14
Chippewa	32	.08
Clare	33	.08
Clinton	336	.83
Crawford	15	.04
Delta	66	.16
Dickinson	20	.05
Eaton	478	1.20
Emmet	124	.31
Genesee	1,231	3.00
Gladwin	21	.05
Gogebic	16	.04
Grand Traverse	464	1.10
Gratiot	61	.15
Hillsdale	47	.12
Houghton	48	.12
Huron	66	.16
Ingham	2,706	6.70
Ionia	153	.38
Iosco	38	.09
Iron	26	.06
Isabella	94	.23
Jackson	447	1.10
Kalamazoo	889	2.20
Kalkaska	25	.06
Kent	1,392	3.50
Keewenaw	0	0
Lake	7	.02
Lapeer	202	.50
Leelenau	67	.17
Lenawee	173	.43
Livingston	706	1.70
Luce	5	.01
Mackinac	9	.02
Macomb	4,289	10.60
Manistee	49	.12
Marquette	190	.47
Mason	53	.13
Mecosta	61	.15
Menominee	14	.03
Midland	403	1.00
Missaukee	18	.04
Monroe	418	1.00
Montcalm	80	.20
Montmorency	6	.01
Muskegon	235	.08
Oakland	10,224	25.00
Oceana	18	.04
Ogemaw	34	.08
Ontonagon	6	.01
Osceola	30	.07
Oscoda	1	.01
Otsego	47	.12
Ottawa	412	1.00
Presque Isle	14	.04
Roscommon	35	.09
Saginaw	491	1.20
Saint Clair	403	1.00
Saint Joseph	92	.23
Sanilac	73	.18
Schoolcraft	6	.01
Shiawassee	276	.68
Tuscola	127	.31
Van Buren	221	.55
Washtenaw	2,333	5.60
Wayne	7,756	19.10
Wexford	67	.17
Military	94	.22

Source: Department of Treasury

Endnotes

"Q & A, Guarantee Tomorrow's College Tuition at Today's Prices," Michigan Education Trust (promotional literature).
"Ways & Means," The Chronicle of Higher Education, October 18, 1989.
"Researchers Criticize Value Of MET As Enrollment Opens," Gongwer News Service, October 2, 1989.
MET promotional literature.
"Alternatives may beat MET as best college bet," The Detroit News, September 24, 1989.
"New Deal," The New Republic, May 1, 1989.
MET promotional literature.
The 1989 Survey of College Savings and Guaranteed Tuition Programs, Education Commission of the States, Aims C. McGuinness, Jr., and Christine Paulson, Denver, November 1989.
Ibid.
Interim Report, National Survey of College Savings and Guaranteed Tuition Programs, Education Commission of the States, Denver, April 12, 1989.
Ibid.
Interview, Henry Hector, State of Indiana.
Interim Report.
1989 Survey.
Ibid.
Ibid.
Ibid.
For Mr. Bowman's argument about security and simplicity, see "MET Offers Guarantee, Not Highest Return," Detroit Free Press, October 17, 1988.
WJR Radio, AM-760, January 11, 1990.
"MET Plan Favors MSU, U-M?" Detroit News, October 3, 1989.
MET promotional literature.
WJR-Radio, AM-760, January 11, 1990.
MET promotional literature.
"Midland Group Raps Tuition Plan," Saginaw News, Nov. 2, 1989.
Michigan Department of Management and Budget.
"State Tuition Plan To Rise 13%," Detroit Free Press, Nov. 2, 1989.
Ibid., Department of Management and Budget.
Ibid.
Michigan Department of Treasury.
PA 316 of 1986.
"Readers Are Glad They Invested In MET," Barry B. and L. Joanne George, Midland Daily News, Oct. 4, 1989.
Information on the Florida plan is based on Associated Press reports provided by the Illinois State Scholarship Commission.
"Tuition Plan Scores High With First Class," Detroit Free Press, Oct. 8, 1989, and State Department of Treasury. Other schools with students enrolled under MET are Oakland Community College (4) ; Delta College (3) ; Eastern Michigan, Wayne State, Ferris State and Macomb Community College (2); and Michigan Tech, Central Michigan, Oakland University, Lake Superior State, Grand Rapids Junior College, Washtenaw Community College, Henry Ford Community College, Lansing Community College, Kalamazoo Valley Community College and Grand Valley State (1).
Ibid.
U.S. Census Bureau.
Michigan Department of Treasury.
See Gordon Tullock, Economics Of Income Distribution, (Boston: Kluwer Academic Publishers, 1983) and Welfare For The Well-To-Do, (Dallas: Fisher Institute, 1983). Also see Charles Murray, Losing Ground, (New York: Basic Books, 1984) for a general indictment of the efficacy of social programs to help the least advantaged in society.
See James Buchanan, Robert Tollison and Gordon Tullock, ed., Towards A Theory of The Rent-Seeking Society, (College Station: Texas A & M University Press, 1980) for a collection of the leading academic papers in this area. Also see Tollison, "Rent-Seeking: A Survey," Kyklos, 35, #4 (1982). On aspects of rent-seeking within universities see Geoffrey Brennan and Tollison, "Rent Seeking And Academia," in Buchanan, Tollison and Tullock, ed., Towards A Theory Of The Rent-Seeking Society, (Ann Arbor: U of M Press, 1984). Also see the work on the incentive system of the modern university found in Armen Alchian, "Private Property and the Relative Cost of Tenure," and "The Economic and Social Impact of Free Tuition," in Economic Forces At Work: Selected Works by Armen A. Alchian, (Indianapolis: Liberty Press, 1977), and Henry Manne, "The Political Economy of Modern Universities," in Ann Husted Burleigh, ed., Education In A Free Society, (Indianapolis: Liberty Press, 1973).
"New Ways To Save For College," Parents Magazine, February 1990.

About the Author

Dr. Peter Boettke, a Senior Policy Analyst with The Mackinac Center, is Assistant Professor of Economics at Oakland University in Rochester, Michigan.

Dr. Boettke would like to thank Robert Kleiman (Oakland University), Lawrence Reed and especially Greg Kaza (Mackinac Center), along with several anonymous referees for their helpful comments on earlier drafts of this report.