By: Ken Miller and James McIntire
President Obama’s Fiscal Year 2017 budget proposal to limit the tax exemption for municipal bond interest would hobble state and local infrastructure projects nationwide. If implemented, this proposal would raise costs to state and local taxpayers by over $17 billion – a devastating blow to communities at a time when they can least afford it. Congress must reject this proposal that for the first time in history would tax municipal bonds.
Tax-exempt municipal bonds are an indispensible tool for overcoming our nation’s infrastructure challenges. These bonds have financed more than three-quarters of U.S. infrastructure projects in the 21st century. Since the advent of the U.S. tax system, state and local governments have used tax-exempt municipal bonds to finance the construction and maintenance of community necessities such as roads, bridges, schools, hospitals and sewers.
Every day throughout the nation, infrastructure shortfalls are addressed with financing from tax- exempt municipal bonds. Last year, state and local governments invested $400 billion in public infrastructure. If the tax benefits of municipal bonds are capped as the president proposes, the nation’s mayors – over half of whom cite underinvestment in infrastructure as their greatest challenge – state treasurers and county leaders would have significantly less to invest in infrastructure due to higher interest payments.
For example, in Washington state, the world’s longest floating bridge which connects Seattle to eastside cities across Lake Washington needs replacement after more than five decades of heavy traffic, wind and wave action. The state is issuing tax-exempt municipal bonds to replace the bridge slated to open in April 2016. If the president’s proposal was in place, it is estimated that the project would cost Washington taxpayers $265 million in additional debt service.
In Oklahoma, municipal bond financing is also an important tool in upgrading transportation infrastructure. The President’s proposal would add millions in financing costs and be a significant drain on limited tax dollars.
With our nation’s infrastructure slowly crumbling, tax-exempt municipal bonds are more important than ever. In 2015 the American Society of Civil Engineers gave the nation’s infrastructure a D+ grade. More than 140,000 state or locally owned bridges are deficient and nearly one-third of our schools require major infrastructure investment. The American Society of Civil Engineers estimates that more than $3 trillion will be needed to modernize and repair America’s infrastructure by 2020. With so many needs throughout the nation, now is the wrong time to make all these projects more expensive by fundamentally changing this incredibly successful financing program.
State and local governments are not just another “special interest,” they provide essential public services that are the building blocks of our federal Union. National tax policy should encourage state and local governments to invest in their public infrastructure. Taxpayers in every state have a very real interest in good, safe highways and modern schools that will help our economy prosper and thrive. But this interest is not limited by state borders. Our ability to stock our shelves, get our goods to market and compete globally depends on quality transportation infrastructure. Our national economy would be ill-served by school overcrowding and the lack of buildings designed for 21st century instruction and technology. By encouraging state and local governments to invest in public infrastructure we help weave the fabric of a stronger Union that is striving to be more perfect.
McIntire is the state treasurer of Washington and president of the National Association of State Treasurers. Miller is the state treasurer of Oklahoma and senior vice president of the National Association of State Treasurers.
Gov. Peter Shumlin won a promise from the state treasurer and the Vermont Pension Investment Committee that they would consider his call for divesting from coal and ExxonMobil stocks.
The governor proposed divestment in his State of the State speech in January. Treasurer Beth Pearce has pushed back, saying that decisions about pension investments should be based on financial criteria, not political considerations.
But after Shumlin made his pitch to the pension investment committee Tuesday morning, citing financial — as well as moral — reasons to divest from coal and ExxonMobil, Pearce said, “I am committed to a full vetting of the issues.”
Representatives of organizations lobbying for divestment welcomed the thawing in the stance that Pearce and the panel had taken. “I see it as progress, although not as fast as any of us who support this want to see,” said Paul Burns, executive director of the Vermont Public Interest Research Group.
Shumlin focused first on ExxonMobil, which he noted had spent millions of dollars on advertising to sow doubt about climate change, while at the same time its own research showed that climate change was real. If the committee wasn’t persuaded to act by this moral case, he urged them to look at the stock’s underperformance in recent years.
Similarly, he noted that financial institutions are scaling back their investments in coal projects, and coal is shrinking as a means of electric generation. He cited coal company bankruptcies and the industry’s tarnished safety record. Shumlin said, “I want all our friends in the Vermont labor community to remember that if we say no to divesting from coal, we are saying yes to the idea of investing your hard-earned dollars in mining companies that have not shown a high regard for the lives and welfare of their workers.”
Shumlin reminded the committee that the state has divested from problematic investments in the past. In the 1980s, Peter Welch, then a state senator, pushed through a bill that Gov. Madeleine Kunin signed, requiring divestment from companies doing business in South Africa. In the 1990s, then-treasurer Jim Douglas got rid of $21 million in tobacco stocks. And in 2007, then-treasurer Jeb Spaulding divested from businesses operating in Sudan.
“Divestment in Vermont has been a seldom-used, but necessary tool to confront major challenges and put us on the right side of history,” the governor said.
Shumlin wants the pension committee both to divest and set up a “screen” that identifies bundled blocks of stock that include coal companies, so the state can avoid those in the future.
Tom Golonka, chair of the Pension Investment Committee, suggested that such filters could be expensive to create. He said the cost could go as high as $3 million. Pearce echoed this concern.
Shumlin interrupted. “It is always easy to find obstacles to pressing change,” he said. He suggested the Vermont panel considering moving its money, if it can’t persuade its money managers on Wall Street to give Vermont a good deal to create screens for coal companies.
The governor said he would prefer that the investment committee take the necessary steps to divest, but warned, “It has to be resolved by the end of the legislative session. If you don’t, I will push the legislature to do it because I think it must be done.”
The Senate Government Operations Committee is likely to vote on a divestment bill after the legislature’s one-week Town Meeting break.
“We will be in touch,” Golonka responded.
What is the outlook for munis in 2016?
We think 2016 could look a lot like the second half of 2015 from a technical standpoint. That’s an important distinction because 2015 was, in many ways, a tale of two markets. The first half saw heavy supply as issuers took advantage of the unexpected drop in rates to refinance earlier than they might have otherwise. In the second half of the year, supply was basically flat relative to the five-year average.
The market also notched the majority of its performance in the second half. At mid-year, the Barclays Municipal Bond Index was up a meager 0.12%. By year-end, it had returned 3.3%. This compared to returns of less than 1% for long-term Treasuries and -0.7% for corporate bonds.
Supply/demand was a big driver of the turnaround, as was the macro backdrop. As the Fed signaled liftoff, stocks and other risk assets retreated while investors flocked to high-quality fixed income. Munis, given their less volatile nature, outperformed Treasuries. The appeal of tax exemption also drew the interest of a large and diverse investor base.
For 2016, we’re forecasting supply to be down approximately 3% relative to 2015 and demand steady. That’s a good technical backdrop that should continue to support pricing.
Overall, we see carry (the payment of income) as a key theme for fixed income investors in 2016. With that as our thesis, if you have a theoretical yield of 2.90% on a 30-year municipal bond, that’s 5.11% on a tax-equivalent basis. In a world where we’re fighting to achieve 2% inflation and rates on Treasuries remain low, a yield above 5% is pretty attractive.
How will Federal Reserve interest rate hikes impact the municipal bond market?
That’s the question on everyone’s mind. The Fed has promised to be data dependent with the path of rate hikes, and that means it’s likely to have more impact on the front end of the yield curve than the back end. Historically speaking, munis tend to do well in this environment.
In fact, history tells us that the trends in place for the 12 weeks preceding a rate hike tend to prevail for 12 weeks post-hike. (See chart above.) The curve was flattening leading up to liftoff, and it continues to flatten. Credit spreads were tightening ahead of the Fed, and they continue to do so.
That’s not to say there won’t be uncertainty and volatility. In fact, as in 2015, the Fed is going to distort and inject volatility into the market, if only because we don’t know how many hikes are to come. The central bankers have specifically noted a “gradual” tightening, not a “measured” and predictable program of 25-basis-point hikes like we’ve seen in the recent past.
All of that said, we don’t think it matters much whether it’s two rate hikes in 2016 or four. You still have a fed funds rate in the area of 1% or slightly higher. That’s not restrictive monetary policy, and certainly not enough to push long-term rates higher. So, the Fed may matter, but mostly to the front end of the curve.
Why is the long end less vulnerable to rate hikes?
Typically, the aim of a rate-hiking cycle is to tighten accommodation. And that generally comes with a sense of increased inflation. This time, people aren’t afraid of inflation. In fact, inflation measures were falling on Dec. 16 precisely as the Fed was announcing interest-rate liftoff. While short-maturity bonds will naturally react to changes in the federal funds rate, longer maturities will trade on inflation expectations, which are hovering below 2%. In fact, the Fed doesn’t see inflation hitting its 2% target until 2018.
In addition, the current backdrop of lower commodity and oil prices, along with a stronger dollar, represents a major disinflationary force. There is also question around the strength of the global economy and the impact that might have on the U.S. All of this may temper Fed action. You also have an aging population, which means more retirees propping up the demand for high-quality fixed income assets, and that should further assist in anchoring the price for longer-term bonds.
Returning to technicals, what underscores your positive outlook for supply/demand?
We expect supply to be similar to or lower than in 2015. The election may play into that to some extent. In election years, as hopefuls seek office and administrations sit in flux, you generally don’t have a lot of issuers adding debt, and that may help to keep supply muted.
Meanwhile, we expect demand will be driven by an acceptance that rates aren’t going to go up appreciably. Waiting on the Fed had some dire implications for rates, but once investors grew comfortable that rates weren’t going through the roof, demand picked up. And as noted earlier, demographics point to a greater need for income, and that should also support demand for high-quality income vehicles such as munis.
One additional anecdote: Munis were the best-performing fixed income asset class in 2015. That bodes well for demand, because muni demand tends to follow performance. Our analysis finds that every 1% return draws about $3 billion of flows into municipal mutual funds. In 2015, we saw $5 billion in inflows for every 1% of performance. Those are good, steady inflows. This positive demand dynamic is a tailwind for municipal performance going forward.
So technicals look good. How are fundamentals in the municipal market?
Creditworthiness among most issuers of municipal debt continues to improve. State revenues continue to do well as the economy progresses, albeit slowly. Housing stabilization has helped local issuers by boosting property tax collections. Balance sheets are better: Issuers have deleveraged, added jobs, avoided debt. Chapter 9 cases, at four in 2015, are down 60% year over year and defaults are down 57%. So fundamentals for the market broadly are pretty strong.
The big differentiator continues to be pensions. Unfunded pension liabilities are weighing on long-term fiscal stability in certain locales. Increasingly, we’re seeing the rating agencies factor this into their calculations and that’s leading to more ratings volatility. Last year, Moody’s took Chicago down multiple notches to below investment grade. We may not see more drops of that magnitude, but we may well see more ratings volatility.
Pension reform, meanwhile, has been slow. Illinois, the most pension-indebted state, made attempts at reform without success. We still think reform is what’s needed to alleviate the long-term problem. For those states with large unfunded liabilities, the options are either to raise taxes significantly to pay for the future obligations or initiate some kind of reform to reduce them.
What is the outlook for Puerto Rico, the major headline maker of 2015?
Puerto Rico has a long way to go. It already missed a portion of its debt payments that were due Jan. 1. The good news is that the broader market realizes Puerto Rico is an isolated, special situation.
What’s really interesting and informative, we think, is that the market proved its resilience this past year. Even though the Barclays Puerto Rico Index was down 12%, nothing else followed suit. Whereas the market at one time worried about a systemic risk related to that single credit, we’ve now seen Puerto Rico is an island of its own. It’s a debt problem different from any other and, as such, market participants have been wise not to draw conclusions about the broader market based on Puerto Rico. The fact that a credit can lose 12% and investors look the other way and understand that issue, speaks volumes about the tenacity of the municipal marketplace. In fact, looking at returns by sector, the next biggest “loser” had a positive return of 1%.
Our overarching view on Puerto Rico has not changed. We continue to believe debt restructuring and economic reform are the long-term solutions to long-running problems.
How has the high yield sector been affected by Puerto Rico?
Puerto Rico represents roughly 24% of the high yield municipal market. While it’s been a drag on high yield performance, the sector has done quite well outside of that.
Tobacco, which makes up 19% of the high yield index, was actually the top-performing sector of the year, returning nearly 16%. High yield overall had a return of 1.8%. If you invested in high yield ex Puerto Rico, you would have done quite well in 2015.
We continue to believe an allocation to high yield makes good sense; it offers a great deal of positive income carry. But how you own high yield is important as well. We believe it’s prudent to own it in a well-diversified vehicle, such as a high yield municipal bond mutual fund.
How do muni and corporate high yield compare? Did energy exposure weigh on munis?
The high yield muni market is generally uncorrelated to the taxable high yield market and didn’t experience any of the volatility that the corporate market did due to energy exposure in 2015. In fact, less than 2% of the Barclays Municipal High Yield Index is exposed to energy.
In the corporate credit market, the implied default rate is creeping up rather quickly. Investors are trying to identify and avoid names and funds that are going to suffer losses as default rates move higher. We don’t have that in the muni market; default rates have fallen. Plus, we have a great supply/demand dynamic: There’s just not enough high yield municipal debt being produced to meet the demand. In addition, the fact that the market has recently rejected certain junk-rated new issues tells us we’re later in the cycle than the corporate market. During mid-cycle, investors are still diving on names they know are probably too risky.
It’s also worth noting that corporate high yield has equity-like characteristics, including greater volatility. The high yield muni market is very different. As shown in the chart below, the VIX index (a measure of equity market volatility) and the corporate bond spread largely move in tandem. The VIX tends to direct spreads in the corporate market; not so in the muni market.
Will the election reignite talk of muni-related tax reform?
The rhetoric may pick up after primary season, once the candidates are set, but any type of tax reform is unlikely to be undertaken before 2017. House Speaker Paul Ryan has been engaging conservative Republicans in discussions around tax reform, but we know from experience that individual tax reform is very complex and challenging. It would be difficult to target and carve out munis for change. So we don’t see much happening beyond talk, but we acknowledge that talk alone can stoke market volatility. One final observation: If you look at broad tax reforms that have taken place in the last 50 years, they generally start from the executive branch, not at the congressional level.
Why should investors own munis in 2016?
It’s hard to see why you wouldn’t have munis in your portfolio. Munis are a high-quality, relatively low-volatility source of income with an attractive taxable equivalent yield, particularly for longer maturities. We believe the asset class deserves a place in every investor portfolio, especially those in high tax brackets seeking to keep more of what they earn. And with real ratios above 100%, you’re achieving more income with a lower level of volatility than might be expected in the corporate or Treasury market today.
How should they position their allocations?
We think yield curve positioning will be important again this year. We’re no longer worried about when the Fed goes, but the market will try to price in exactly where the Fed goes. We expect the front end of the curve to bear the brunt of this, while the intermediate to long end remains relatively anchored amid muted inflation.
Against this backdrop, investors should pursue income via exposure to both the longer end of the yield curve and to credit, where improving fundamentals bode well. We believe it makes sense to own some high yield, but advocate for diversified exposure to the sector through a professionally managed vehicle.
A somewhat new nuance to consider: In the past, investors hunkered down in general obligation (GO) bonds, generally seen as the having the highest priority of payment. But given the large pension liabilities in some states, and Chapter 9-related decisions witnessed in Detroit, for example, we think the best value may be found in revenue bonds, which comprise the largest part of the market.
Any other advice for investors?
As in recent years past, we’d urge investors to approach the market with proper perspective. Focus on income and the tax benefit that is unique to the municipal asset class.
Total return should be seen as a fringe benefit, and one that investors have been fortunate to enjoy in recent years.
With interest rates likely to remain low for longer, it makes sense to have some allocation to high yield, but balanced with higher-quality investment-grade bonds for liquidity and trading flexibility. We would avoid the extremes: Don’t take on more risk than you can stomach, either by extending too far out on the curve and/or by taking excessive credit risk. At the same time, don’t get too defensive. There’s no upside potential in exiting the market to hold cash. It typically is best to stay the course during periods of market dislocations based on your long-term goals and investment outlook. Volatility is a normal occurrence for all asset classes and often creates longer-term opportunities.
Finally, know what you own. Credit research is a must and is at the core of our process here at BlackRock. In addition to referencing the agencies’ ratings, we assign an internal rating to every credit and issuer before considering it for inclusion in our portfolios. Ultimately, avoiding the wrong credits is as important as owning the right ones.
Peter Hayes is BlackRock’s managing director and head of the Municipal Bonds Group, and Sean Carney is BlackRock’s director and head of municipal strategy.
Several months ago, it was my privilege to return a $5,000 unclaimed property check to a man from Hinton. Joseph Bigony thanked me. He told me that had it not been for my office’s Unclaimed Property Division, he never would have known he was due this money from his sister’s estate. His sister died almost 16 years ago.
A large insurance company held onto this money for years. It finally reported it to our Unclaimed Property Division after being pressured into a regulatory settlement with various states.
That agreement stemmed from an ongoing battle between states and insurance companies as to whether companies have an obligation to search Social Security’s Death Master File (DMF). Why is this important? A DMF search reveals which policy holders are dead, triggering payment to heirs. Still, insurance companies feel it is their right to hold onto someone else’s money.
I have been in the middle of this fight as your State Treasurer, working to make certain insurance companies relinquish these funds. I took this fight all the way to the West Virginia Supreme Court of Appeals.
In June 2015, the High Court unanimously ruled that the death of the insured triggers the duty to pay out proceeds. The court also said that insurance companies must make reasonable efforts to determine whether their insureds have died. If they are unable to locate beneficiaries, they must report those proceeds to the State as unclaimed property.
There are 19 other states that took a different route, and passed legislation to ensure that insurance companies make a reasonable effort to pay out claims. Similar legislation is pending in six states. But incredibly, this state’s lawmakers are working to do the exact opposite. The bills are HB 4473 and SB 599. I would gladly welcome your help in fighting them.
This proposed legislation says insurance companies have NO obligation and NO responsibility to check the DMF or a similar list to find out if the insured has died. I should point out that many insurance companies already conduct a similar search to suspend annuity payments. Companies cut off annuities for their own benefit but refuse to use the same file to pay out policies. I find this deeply disturbing.
People purchase life insurance with the expectation that their family will be taken care of during a most vulnerable time. It is our duty as public servants to protect these widows, children and loved ones and make sure they receive what they are due. It is not our duty to protect special interest groups and out-of-state insurance company executives.
Joe Bigony said he was glad to finally get the money owed his family. But he added it would have been better to have received it when he dug into his own bank account to bury his sister almost 16 years ago.
This is about a commitment insurance companies made to people long ago. They vowed they would be there for families during their time of need, at the time of their loved one’s death. We owe it to the people of this state not to pass legislation that undermines this commitment.
John Perdue is West Virginia’s state treasurer.
As I walked back to my car through the grey February slush, I already knew I was going to finance the project. I realized this bond issue was going to do well because it was doing good. Investors could benefit and the community could benefit—shareholders in the fund would enjoy fuller wallets from the tax exempt income from the bonds, workers in and businesses supplying to the construction trades would get much needed work, the facility would employ more than 50 full time positions in well-paying jobs, and the seniors in the community would get great care.
I didn’t realize it at the time, but I had backed into the key investment criteria for socially responsible investing. Today, investments in the socially responsible, social enterprise and social impact strategies total some $6.6 trillion according to the latest biennial survey by the Forum for Sustainable and Responsible Investment.
Moreover, according to a recent internal survey by Bank of America Merrill Lynch, half of investors want their personal values reflected in their investment decisions. As millennials begin to experience wealth transfer from their Baby Boomer parents, they increasingly want to see their investments doing good. Correspondingly, the number of money managers offering impact investing products has surged 155% during the past five years (Collins 2014), particularly in separately managed accounts.
At the forefront of these investments are municipal bonds. For good reason—broadly, the projects financed by municipal bonds are for essential public purposes such as, hospitals, affordable housing, senior care, public transportation, water and sewer, bridges and tunnels. Bond proceeds provide needed jobs during project construction and long-term jobs afterwards to maintain the services. In the long term, the community gets health care, places to live, clean water and better transportation. Investors in the bonds, individuals or institutions, get a steady income stream from the interest payments on the bonds.”
Source and Full Article: http://www.forbes.com/sites/investor/2016/02/23/municipal-bonds-a-socially-responsible-investment/
BATON ROUGE – Despite opposition from several legislators, the House Appropriations Committee today gave an initial nod to a bill by a Houma lawmaker to let private citizens donate money to Louisiana to help ease the state’s budget issues.
The committee voted 11-7 to send House Bill 77 by Republican Rep. Beryl Amedée to the House floor for more debate. The legislation would create the Payment Towards State Debt Fund to accept private donations to the state. It also details how the money would be distributed to cover state debts.
The bill as written, however, would not automatically help ease either the nearly $1 billion shortfall for the current year or the $2 billion deficit for the 2016-17 fiscal year. Instead, it would direct at least a portion of any private donations to help pay off the state’s long-term debts.
HB 77 says at least 25 percent of any private donation would be appropriated for the Budget Stabilization Fund, commonly known as the Rainy Day Fund. Another 10 percent would go toward paying the balance of the state’s multi-billion-dollar unfunded accrued liability of retirement costs for state employees and teachers. The remainder would be used to help pay off state bonds early.
Lawmakers have used the Rainy Day Fund to plug budget shortfalls in recent years and are poised to do so again this year.
“We don’t know how much money people might contribute; we don’t know if they’ll contribute a dollar,” Amedée told committee members. “But if they do and when they do we know have a process in place so that the money would be used to pay down state debt.”
Amedée, who is a member of the Appropriations Committee, said she filed the bill after hearing from two constituents who had heard about the state’s budget shortfalls and asked what would happen if they cut the state a check to cover their share. The freshmen legislator said she worked with legislative staff to draft a plan for how to handle private donations based on language already in law detailing how the state handles other types of outside money.
“I’ve already heard from a few people that are interested,” she said. “If this gets put into place they’d like to make contributions.”
Amedée said that even if the law didn’t prompt a wave of private donations, she hoped it would at least raise awareness about the budget and state debts.
Rep. Pat Smith, D-Baton Rouge, said it wasn’t fair to set up another dedicated fund in the state budget when the Appropriations Committee voted a day earlier to remove a series of “statutory dedications” that guarantee in law the state will fund certain operations.
Some lawmakers argue that too many funding dedications in state law have limited their ability to balance the budget. Smith, though, said she opposed the committee’s Monday vote to remove the dedications.
“I just don’t understand setting up another fund,” Smith said of HB 77.
Smith objected to a motion to send the bill to the House floor, but only six of her colleagues followed suit.
Voting for the bill were Reps. Amedée; James Armes, D- Leesville; Jerome “Zee” Zeringue, R-Houma; Mark Abraham, R-Lake Charles; Dee Richard, I-Thibodaux; Blake Miguez, R-Erath; Tony Bacala, R-Prairieville; Charles Chaney, R-Rayville; Lance Harris, R-Alexandria; Valarie Hodges, R-Denham Springs; and John Schroder, R-Covington.
Voting against were Reps. Smith; Larry Bagley, R-Stonewall; Johnny Berthelot, R-Gonzales; Robert Billiot, D-Westwego; Gary Carter, D-New Orleans; Jack McFarland, R-Winnfield; and Dustin Miller, D-Opelousas.
A bill that would outline a procedure for the state to take title of unclaimed U.S. savings bonds held by Nebraskans was heard Feb. 22 by the Banking, Commerce and Insurance Committee.
Murante said current and former Nebraskans or their heirs hold approximately $95 million in unclaimed U.S. savings bonds.
“This legislation is intended to collect those funds from the U.S. government so the state of Nebraska can return them to their rightful owners,” Murante said.
Within 180 days of the five-year time period, the state treasurer would begin court proceedings regarding the bonds. If no valid claim is filed, all property rights or proceeds from such bonds would be redeemed by the treasurer and be vested with the state of Nebraska.
Nebraska State Treasurer Don Stenberg testified in support of the bill, saying his office has been responsible for receiving and attempting to return unclaimed property to Nebraskans since 1969.
The office returned more than $11 million in unclaimed property in 2015, he said, and likely would add several million dollars to that total if it could obtain title to unclaimed U.S. savings bonds.
“Unlike the state of Nebraska, the U.S. government makes no effort to locate the rightful owners of U.S. savings bonds that have matured,” Stenberg said.
No one testified in opposition to the bill and the committee took no immediate action on it.
DST and the Board seek to engage a consultant to examine and advise the Board regarding the search and evaluation of a Program Manager (Third Party Administrator) and Investment Consultant for the Program. The consultant would also advise on Program design and assist through implementation of the Program.
The Office of the Illinois State Treasurer (“Treasurer”) is issuing this Request for Proposals (“RFP”) for a Consulting Services (“Contractor”) for the administration of the Treasurer’s programs with a particular emphasis on the Illinois College Savings Plans (“College Savings”) and Achieving a Better Life Experience Act Savings Pool (“ABLE”).
The Contractor shall assist the Treasurer in the formulation of strategy, structuring, marketing, implementation, and oversight of programs, particularly the College Savings and ABLE plan pools (collectively, the “Pools”). Consultants who submit responses (“Respondents”) must submit their responses to this RFP (“Proposals”) by 12:00 p.m. CT on March 11, 2016.
The Treasurer intends to select a Respondent with extensive experience in strategic implementation, management, and assessment of 529 plans; comprehensive understanding of the 529 and 529A landscape; and expertise in client counseling, third-party review and rankings, structuring 529-type investment vehicles/programs, and marketing of investment products to a broad market. The Contractor shall enter into a contract with the Treasurer (“Agreement”) for an initial term of four (4) years. Upon expiration of this term, the Treasurer may elect to extend the Agreement for a period of time agreed upon by the parties, not to exceed a total of ten (10) years.
State Treasurer Clint Zweifel said the new management agreement for the Missouri 529 College Savings Plan, or MOST, will save parents millions of dollars.
“We’ve made it easier for families to save for college, made it less expensive for them,” Zweifel said.
The new program reduces fees, which is significant considering the total value of about 155,000 accounts across Missouri is about $2.4 billion, Zweifel said.
“High fees are the biggest investment drag on most retail investors’ returns, so … trying to reduce those fees was important,” he said. “We reduced fees by 25 percent for most of our participants and up to 80 percent for some of them. They’re going to save about $20 million over five years.”
The money will stay in taxpayers’ pockets rather than go into a mutual fund or an investment firm, Zweifel said.
“It will help (taxpayers) save even more and help that money grow even faster,” he said.
Other college savings plans across the country also have low fees, but require a $3,000 investment minimum, Zweifel said.
“Which stops a lot of people right at the door,” he said, but the Missouri 529 College Savings Plan has no minimum. “You contribute a dollar if you want to, $5, every pay period.”
The focus is to get parents to invest over time in the education of their children, Zweifel said.
“If we can just get individuals in the habit of saving a few dollars here and there, over time they can build that amount up,” Zweifel said. “Getting into the habit is an important part of that.”
The savings formula works, he said.
“Low fees, high access and eliminating hurdles to savings are all good tenants … in terms of investments strategy,” Zweifel said.
Zweifel’s office announced the new contract is with Ascensus College Savings. The agreement “retains most of the plan’s current Vanguard investment options but includes five new portfolios managed by Dimensional Fund Advisors” and “MOST 529 Advisor Plan accounts will be rolled into the MOST 529 Direct Plan,” Treasurer’s Office information states.
A MOST account has a greater value than money, Zweifel said.
“The other thing that we’ve learned is that the value of a college savings account has a profound impact on that child’s likelihood of attending college.”
Zweifel said research shows a college savings account is more valuable to children than the amount of money in the account.
“These accounts really help set expectations early on,” he said. “They help become a focal point of a conversation between parents and kids about their future, their dreams, their aspirations, and what they want to do to achieve them.”