Moody's Gives One of Pennsylvania's TAP 529 Plans an A3 Rating
Casey hails good news, urges legislative action to make program even better
HARRISBURG, Pa., Nov. 15 /PRNewswire/ -- In its first-ever rating of a state's 529 college savings plan, Moody's Investors Service has assigned the Guaranteed Savings Plan (GSP) option of Pennsylvania's Tuition Account Program (TAP 529) an investment grade rating of A3. According to Moody's, one of the world's most respected sources for credit ratings, research and risk analysis, "obligations rated 'A' are considered upper medium grade and are subject to low credit risk." State Treasurer Robert P. Casey, Jr., who took the unprecedented step of hiring Moody's earlier this year to conduct a comprehensive review of the TAP 529 Guaranteed Savings Plan, said today that the A3 rating is "good news for Pennsylvania families." "Now we know that the 50,000 families saving for college through the Guaranteed Savings Plan have an A-rated investment," Casey said at a news conference in Harrisburg. "I hope that the low credit risk associated with the Plan's A3 rating will encourage many new families to join the TAP program." Casey urged the General Assembly to consider enhancing the Guaranteed Savings Plan to give current and prospective TAP families an additional layer of certainty. He also unveiled a new website, http://www.TAPfacts.com, to provide straightforward information about the Moody's rating and online access to a new financial calculator for GSP account owners. Pennsylvania's Guaranteed Savings Plan, one of two TAP 529 options, rests on the expectation that contributions made to TAP accounts will grow at a rate that keeps pace with tuition inflation at selected "tuition levels." Tuition levels vary depending on the types of schools for which families choose to save -- from community colleges to Ivy League schools. Since the GSP began in 1993, the Treasury Department has made more than 54,000 payments for over 14,000 college students. Moody's said its A3 rating is based on an analysis of the strengths and challenges of the GSP, considering both the assets of the Plan itself and the sponsorship of the Plan by the Commonwealth of Pennsylvania. The rating reflects Moody's assessment of the likelihood that GSP account owners will receive the full tuition inflation value of their accounts when their children are ready to go to college. "The rating addresses the combined credit quality of the TAP Guaranteed Savings Plan Fund's assets underlying the tuition-inflated liabilities and Moody's view of the likelihood and degree to which the Commonwealth of Pennsylvania might offer financial assistance to the program in the event that the Fund does not generate an adequate return," Moody's said in a news release issued today. "Today's positive rating of the Guaranteed Savings Plan reflects Moody's expectation that the Plan will continue to attract new investors and that the Commonwealth will honor the guarantee implicit in the Plan and explicit in its name," Casey said. In its news release, Moody's noted that, "while the obligation to the Plan beneficiaries does not represent an explicit or binding guarantee by the Commonwealth, there is an implied support structure based on legislative and executive branch backing of the program and the strategic importance of the GSP to education finance in the Commonwealth." According to the most recent actuarial report, as of June 30, 2005, the GSP fund had a value of $985 million and an actuarial deficit of $44 million. This means that if no new contributions are made to the GSP -- and based on a variety of assumptions -- the estimated cost of guaranteeing the contributions already made exceed the projected future value of the fund by $44 million. The speculative nature of this actuarial deficit, as well as its size, prompted Casey to hire Moody's to do this thorough, independent rating of the Guaranteed Savings Plan. While Moody's said it was able to independently replicate the analysis that produced this $44 million actuarial deficit, Moody's went beyond the actuary's model and evaluated tens of thousands of possibilities. Moody's then factored in the Commonwealth's positive support for TAP, as well as Pennsylvania's General Obligation municipal bond rating of Aa2. This so-called "joint-default analysis" takes into consideration when an obligation, such as TAP, benefits from external support, but that support falls short of an iron-clad guarantee. In giving TAP an A3 rating, Moody's weighed the Commonwealth's incentive to support TAP if it faces a budgetary shortfall over the next 25 years. "In Moody's view, the likelihood of efforts by the State to support the Plan in a time of crisis causes the credit quality of the GSP and its obligations to be higher than that of the TAP GSP when evaluated on a stand- alone basis," said Moody's news release. "While Moody's acknowledges that there is no moral or legal obligation for the Commonwealth to infuse capital into the GSP Fund, the A3 rating reflects an implicit promise based on strong, bipartisan expressions of support from Governor Ed Rendell, Senate President Pro Tempore Bob Jubelirer, Representative Elinor Taylor, and other members of the General Assembly, many of whom actively promote this high profile program to their constituents," Casey said. Moody's considered several factors in its rating process, including: the "horse race" between TAP's investment performance and tuition inflation over the next 25 years; the asset allocation of TAP investments; the impact of premiums on the TAP Fund; the dynamic management of TAP by the State Treasurer; and the strength derived from the Commonwealth's sponsorship of TAP. Future challenges In conferring the A3 rating, Moody's also mentioned several issues that could negatively impact TAP, including: continued uncertainty with regard to high tuition inflation at Pennsylvania colleges and universities, declining state appropriations for higher education as a percentage of university budgets, and the possibility that the federal income tax exemption will not be made permanent (making state-sponsored 529 programs less attractive investments). "Moody's view is that the Plan faces structural challenges given the sweeping nature of its tuition inflation objective," Moody's news release said. "Moody's notes that the persistent volatility of higher education prices in Pennsylvania creates challenges for asset allocation that must produce returns that keep pace with inflation in order to provide future payouts." Although the General Assembly gives statutory authority to the State Treasurer to administer the TAP program, as Moody's noted in its news release, "the General Assembly is the policy maker as it relates to the GSP." "Over a decade ago, the General Assembly demonstrated the Commonwealth's commitment to helping Pennsylvania families save for college by creating the TAP program," Casey said. "I urge the General Assembly to now consider enhancing the Guaranteed Savings Plan to secure this commitment for decades to come." New website for TAP 529 investors In an effort to make sure that families saving for college always have access to the most accurate, up-to-date information about the TAP 529 program and the Moody's rating, Casey has launched a new, interactive website called http://www.TAPfacts.com. The site includes details about the two savings options available through TAP 529, a link to the Moody's rating press release, frequently asked questions with straightforward answers, and a new financial calculator that lets GSP account owners obtain the current values of their accounts and, for the first time, calculate projected values based on different variables they select. The A3 rating applies only to the TAP 529 Guaranteed Savings Plan. Moody's did not analyze Pennsylvania's TAP 529 Investment Plan, in which accounts grow based on market performance of investments. For more information, log on to http://www.TAPfacts.com.
SOURCE Pennsylvania Department of the Treasury
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