PhillyDeals: Paying more to save for college tuition

Inflation? Ha!

Since 1993, Pennsylvania has promised residents it would pay their children's college bills if they set aside money at today's lower tuition rates.

The 529 Guaranteed Savings Plan pays private advisers about $270,000 a month to invest that money in U.S. and foreign stocks, bonds, real estate, venture capital, and buyout funds. From late 2007 through March 2009, those investments lost about $400 million.

To make up the loss to the fund (now worth about $1 billion), state Treasurer Rob McCord did what earlier treasurers did when markets went south: He boosted next year's fees.

Pennsylvania told savers last week it would replace the $25 yearly fee with a 0.49 percent charge on the value of parents' accounts and slap "premium" surcharges on parents' annual payments, starting Aug. 31.

Not everyone pays alike. If you're squirreling cash for Junior to attend Bloomsburg University, Community College of Philadelphia, or other moderately priced state- or county-run schools, there's no extra premium.

If you're saving for more costly Temple, or St. Joseph's, and some other private colleges, or Penn and other Ivy League colleges, the plan will clip you an additional 2 percent surcharge.

But if you've signed up for Penn State or Pitt, be prepared to add a full 8 percent to your bill.

Why do Lions and Panthers pay more? Penn State and Pitt "have seen the greatest rate of tuition inflation," deputy treasurer Doug Rohanna told me. Now participants will pay a sort of inflation penalty.

Though Pennsylvania still has a Guaranteed Savings Plan, Rohanna said most other states don't guarantee tuition payments but let investment values fluctuate with markets, like a 401(k) plan. (Pennsylvania has a separate plan like that, too.)

The 529 Guaranteed Savings Plan was invested in more or less the same kind of assets as the state's pension plans, and it faces the same problem: More money has been going out than coming in.

Same for many cities. The Philadelphia plan just published one of its weirdly behind-the-times annual reports, full of data from June 30, 2008.

Money in: The city paid the fund $426 million that year and collected $52 million from future retirees.

Money out: The city paid $726 million to retired police officers, firefighters, sanitation workers, and other civil servants, and lost $218 million playing the stock, bond, real estate, private-equity, and other investment markets.

Net loss: Nearly a half-billion dollars. And that was before the stock market really slid last fall.

Philadelphia has about 55 cents saved up for every $1 it's going to have to pay pensioners. Mayor Nutter has a plan to close the gap: He wants to boost the sales tax to fund pensions.

Pittsburgh is down to its last 27 cents in the bank for every future pension dollar. And it has no plan; soon it will have to fund pension checks straight from taxes, says James McAneny, who runs the Public Employee Retirement Commission in Harrisburg. The commission monitors the various public pension funds.

"We have very few choices," McAneny explains. "Put more money in, which we don't have. Or find a way to reduce costs, which is hard to do when our courts say you can't reduce benefits." That's benefits for people who've already been hired, even if they haven't earned them yet.

McAneny wants to "lock down" pension plans in communities that cannot afford or refuse to pay for their retirement plans. He is supporting state reform bills like H.B. 1884 - sponsored by Rep. Ted Harhai (D., Westmoreland) - that would allow the state to seize and freeze badly underfunded plans such as Pittsburgh's, pay benefits already earned by workers, and impose a new, better-funded plan, probably by charging workers more up front.

Pennsylvania's state-funded pension plans say they're not as bad as the big-city plans. That is hard to tell, because they have so much squirreled away in high-fee private debt, buyout, venture capital, and real estate funds, which are tough to sell, or price, at the moment.

The state won't say what is actually in those funds, which don't trade publicly. You can piece the outline together from annual reports, and the news.

As of Dec. 31, the Public School Employees Retirement System had put $14 billion into private funds since the late 1990s that have yielded only $11 billion to date. The system says the funds still have investments worth an additional $7 billion or so, which it hopes to sell and pocket, perhaps when markets improve.

The State Employees Retirement System put $10 billion into private equity, buyouts, and venture capital, and it has gotten back $8 billion and hopes for more.

What can go wrong? In 2006, PSERS committed $400 million, and SERS $75 million, to Cerberus Institutional Partners L.P.'s Series 4 Fund.

The state had done well with some earlier Cerberus funds, doubling smaller investments in Cerberus Series 2 (starting in 2001), for example.

But Cerberus used Series 4 money to finance Chrysler, which went bankrupt. Neither fund has so far reported getting back anything.