Avrum D. Lank
EdVest has a cozy deal with the state
By AVRUM D. LANK of the Journal Sentinel staff
Sunday, September 28, 2003
The financial relationship developed by the state of Wisconsin and Strong Capital Management Inc. of Menomonee Falls around the EdVest 529 college savings program is a sweetheart deal with the public footing the bill.
For Strong, the plan is a way to draw assets into its mutual funds and collect an annual fee for managing them. As of Aug. 31, 529 accounts contained about $726 million of the $44 billion in assets under Strong’s management.
The state benefits by collecting an annual fee for every $1 put into an EdVest account. As an incentive, Wisconsin offers a multimillion dollar tax break to parents and grandparents to make EdVest investments for their progeny.
Because of this mutual dependence between the state and Strong, any fundamental changes in the deal would require hard thinking on both sides.
Such change may be coming, however, energized by recent charges that Strong was among at least four big mutual fund companies that cut deals with a New Jersey hedge fund to profit improperly from quick trades at the expense of ordinary shareholders.
529 plans allow money contributed by anyone to accumulate tax free in special accounts for college expenses.
Until recently, only states could sponsor them, which is why the state and Strong needed each other — Madison to supply the tax advantage and Strong the marketing and investing expertise.
The federal law that created the 529 program has been amended to expand the plans. Now, residents of one state can put money in a plan sponsored by another, and non-government institutions can sponsor the programs.
Because of this additional competition, Strong and the state need to consider tweaking their offering. Wisconsinites dissatisfied with Strong have an increasing number of alternatives to chose from, provided they are willing to forgo the state income tax break available only for EdVest investments.
Watching all of this, state Rep. Steve Nass (R-Palmyra) is circulating a bill that would expand the state’s EdVest tax break to any 529 plan.
“I think it would be good for families to have the option to shop around,” he said.
Strong’s contract with the state runs through 2006. While the Legislature could amend the tax law without violating the contract, it could not enter into an agreement with another mutual fund company without Strong’s consent.
If the Nass proposal were adopted, it would remove the unique advantage Strong has in marketing its 529 in Wisconsin. That means it would attract fewer investors and collect fewer fees. So serious consideration of changing the tax law might bring Strong to the bargaining table.
Unless Strong agreed to let other funds in on the action, Nass’ proposal would cost Madison more than just the money from an expanded tax break — the fewer dollars EdVest attracted through Strong, the less the state would collect as its share.
In the fiscal year that ended June 30, Wisconsin took in $2.3 million in fees on EdVest accounts, about 10 times more than it costs Madison to administer the program.
The state probably still loses money on the deal. Extrapolating from numbers provided by Strong, it appears the tax break costs the state about $6.5 million yearly.
If Nass’ proposal were adopted, the $6.5 million figure would go up, as investments in any 529 plan would qualify for the break. The only way for the state to level the playing field and collect more money would be to end the tax break for all 529 investments, including those in EdVest.
All in all, it’s a complicated situation that pits the desires of Wisconsin investors to invest in any 529 plan — without losing the tax break — against the cozy relationship between the state and Strong.
Contact Avrum D. Lank at (414) 223-5333 or [email protected].
