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]