With legal news slow this week going into today’s election, I am blogging on this report yesterday on the Jackson Jambalya blog. The post reports that the Mississippi Prepaid College Tuition Program is 75% funded and faces an unfunded liability of $84.7 million as of June 30, 2010. The unfunded liability will presumably have to be covered out of the State’s general fund, which has no funds to spare.

The reason for the short-fall? Kingfish reports:

The program assumes an annual rate of return of 7.8% on investments and an annual tuition rate increase of 6.5%, yielding a spread of 1.3%. There are 21,257 participants enrolled in the program. The 2009 report posted below shows the program was 95% funded with an unfunded liability of $13.5 million in 2007. The program was 85% funded with an unfunded liability of $48.6 million in 2008. The 2008 meltdown hit hard as the unfunded liability skyrocketed to $86.8 million in 2009 while funding dropped to a level of 72.7%. The funding level improved slightly to 75% as the program enjoyed a 12.87% return of investment last year as the markets recovered.

State Treasurer Tate Reeves defended the fund’s assumption of a 7.8% investment rate of return:

Mr. Reeves said as the markets recover, the rate of return will improve. He agreed with me that the reason for the high rate of return last year was due to the “dead cat bounce” the markets enjoyed as they recovered from the crash of 2008. He said 7.8% is a realistic goal over a long period of time such as thirty years, as shorter terms are subject to more variations in the rate of return, but they tend to be more stable over time.

My jaw hit the floor when I read Reeves defending a 7.8% assumed investment return over thirty years. Over the last ten years investment returns have gone nowhere (other than gold and other metals that the fund does not invest in). Mississippi’s non pre-paid 529 plans have been losing money for the last few years. The economy is in the ditch and there is no reason to think that the market will earn 7.8% annualized returns anytime in the foreseeable future.

Eager for a second opinion, I emailed Mike Shedlock, author of the Mish’s Global Trend Analysis financial blog. This dude knows what he is talking about in the financial markets. Here is Shedlock’s response to my email asking if 7.8% is a reasonable assumption:

7.8% is nuts
will never happen when treasuries are yielding nothing
I think 5% is very optimistic
In fact, I think there will be no returns at all for 5 years – and they might even be negative

I am predicting that the shortfalls in this program create a huge political stink at some point in the future. And this is something that the politicians should have seen coming.