FISCAL NOTE

Date Requested: January 28, 2019
Time Requested: 03:11 PM

2975	Introduced	SB451
Agency:	Treasurer's Office, WV
CBD Number:	Version:	Bill Number:	Resolution Number:
CBD Subject:	Education (K12)

FUND(S):

Special Revenue

Sources of Revenue:

Special Fund

Legislation creates:

Creates New Revenue, Creates New Expense, Creates New Program

Fiscal Note Summary

Effect this measure will have on costs and revenues of state government.

Summarize in a clear and concise manner what impact this measure will have on costs and revenues of state government. The purpose of this bill is comprehensive public education reform. This fiscal note only deals with the creation and operation of the Educational Savings Account Program. Our fiscal note for House Bill 2002 contemplated Education Savings Accounts only for exceptional children. This bill expands who qualifies as an “eligible student” to an “elementary or secondary student who has been a resident of this state for at least a year and continues to be a resident.” This expansion will require additional staff for the Treasurer to properly administer the ESA Program and contracts to be more expensive. The bill does not appear to create a Coverdell (26 U.S.C. 530) program and may create various associated federal tax benefits and consequences. We examined how ESA programs work in other states and found none are Coverdell plans and they vary in structure and funding. This fiscal note was created on the basis that the bill does not authorize Coverdell accounts. This means the amounts transferred and expended on behalf of Eligible Students, as well as earnings, may be taxable income. Other states have made this into a scholarship program, under which certain funds would not be taxable income. However, even scholarship funds are taxable when used for incidental expenses, such as room, board, travel and optional equipment. The Tax Cuts and Jobs Act of 2017 amended the definition of “qualified education expenses” for 529 plans, but the IRS has not yet chosen to extend that definition for other programs. The IRS currently defines “qualified education expenses” as “amounts paid for tuition, fees and other related expenses for an eligible student”, but are not amounts paid for room, board, insurance, medical expenses, transportation, and similar personal, living or family expenses. In addition, “qualified education expenses” are only permitted for an “eligible educational institution” which the IRS defines as “a school offering higher education beyond high school.” Clearly, those definitions do not fit the ESA Program as set forth in the bill. The Tax Cuts and Jobs Act of 2017 also opened 529 accounts to allow “expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private or religious school” as qualified expenses. Currently, these expenses are limited to “tuition” expenses. The plans are subject to a $10,000 annual limit on these expenses. Tuition for pre-school would not qualify. Assuming we can implement the ESA Program, there may well be litigation (which is anticipated in §18-31-9), as has happened in other states. The outcomes of the litigation to date in other states are mixed. There will need to be an appropriation to cover those expenses, even if the Attorney General provides the legal services. We estimate the litigation expenses at $200,000. There will also be the need for specialty counsel for the creation and structure of the program and to consider any tax consequences. We estimate cost in years 1 and 2 at $100,000 total ($75,000 in year 1 and $25,000 in year 2). We anticipate the need for at least five employees, with annual salaries and benefits estimated at $345,000. This would include a director, accountant and two assistants (Treasurer is required to audit individual accounts on a random basis, as well as to manage the funds) and an administrative assistant. With the expansion of eligible students, the number of accounts will dramatically increase, necessitating an additional two employees beyond those contemplated for House Bill 2002. For current expenses, we estimate annual current expenses at $100,000. In addition, an auditing firm would have to be hired annually at an estimated cost of $100,000 per year (Treasurer is required to audit the individual accounts at least annually). Add to that the Treasurer is authorized to contract with a private organization to administer the ESA Program and to contract with a private institution to provide a payment system. These contracts are estimated to cost $150,000 per year. This amounts to a total of $ 870,000 for year 1, $620,000 for year 2 and $595,000 thereafter. All of these estimates are subject to increases due to inflation. The expanded definition of Eligible Students will expand the number of accounts we believe will be opened and maintained. After the first few years of implementation, we estimate that there will be 6000 accounts with a total amount of assets of $30 million at any point in time; however, we expect funds to be almost immediately expended as received, thereby reducing the average amount of assets to $10 million. The bill limits the amounts that may be deducted from accounts for administration in §18-31-5(5) to maximum of 5% in years 1 and 2 of the Program and then a maximum of 3% annually thereafter. That means in years 1 and 2, the amount would be $300,000, and then $180,000 thereafter. As you can see, those amounts are insufficient to cover the expenses of administering the ESA Program and a separate appropriation will be required. One other issue that will need to be examined is the impact of Article X, Section 6 of the West Virginia Constitution as to public versus private use of state funds. After we begin creation of the program, there may be a need for modifications to the legislation. I apologize for the time it has taken to provide this fiscal note, but the importance of this program has necessitated we contact and study the various programs in the country. Problems we found are: (1) the use of term “director” on page 9, line 10, which is not defined or used anywhere else in the bill, (2) the Treasurer is allowed to deduct the costs of administration from the ESAs, but no fund to hold the amounts is created, and (3) the amounts the Treasurer may deduct are insufficient to cover anticipated Program expenses.

Fiscal Note Detail

Effect of Proposal	Fiscal Year
Effect of Proposal	2019 Increase/Decrease (use"-")	2020 Increase/Decrease (use"-")	Fiscal Year (Upon Full Implementation)
1. Estmated Total Cost	870,000	620,000	595,000
Personal Services	345,000	345,000	345,000
Current Expenses	325,000	275,000	250,000
Repairs and Alterations	0	0	0
Assets	0	0	0
Other	200,000	0	0
2. Estimated Total Revenues	300,000	300,000	180,000

Explanation of above estimates (including long-range effect):

Please explain increases and decreases in personal services, current expenses, repairs and alterations, assets, other costs and revenues, including assumptions and data sources and delineation between start-up and ongoing costs. Please also include a long-range schedule of costs and revenues if fiscal impact is expected to vary in future years. Please see the Fiscal Note Summary above.

Memorandum

Please identify any areas of vagueness, technical defects, reasons a bill would not have a fiscal impact, and/or any special issues not captured elsewhere on this form. Please see the Fiscal Note Summary above.

Person submitting Fiscal Note: Diana Stout
Email Address: diana.stout@wvsto.com