Initial Report for the Select Committee on Higher Education Endowment Account Merit Scholarship

2005 Session Laws, Chapter 190 created an Education Merit Scholarship Committee to study proposals for student scholarship programs proposed in the 2005 General Session and to consider other potential scholarship programs to be funded by earnings from an endowment account created by that Act. The goal of the Committee was, by law, to make recommendations to the Wyoming Legislature for future legislation needed for merit based scholarship programs, to be known as Hathaway scholarship programs, to make undergraduate post secondary education in Wyoming as free as possible to Wyoming high school graduates.

The Committee was comprised of eleven members; five appointed by the Governor, two appointed from the Senate, two appointed from the House of Representatives and two appointed by the State Superintendent.[1] The Committee selected Senator Tex Boggs and Representative Steve Harshman as cochairmen. The Committee membership required by the session law and as implemented by the selections of the various elected officials represented a diverse and informed view, which contributed significantly to the process of developing the recommended scholarship program for Wyoming.

The Committee was directed by law to consider and make recommendations as to the following:

(i) The amount of tuition, fees and other education related payments which can be sustained from anticipated earnings from the student scholarship endowment account at various qualification levels including:

(D) College grade point average and other academic progress requirements to maintain a scholarship.

(ii) Reentry requirements for students failing to maintain established college grade point average and other requirements;

(iii) Waiver provisions, if any, regarding any of the entry or continuing scholarship requirements;

(v) An implementation date for the program, which shall be no later than the first school year after the student scholarship endowment account contains at least four hundred million dollars ($400,000,000.00);

The Committee was directed to report its initial findings and recommendations to the Governor, the Joint Appropriations and Joint Education Interim Committees by November 1, 2005 and, if the Committee determined modifications to its initial findings and recommendations were appropriate, again by November 1, 2006.

The Committee met in May, June, August and September, 2005. The Committee reviewed the three bills introduced in the 2005 General Session, referenced above, as well as scholarship programs in Alaska, Arkansas, Florida, Georgia, Kentucky, Louisiana, Massachusetts, Michigan, Mississippi, Missouri, Nevada, New Mexico, South Carolina, Tennessee, Washington and West Virginia. A matrix comparing various aspects of each of those programs was prepared, reviewed and discussed by the Committee. Staff also provided the Committee with summaries of studies undertaken of various state scholarship programs, showing program effects on academic enrollment, retention and achievement.

In addition to reviewing those studies and the laws underlying the various state programs, the Committee had the benefit of discussing in more detail the workings of three programs with persons familiar with the programs. Seanna Murphy, with Indiana' 21^st Century Program, addressed the Committee, as did Melissa Goff with the Indiana Merit Scholarship Program and Dr. James Caillier, with the Taylor Scholarship Plan in Louisiana. Each informed the Committee as to the specifics of their particular state programs and how those programs worked in comparison to other state programs. All three volunteered their time, participating in the second Committee meeting and allowing Committee members the opportunity to ask questions regarding strong aspects of their program, as well as pitfalls to avoid in developing a new state scholarship program.

The Committee also sought public testimony at each of its four meetings. Representatives of business and industry, higher education, K-12 education, parents and concerned citizens all provided testimony regarding the need for and aspects of a scholarship program. The Committee heard from the presidents of a number of community colleges and the University as well as from representatives of the Community College Commission.

The help of the Community College Commission and the University of Wyoming was enlisted to provide a cost model for a scholarship program. Representatives of the University developed and explained the model in depth. While the model provided valuable information, it is critical to note that the model is based upon a number of assumptions and incomplete data and the Committee was cautioned on numerous occasions to not take the figures provided as exact costs of the program, only as best estimates based upon available data.

The model contains a number of variables which can be manipulated in order to determine the cost of a scholarship program at various GPA and ACT performance levels. Numerous other assumed variables can be manipulated as well, such as percentage of enhanced high school graduation and college attendance rate increases which might result from the program. The Committee reviewed numerous scenarios with differing eligibility and scholarship levels.

The law establishing the Committee and the general framework for a scholarship program established an endowment for funding the scholarship program. The endowment is to be funded with excess revenues from the school foundation program account. With a program funded by endowment earnings, the earnings necessarily form the parameters for the size of the program. On this issue, the Committee was informed by staff that while different experts have different views of foreseeable earnings, the State Treasurer anticipates earning about four to four and one-quarter percent on fixed income investments and approximately seven percent on the overall portfolio investment for fixed income and stocks, once fully invested at a 50/50 mix. The limitations on state investments and endowment funding were discussed by the Committee and were taken into consideration during the development of the more fully developed recommendations presented below.

From the public testimony and the background materials provided, Committee members were polled at the end of the second meeting regarding their views on the goals for and the framing of a scholarship program for Wyoming. The Committee cochairmen then undertook to develop a draft bill for Committee consideration. The bill was provided well before the third meeting.

At the third and also at the final meeting the Committee considered both a bill establishing a scholarship program and a resolution providing for the creation of inviolate education trust funds which could be invested in equities. The Committee considered and acted upon literally dozens of proposed amendments to the scholarship draft bill. Both the bill and the resolution were redrafted and again at the fourth and final meeting of the Committee dozens of proposed amendments were considered by the Committee. The result was unanimous approval of three bills as Committee recommendations.

The Committee is recommending the following proposed bill drafts for the Joint Education and Joint Appropriations Interim Committees' consideration. While the bills are briefly summarized below, the Committee notes that the scholarship program is contained in a forty-eight page bill and that any brief explanation of such a bill would be incomplete.[2] Therefore the Committee urges any reader of this report to carefully review the exact language of the bills in order to be fully informed.

The Committee recommends bill draft 06 LSO 0042.W11 as legislation to implement the Hathaway scholarship program. (Appendix 2) The draft bill creates 4 levels of Hathaway merit scholarships for Wyoming residents[3] to attend the University of Wyoming or a Wyoming Community College. The amounts and academic criteria for eligibility are summarized as follows:

All but the career scholarships are available for the equivalent of eight full time semesters with a maximum time for attendance under the scholarship of six academic years. The career scholarships are available for four semesters, but can be granted again for another four semesters if the student maintains a 2.25 cumulative GPA and earns a certificate from a Wyoming Community College before requesting the second scholarship.

There are also Hathaway need based scholarships.[5] These are available only if the student has first earned a Hathaway merit scholarship and continues to be eligible for the merit scholarship. The need based scholarships are awarded only if the student has at least $2,000 annually in unmet financial need. If so, the student may be awarded a need based scholarship as follows:

There are provisions in the bill which cover issues beyond the scholarship amounts and criteria. Administration is shared between the eligible post-secondary institutions and the Department of Education. The institutions determine issues such as initial eligibility and the amount and type of scholarships for which a student qualifies. The Department verifies eligibility and determines, based upon that verification, the amount of funds each eligible institution should be reimbursed by the State for that student's enrollment at the eligible institution. The State will make a prepayment each semester of seventy-five percent of the estimated State obligation to the institution under the program and will make a payment later in each semester to fund the balance of the amount due.

The Department is also responsible for adopting rules to implement the program. The Department's duties include developing recommendations for changes to the high school curricula requirements to qualify for a scholarship, compiling annual reports concerning the program in order to inform the Legislature of the program's efficacy, and other provisions, all with the goal of encouraging students to take more rigorous courses and achieve greater academic proficiency.

The bill calls for the program to be applicable to students graduating in the spring of 2006, and to receive Hathaway scholarships beginning with the fall of 2006. As stated above, the legislation creating the endowment specifies that the recommended implementation date for the program "shall be no later than the first school year after the student scholarship endowment account contains at least four hundred million dollars ($400,000,000.00)." The President of the University and the Governor both wrote to the Committee recommending an implementation date in the fall of 2006.

The Committee determined the scholarships should be made available as soon as possible but noted that the fall 2006 implementation date is appropriate only if certain conditions are met. The Committee's position on this matter is delineated in a letter to the Governor. (Appendix 3). Again the reader is referred to the letter for a full understanding of the Committee's position, but the Committee reemphasizes the following:

Necessary staff must be allocated to the Department of Education immediately in order to commence preliminary activities for the rulemaking process and other administrative activities. Waiting for final action on the bill compromises the potential for successful implementation of the program in the fall of 2006.

The State is promising specific scholarships that students can earn through their performance in school. Failure to keep these promises would damage the credibility of Wyoming's citizen government. The full funding of the program through an endowment is therefore an important concept. Given the current arrangement to fund the endowment through excess mineral resources and the historically volatile nature of mineral prices, the Committee recommends a 2006 implementation date only if there is an appropriation for the endowment to achieve a balance of $400 million dollars as of July 1, 2006.

Funding of the program is crucial. The Committee recommends a separate bill to fund the program with the appropriate attention given to this crucial aspect.

The Committee recommends bill draft 06 LSO 0145.W2 as legislation to fund the Hathaway scholarship program. (Appendix 4)

This bill provides an appropriation of one hundred thousand dollars and authorizes two full time positions to the Department of Education, all to be effective immediately.[6]

For initial funding of the program, seventeen million dollars is appropriated from the common school permanent fund reserve account. These funds are only to be deposited to the scholarship expenditure account after all other funds within the expenditure account have been spent and shall only be used as needed to fund payments to eligible institutions. It is anticipated that the initial first year of the program will cost less than five million dollars as the bill is now structured. This would leave approximately twelve million dollars to be deposited to a reserve fund created in the bill for future years when earnings might not be sufficient to fully fund all Hathaway scholarships.[7]

Sustained funding of the program is provided through an endowment. The bill provides for funding of the scholarships through earnings from funds deposited into the endowment account. The anticipation is that $400 million will be deposited into the endowment account to produce at least sixteen million dollars in earnings per year. This is based upon an assumed investment return of four percent. The State Treasurer anticipates earning about four to four and one-quarter percent on fixed income investments and approximately seven percent on the overall portfolio investment for fixed income and stocks, once fully invested at a 50/50 mix

Thus whether the scholarship fund can be invested in stocks is a major consideration in determining a program to be supported from investment earnings. The Attorney General informally opined in the spring of 2005 that only certain funds of the State can be invested in equities under the Wyoming Constitution. As the law is now constituted the endowment funds could not be invested in equities. While the Attorney General's opinion would allow for the construction of subfunds of the Permanent Wyoming Mineral Trust Fund to be invested in equities, the Committee was cautioned that path had not been court tested and there was room for a contrary view. Additionally, if the Scholarship Endowment funds were placed in such a subfund the funds would not be inviolate and would be subject to Legislative reappropriation in later years.

Given these considerations, the Committee has taken a very safe approach to the long term funding issue. While some other estimates were higher, the Committee accepted a four percent return on investments as a safe "guaranteed" return, long term.

At its final meeting the Committee adjusted the scholarship amounts and slightly adjusted the eligibility criteria in order to maintain the program's estimated annual cost within that sixteen million dollar figure. The major adjustments were to the scholarship amounts, rather than eligibility. As the bill is recommended, over eighty-seven percent of incoming freshmen to the University will qualify for at least the Hathaway Opportunity Scholarship, the lowest level degree scholarship initially provided.[8]

The reduction in proposed scholarship amounts was not an easy decision. There was considerable debate on the issue; but the overwhelming prevailing view of the Committee was that the program must not fail. Assumptions and admittedly uncertain data have been used to support the cost model. The program's goals include increasing post-secondary enrollment and retention rates, thereby increasing the program's cost by unknown amounts.[9] While today's investment returns might be higher than assumed in the bill, those returns are not guaranteed next July when the funding is provided for investment, or decades from now when a new generation of Wyoming students earn Hathaway scholarships. Therefore, if the Committee erred in its income estimates, it erred on the side of caution, guided by the principle: Promises made to Wyoming students will be kept.

As the program matures and better data are available and can be used to forecast expenditures and revenues, the Committee fully endorses future increases in the size of the program, including increasing scholarship amounts and modifying eligibility criteria. In fact, future increases are a hoped for goal, so long as the endowment concept is retained and the increases are consistent with a prudent view of maintaining the endowment for future generations.

Another issue which will affect earnings and thus the maximum size of the program is the timing for when the corpus will contain the $400 million the law specifies. That will be dependent upon federal mineral royalty revenues and spending from the school foundation program account as the law is currently structured. The Committee is fully cognizant of Wyoming's reliance on the mineral's industry and its volatile nature. While the endowment might well be fully funded within the next six to eight years, or even earlier, no one knows when or whether that will occur. There will be without doubt historically high revenues available to the State in the upcoming budget session. The Legislature's best opportunity to fully fund the endowment is in that session. The Committee recommends a general fund appropriation to the endowment account to complete the funding of that account in the amount of $400 million dollars.

The final recommended appropriation is for the excellence in higher education endowment account. This account was created along with the Hathaway scholarship account and the linkage should remain and be complete. The State should be striving to achieve not only an excellent scholarship program, but an excellent program of post-secondary education. Full funding of this endowment account, by a general fund appropriation in the amount of one hundred five million dollars, should be made this budget session for the same reasons. The programs began and should remain in tandem.

The Committee's final recommended piece of legislation involves the investment of education funds. (06 LSO 0056.W2, appendix 5) The legal issues related to State investments are noted above. The resolution would authorize, not require, the Legislature to permit investment of education trust funds in equities. The State Treasurer's Office has previously noted that investments in equities can increase earnings from an estimated four percent to seven percent. That can provide an opportunity to increase scholarship amounts and adjust eligibility requirements to allow more students to attend post-secondary institutions at an even more affordable rate. The Committee notes that this step has been authorized by the voters for the permanent funds of the State. The Legislature has taken that authority and delegated it to the State Treasurer in a prudent manner, and the Committee expects the Legislature and the Treasurer would continue to so act to increase education trust fund investment returns.

The resolution addresses more than investment of education trust funds. It would allow the Legislature to ensure the inviolate nature of education trust funds. Under current interpretation of the Attorney General, the Constitution does not protect trust funds established by legislative action from future appropriation by subsequent legislative action. The Constitution can provide such protection to designated funds. The resolution would authorize the designation of education trust funds, thereby protecting those funds from appropriation for other purposes in the future. If the resolution is passed and adopted by the people of the State, the Committee recommends the Hathaway Scholarship Endowment Account be the first fund protected, ensuring that this promise made to Wyoming students will be kept.

The Committee is authorized to submit both an initial report in November 2005 and a final report in November 2006. The Committee anticipates doing both. The program is important and after it is operating, there likely will be improvements to be made. The expertise brought to and developed by the Committee in creating the program can help the Legislature in making those improvements.

The Committee extends its sincere appreciation to persons attending Committee meetings and volunteering their time and expertise to help the Committee. While statute required agencies to assist the Committee, the level of personal involvement and assistance provided by personnel of the University, the Community Colleges, the Community College Commission, the Department of Education and others was invaluable to the Committee in producing recommendations for a quality Hathaway scholarship program.

Finally, the Committee extends its congratulations and appreciation to the Wyoming Legislature. The foresight in establishing an endowment based scholarship program is to be commended. The opportunity to participate on a Committee of diverse interests and backgrounds in order to advise the Legislature and to serve the citizens of the State is appreciated.

Respectfully submitted on behalf of the Education Merit Scholarship Committee this 26th day of September, 2005.

[1] A listing of Committee members appears in appendix 1.

[2] A forty-eight page bill might seem unduly cumbersome. In the initial discussions, nearly all Committee members expressed the opinion to keep the program as simple as possible. While the bill might not seem simple, the basics of the program are. The Committee did not allow the need for clear legislative direction on policy choices to be overridden by the desire for simplicity.

[3] While Wyoming residency and graduation from a Wyoming High School is required, there are provisions to accommodate children of military personnel who maintain Wyoming as the parent's state of domicile while stationed elsewhere. There are also provisions to accommodate children attending high schools out of state under tuition programs for border areas of the State.

[4] Although the chart shows only high school GPAs, there are provisions to accommodate students who are home schooled or who have received a GED.

[5] The proposed bill divides the earnings funding the program, with eighty percent of the earnings for merit based scholarships and twenty percent of the earnings for need based scholarships. If monies within the merit "pool" of funds are insufficient to fund all merit scholarships, funds within the need "pool" can be used, after all need scholarships are funded, and vice versa.

[6] While an appropriation is called for and provided and two full-time positions are also authorized, the Department of Education informed the Committee that the funding and positions needed are as of yet undetermined. The Committee recognizes that this item could be adjusted depending on the final duties of the Department of Education as the bill is finally enacted.

[7] The bill creates a reserve account to be funded at $12 million or 3.75% of the endowment corpus, whichever is greater. If the earnings from the endowment are insufficient to fund the scholarships in any year, the reserve account is to be used to fund the scholarships.

[8] The percentage of incoming community college freshmen who would qualify for the Career Scholarship or a greater scholarship is unknown. The Wyoming community colleges are open access institutions, requiring only a high school diploma or GED, thus the Community College Commission does not receive GPA or ACT data equivalent to that available to the University.

[9] The Committee reviewed a number of studies regarding the effects of scholarship programs on enrollment and retention. While it can be said that scholarship programs generally have the effect of increasing both, the findings of those studies are unique to the programs reviewed and cannot be blanketly applied to Wyoming's program.

Opportunity	$800 per semester	High school[4] GPA - 2.5 ACT 19	College GPA 2.25
Performance	$1,200 per semester	High school GPA - 3.0 ACT 21	College GPA 2.50
Honors	$1,600 per semester	High school GPA - 3.5 ACT 25	College GPA 2.50
Career	$800 per semester	High school GPA - 2.5 ACT 17 or WORKKEYS 12	College GPA 2.25