|Date Requested: January 11, 2019
Time Requested: 02:12 PM
||Treasurer's Office, WV|
Sources of Revenue:
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 to create an Educational Savings Account Program for students with disabilities and to provide for its administration.
The bill is unclear as to whether or not this Educational Savings Account (ESA) Program is to comply with the federal legislation in 26 U.S.C. 530 (Coverdell). Coverdell programs are known as Education Savings Accounts, so this is where our research began. As the bill does not appear to create a Coverdell program and may create various associated federal tax benefits and consequences, we examined how ESA programs work in other states. None of the other ESA programs found in other states are Coverdell plans and 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 three employees, with annual salaries and benefits estimated at $250,000. This would include a director, accountant (Treasurer is required to audit individual accounts on a random basis, as well as to manage the funds) and an administrative assistant.
For current expenses, we estimate annual expenses at $100,000. In addition, an auditing firm would have to be hired annually at an estimated cost of $50,000 per year (Treasurer is required to audit the individual accounts at least annually), and average typical expenses for an audit in similar matters would be approximately $50,000 per year.
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. The contracts are estimated at $100,000 per year.
This amounts to a total of $ 625,000 for year 1, $375,000 for year 2 and $350,000 thereafter. All of these estimates are subject to increases due to inflation.
The Program is limited to Eligible Students (exceptional child other than gift, as described in §18-20-1). After the first few years of implementation, we estimate that there will be 1000 accounts with a total amount of assets of $5 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 $1 million at most. 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 $50,000, and then $30,000 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
|1. Estmated Total Cost
|Repairs and Alterations
|2. Estimated Total Revenues
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 information in Fiscal Note Summary above.
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.
As identified in the Fiscal Note Summary, 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.
Person submitting Fiscal Note:
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